Construction Contracts – Do They Need to be in Writing?

» Posted on: 7 March 2011
» Posted by: Chris Scott
» Department: Construction and Engineering

Anyone who has had any legal training will be able to tell you that for a contract to subsist there must be capacity, offer, acceptance, consideration and intention to create legal relations.

One would hope by now that anyone in the construction industry would be able to tell you that you cannot adjudicate unless that is agreed in writing or all the terms of the agreement evidenced in writing. Despite the need for writing since the Housing Grants Construction & Regeneration Act 1996 to enable all parties to the construction process to avail themselves of the cheaper and quicker dispute resolution process of adjudication, many contracts, some for substantial projects, are not, or not wholly, in writing. Many contracts, some for substantial projects, are not or not wholly in writing.

The construction process being what it is, procurement now dragging on through PQQ, tenders, re-pricing and re-designing, many contractors and sub contractors start carrying out work without terms being agreed sometimes with draft terms between the parties still under discussion, sometimes embodied in drafts, minutes and exchanges of email. It is of course perfectly acceptable in law to have an oral contract. It is acceptable for the terms of any agreement to be evidenced in writing or for there to be a mixture of oral terms and written terms. However, beginning work without a formal written agreement increases the risk of dispute and contractors and sub contractors increases the risk of not getting paid.

In the case of RTS Flexible Systems v Müller (2010) the parties commenced the works under a letter of intent and allowed themselves 4 weeks to conclude and sign a contract. The contract was never executed and terms were negotiated “subject to contract”. Usually on the expiry of a letter of intent term or on the contractor exceeding the financial limits imposed in the letter of intent the Court will not recognise there being any additional contract or any additional payment due. Furthermore, the Court would not usually recognise a contract on terms that were agreed “subject to contract”. In the above case the Court of first instance found that after the expiry of the letter of intent a contract had been concluded. The Judge considered it was unrealistic to suppose that the parties had not intended to create legal relations. The Court of Appeal, on the same facts, found that no final agreement had been reached and no contract would come into existence unless and until a written agreement was executed. The Supreme Court found that a contract had been concluded but not that comprised in the draft exchange between the parties but some other terms particularly as a price had been agreed, works had been undertaken and variations agreed. This case demonstrates, given the three different interpretations by the Court of first instance, the Court of Appeal and Supreme Court, that if there are no clear written terms there will be considerable uncertainty as to whether a contract had been concluded at all, and, if one had been concluded, then what the terms of the contract would be. In those circumstances clearly there is scope for litigation and a considerable risk that there will be dispute.

It is therefore imperative that where possible agreements are concluded in writing. If no formal agreement is signed ensure you have put forward in writing and there is evidence of agreement about the scope of works, payment, variations and time.

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