We are regularly asked at NBS: "Do I need a contract for my project"?
On further investigation, the question divides into two parts:
- Am I required by law to have a contract?
- If not, should I have a contract anyway – or as it's sometimes expressed: 'can I get away without one'?
Am I required by law?
I should perhaps start by saying I always find it a little strange that anyone contemplating having expensive construction work carried out should even consider the possibility of not wanting to know precisely what the terms and conditions are. It is always a source of puzzlement that parties to jobs with a value of millions should apparently find the cost of less than £50 for some formal contract documentation to be prohibitive.
There is no overarching 'legislative' requirement, in the sense that a general law exists requiring all parties to have a specific type of agreement.
Nevertheless, in the public sector, the Public contracts regulations 2006 refers throughout to "contract documents".
These are defined as "... the invitation to tender for or to negotiate a contract, the
descriptive document (if any), the proposed conditions of contract, the specifications or
descriptions of the goods, services, work or works required......"
It is likely, in any event, that most organisations engaged in procurement of any sort will have a policy detailing how it is to be done, usually containing a requirement to execute a formal written contract, at least for projects over a certain value.
Should I have a contract?
The simple answer is an emphatic 'yes'. But the truth is that you probably do anyway.
Let us look at what a contract represents. A contract typically will result when one party agrees to do something for another in return for 'consideration' – usually expressed in monetary form. Essentially it is simply a set of 'conditional' promises: "If Party A does this, then Party B will do that" and so on. The terms of that contract may be many and varied, however. They will reflect the complexity of what is being done, and the method used.
It doesn't have to be written down, but it certainly helps if it is. If the agreement is verbal, then how do you remember what they were, but even if it's in writing, are the words free of ambiguity, or could they be interpreted differently by someone else?
When you buy something, you usually end up with a contract of some sort. The principle, at least in English law, is based on common law, and generally traces its 'modern' roots back some four hundred years to a doctrine known to lawyers as Slade's Case (1602) 76 ER 1074.
This case set out probably the main advantage of a contract - that it is enforceable in the courts.
Over the years, the industry has developed a variety of procurement methods; examples include traditional lump sum, design and build, cost plus, partnering, management, target cost.
It can be seen, therefore, that there are potentially a huge variety of contracts for a huge variety of contracting situations.
Therefore the question of 'should' might again be rephrased as:
- Do I have a contract?
- If I do, what are the terms?
If a project ends in dispute, this is one of the first problems the person tasked with sorting it out has to resolve. If you have no record of what's been agreed, how can you know what to do if something goes wrong?
Fortunately, the construction industry recognised that because a lot of the work was repetitive, it makes sense to have a 'standard' set of conditions, rather than go to the trouble of creating a new set every time, meaning everyone concerned would have to learn a new set of requirements and procedures, to say nothing of the legal costs associated with drafting, and so on.
Most 'Standard' building contracts deal with similar general headings. Using the JCT Standard Building Contract 2005 as an example, it contains the following section headings:
- Definitions – a list of the terms used
- Carrying out the Works – starting, progress, design responsibility, completion, etc.
- Control of the Works – subcontracting, instructions
- Payment – valuation scope and rules, timescales, etc.
- Variations – procedures for instructing changes to the scope and quality of the work
- Injury, damage and insurance – rules on liability, responsibility for insuring and so on
- Assignment, third party rights and collateral warranties – procedures and format for transferring contractual rights to others
- Termination – Circumstances where the contract might come to an end and procedures to be followed in that event
- Settlement of disputes – How, when and by whom these are to be resolved.
There is usually a set of 'standard' contract conditions that will cover most eventualities. JCT, in particular, is a consensus body – that means their contracts are supposed to be the result of negotiations by various industry bodies to ensure that risks and obligations are balanced fairly.
If you buy a TV, car, garden shed, or even an existing house, you can usually go and see it and look around before deciding whether to proceed. If, however, you are buying a new building, the chances are you are buying into a concept: a design idea which has yet to be realised. To many Clients, this is a leap of faith; building is not their core business, so they may not have the technical capability to visualise what is being described to them, despite advances in computer models and 3D software.
For the uninitiated, or even the experts, this can be a difficult task. Having a contract and knowing what the terms are at least brings some certainty. So why anyone would want to attempt it without one is a mystery.
Related reading on theNBS.com
Which procurement method?