Do we have a deal Part 3

Owen Hayford

Putting contracts together is hard enough. I think the worst scenario for both parties potentially is where work commences before the contract is signed. If the work is completed and there are no problems, well, that is a great result. Experience suggests however that this is more the exception than the rule, and that there will be issues that arise during the course of the work that need to be resolved by reference to a contract.

For example, there is no contract and the contractor starts work, the parties are trying to negotiate and finalise the terms of their written contract, but they never do, the owner is unhappy with the contractor's work, wants to get rid of them and get somebody else in. The contractor in that scenario will want to be at least paid for what he has done.

Stuart Connor

So is he left out in the cold in those circumstances?

Owen Hayford

Well, just because there is no contract and no clear entitlement to payment, he isn't left out in the cold. There are equitable principles at play and the contractor might be able to get up a quantum merit claim, based on the unjust enrichment that the owner would benefit from if he was able to take the work without paying for it. So, no the contractor won't necessarily be left without an entitlement to payment, but it will be difficult and expensive for him to bring a quantum merit claim, and involve you and me. He would be much better off clearly documenting before he starts the work the basis on which he is going to be paid for that work until the formal contract is signed.

Stuart Connor

Okay. so he gets some level of payment. What about the other terms of the contract that he might normally expect to contract on?

Owen Hayford

If the work has started whilst the parties are trying to sign the terms of a formal agreement which hasn't been signed, there are real questions as to what is the basis on which that work has commenced. Is there a contract at all? Maybe there is no contract. It may be that there is a contract which has arisen, even though it hasn't been formally signed, simply by virtue of the conduct of the parties.

Stuart Connor

What are the indicators of that? How can a lay person have an idea of whether there is a contract in place.

Owen Hayford

I guess it all turns on whether or not there has been at any point in time a true meeting of the minds in relation to how the work is to be carried out.

Stuart Connor

And I suppose instead of key terms, like price, scope of the work, and the standards to which the work is going to be done.

Owen Hayford

I think the best practice is not to allow work to commence on site until there has been a clear meeting of the minds which is capable of being reduced to writing. Now, it might be that you don't sign the formal contract at that point because there are still finer details which need to be worked out, but maybe that the parties have reached agreement in relation to the key terms which would enable work to start whilst they negotiate and finalise the finer details. In those circumstances, the parties should try to reduce to writing those key terms - perhaps in a letter of intent or an early works contract - so that there's a clear understanding as to the basis on which those works proceed.

Stuart Connor

Sometimes clients ask me whether or not this particular letter of intent does actually constitute a contract or not. Is it possible that it can go either way.

Owen Hayford

Yes. I guess it depends on what it says. I mean you might have a letter of intent which makes it quite clear that no contract has been signed, but in those circumstances it would be unusual to have a letter of intent of that nature but at the same time the parties be under the expectation that the contractor is going to carry out the work because if it is carrying out the work, then clearly there must be some contractual ... well, you would think there would be some contractual arrangement governing that work.

Stuart Connor

Potentially, he is just relying on the representation of the principal that he intends to go forward with the contract with that contractor. Then, aside from remedies he is entitled to from that representation being wrong, he is proceeding on the basis of his own risk.

Owen Hayford

It's a high-risk strategy for a contractor to start work on the basis that if no contract is signed, he has not entitlement to payment.

Stuart Connor

Legally speaking, the other thing to throw in the mix is the negotiation position of the parties, and the traditional logic is that the contractor becomes in a better negotiating position once he is on site and doing the work.

Owen Hayford

And I think for that reason, if the owner has broad commercial objectives and he wants the contractor to get on and start work, notwithstanding that the parties are still negotiating and trying to finalise the contract, well then get him to start work on the basis of a letter of intent but make sure the letter of intent includes some basic protections.

An example of a basic protection is that the owner's liability in relation to payment caps out at a certain level, so if the contractor wants to continue working beyond that level, than they either need to sign a fresh letter of intent increasing the cap, or hopefully by that time be in a position to sign their final contract. In the same vein, I think it is useful to include a deadline for signing the contract to make sure that the practicalities don't overtake the situation and that a contract's ultimately signed.

Stuart Connor

So those things protect the principal. I guess, if I was the contractor intending to sign one of these letters of intent or indeed going down the line of doing some work before a formal contract is entered into, I would be looking to protect my interests as well.

One thing that comes to mind is, in today's market in particular, contractors are more and more entitled to the limitations of their liability under the contract. Arguably, if you go forward either without a contract or on the basis of a short form letter of intent, you don't have the benefit of the limitation of liability that might ultimately had found its way into the contract.

Owen Hayford

Yeah, absolutely. The default position would be that the contractor will be liable for the work that he carries out and so if the contractor is only happy to proceed and start carrying out the work on the basis that its liability is going to be limited, well then it really needs to record that agreement before it starts the work, otherwise it may find itself in a situation where its liability is not limited.

Stuart Connor

Even in the alliance contracting world where things are all very warm and fuzzy, you still have a contract which accords the contractor quite a strong limitation of liability. If they are going to be doing work before the alliance contract is entered into, which they quite often do, you would be having those same sort of thoughts.