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A CONTRACTORS GUIDE TO ENTERING INTO A CONTRACT

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Courts uphold the doctrine of ‘Freedom of Contract’, which means parties have the ability to enter into a Binding Agreement to do anything, provided it is not illegal, contrary to statute, or indeed Public Policy.  This freedom however comes at a price because once a Contract is entered into, the Contractor will be held to it, even if it later turns out you believe the Contract was wholly unfair, or unreasonable.

 

“If you are invited to agree to the terms of a Contract, whether a Bespoke Contract or one of the Standard JCT Forms of Contract, you need to consider the contents very carefully.  There may be clauses contained within these Contracts which appear to be unfair, harsh or even unjust.  The Contract may be written in such a way that it is clearly biased towards the Employer and contrary to the wishes of the Contractor.  However, if you sign the Contract, you are nonetheless stuck with it. If, at a later date, you try and get out of the Contract, then a dispute will almost certainly arise. It is very difficult to seek to unilaterally alter the terms of a written contract, as the causes of action are very narrowly defined and exercised with great caution by the courts.

 

“So to avoid a dispute, in relation to any unnecessarily harsh contractual terms, you need to understand the Contract and where you consider it appropriate, seek to amend it by consent before you sign it.

 

It is very important that a Contractor understands the scope of the works required, to enable preparation of the Cost and Time Estimates which will be incorporated into the Tender Document. 

 

“It is vital therefore that the programme submitted as part of the Tender, is very carefully prepared and thought through, as this may also form part of the Contract. The programme will need to be followed if it is to be a Contract Document so the time schedule needs to be realistic to allow for the execution of all activities.

 

“Apart from looking carefully at the preparation of the Tender Document, the Contractor needs to carefully assess the proposed Contract Terms the Employer has supplied. Look at how these terms will impact on the scope, time, quality, cost and risk of the overall Contract. 

 

“Employers will generally put forward proposed Conditions of Contract, with the Tender Documents and it is likely that Non-Standard Terms can be put into the proposed Contract that will involve the Contractor in accepting more risk than they normally would. 

 

“Contractors need to be vigilant if faced with an apparently onerous, non-standard Contractual Terms and should consider adopting one or more of the following approaches:-

 

* qualify your Tender and negotiate more satisfactory terms to it.

* choose to accept the onerous term, but put in a higher price to off-set the additional risk that you will be accepting.

* accept the onerous term without putting in a higher price and hope that the risk will not materialise. 

 

“Careful consideration is essential at this stage.  There are some Contracts a Contractor would be ill advised to enter into, for example a project that results in major execution problems that then become contractual disputes, will almost certainly not be successful in terms of financial reward. 

 

“It is important to set the risk/cost boundaries to define the point beyond which a Contract is unacceptable and will not be entered into.  This requires awareness of the Contractual Terms that are unacceptable irrespective of price, and undesirable Contractual Terms for which the additional risk can and should be priced.  The Contractor should prepare a Tender Price based on the scope of the work required, which should be stated clearly and unambiguously in the Contract.  If it’s believed the Employer’s Documents do not do this, it is important to qualify the Tender accordingly, to define exactly what will be provided for in the Tender Price. 

 

“Any resistance by the Employer to this fairly reasonable request should be viewed with suspicion, and it may demonstrate the Employer is expecting more than the Contractor has priced and allowed for. A reasonable Employer should not have any problems with clarification of any ambiguous specification of the scope of works, as this will assist in avoiding future disputes.

 

Remember that any changes to the scope of works agreed during Tender negotiations, needs to be incorporated into the Contract Documents, before execution.

 

“Given the financial penalties of Liquidated Damages payable by a Contractor for not achieving completion of the works by the contractual date, then it is vital to have the maximum amount of flexibility possible to make up all time lost through problems.

 

“The legal effect of any Contractual Terms, particularly non-standard ones, should be fully assessed to understand any changes in the ‘normal’ risk allocation. This may require a careful analysis of the proposed Contractual Terms, perhaps in comparison with a Standard Contract Form, to determine the likely effect of the extent to which it transfers risk to the Contractor. 

 

“Beware of the addition or deletion of a few words from a Standard Form of Contract, which can completely change the meaning of an expression, so take time to assess the actual meaning carefully.

 

“Disputes can be reduced and even avoided if a proper Contract Strategy is adopted which is appropriate to the works and the apportionment of risk between the Parties. The Contract Strategy needs to take into account the nature of the risk, the events likely to arise and the ability of a Party to deal with consequences of the risk event.

 

“Once happy that the Contractual Terms are satisfactory and the pricing legislates for any risk, the next stage is to compile the Contract Documents.  This should be done thoroughly so simple matters aren’t overlooked.  For instance, ensure the full name of the Employer or Main Contractor, or if dealing with a Company, ensure that the full Company Name is referred to, the Registered Office address and Company Number, as listed at Companies House. 

 

“Ensure the correct Form of Contract; if dealing with a Standard JCT Contract for example, ensure the Standard Building Contract with Quantities is chosen and not a Design & Build Contract. It is often a mistake to add correspondence to the Contract Package as a way of avoiding having to amend the Contract Documents, as this can cause confusion.  If changes are agreed to Post-Tender Negotiations, best practice demands that the Contract Documents are amended to reflect these.

 

“Clarify the status of any documents provided by the Employer, so if they produce Surveys, Plans or Drawings at the Tender Stage, these documents form part of the Contract.  It is best to state precisely what documents form the Contract, setting them out in a schedule so there is no doubt that these documents can be relied upon by the Contractor or whether they were supplied merely for information purposes. 

 

“When the Contractual Documentation is ready for execution, check the documents have been executed by authorised signatories in accordance with the constitution of the Company or Firm concerned.  It is easy to overlook any changes to documents in the hectic period before execution of a Contract.” 

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Written by Andrew Hodges

April 24, 2009 at 8:21 am

Posted in Comment

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