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Avoiding Disputes – The Importance of Construction Contracts

Avoiding Disputes – The Importance of Construction Contracts

01-09-2020

Contracts are an important part of the process of any construction project. A construction contract such as a JCT or NEC Contract provides important protection for Main Contractors, Subcontractors and Building Employers and is vital in preventing disputes.  Primarily the contract safeguards against payments and guaranteeing adequate work, but if a dispute arises, construction contracts can also dictate how the parties move forward to resolve the issue. Simon Dunkling, Director at Arbicon ADR Ltd, Construction Dispute Experts, explains the importance of using a properly drafted written contract for construction projects and the negative impact if the correct terms are not included.

The Issues with Verbal Contracts
A construction contract does not have to be in writing. A contract simply requires an offer, acceptance, consideration and intent. Quite simply if there is no written contract then once the parties agree for the construction work to be undertaken and the contractor commences that work then a contract is formed on the basis of the verbal agreements and subsequent performance. 

However, with verbal contracts the question then arises as to what terms apply to that contract, for example:

  • Is there an agreed lump sum price or any agreed price at all? Is the price subject to remeasure or fluctuations? Can the contractor legitimately ask for more money if they take longer on site or the price of materials changes?
  • Is there an agreed programme? Who is liable if the works are delayed? 
  • Is there an agreed scope? Can the employer change the scope and what happens to the prices, programme, and terms if the scope changes?
  • What are the payment terms? How often are payments made? Can the contractor ask for money up front? Are deposits refundable or not? 
  • What if the parties fall out, how is the dispute resolved?
  • What if one of the parties walks away or terminates the contract? Can they legitimately do this and what process must be followed? 

Without any written terms the answers are defined by the applicable law and the parties' verbal agreement. In practice, these questions usually arise after the problem has already manifested, leading to the parties being in dispute as to what terms apply and what rights each party has. 

No Written Contract Terms
In the absence of written terms, one of the biggest problems with verbal contracts is therefore accurately defining the content of those verbal discussions to establish the party’s true rights and legal remedies. As you would expect when the parties are in dispute, they typically have differing recollections of the verbal agreements, especially when the discussions may have taken place many months prior. Furthermore, in some instances, one party may simply be dishonest about what was discussed when the evidence is limited to “your word against mine”. 

A Robust Written Construction Contract
The above issues can be avoided by simply having a written construction contract that properly records the agreement reached between the parties and each party’s rights and obligations. 

As well as recording the basic agreement as to price, scope and time, the contract should also set out defined procedures for how the parties will manage the works, including how to manage changes to the works, payment provisions, dispute resolution and so forth. A robust document, such as standard industry form, will even record how risk should be allocated for other potential issues that may not have even crossed the parties minds had they opted for a verbal agreement, for example:

  • Which party takes on the risk if materials and labour prices change, 
  • Who is responsible for the design of the works, 
  • What damages will be payable if the project is delayed, 
  • The type and level of insurance each party will hold, 
  • The warranties that will be provided by the contractor or their subcontractors, and 
  • Confirming who carries the risk of delays and cost changes if the working conditions differ to what was expected (Covid-19 being a prime example). 

By formally recording such matters in writing the assumptions and ambiguity are removed. This in turn aids the management of the works, reduces the likelihood of problems occurring later down the line and avoids dispute as to what terms apply, unlike in the verbal contract. 

Ask the Experts
Care must be taken to ensure that the construction contract is well written and incorporates all the necessary content. A badly written contract is of little use or can itself be harmful if the terms are unclear. To ensure that a contract is robust it is typical to make use of a standard industry form such as one of the many forms available from the JCT contract or NEC contract suites, ensuing to select the form that best suits your construction project and procurement route. The correct content and appendices must be included to capture the agreement, and the form should only be amended to include any bespoke risk allocation agreed between the parties.

Arbicon provide a full contract selection and drafting services for Main Contractors, Subcontractors and Building Employees.  We advise on the most suitable contract form to be used, advising on any bespoke content required, and undertake the full preparation, issuing, and negotiation of contract terms. Construction disputes can be costly, risky and potentially damaging to relationships between Main Contractors, Subcontractors and Building Employers. Ensuring the correct contract is in place from the start can help construction projects run smoothly and aid dispute avoidance. 

For more information on avoiding or resolving a construction dispute, please contact Arbicon on advice@arbicon.co.uk or call 01733 233737.      


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