Ken Tracey looks at the essential elements required to form a contract
THERE MAY be frequent exchanges between the parties before an order is placed. Queries and details are hammered out and the focus shifts from day to day until complete. This activity often causes confusion and a subcontractor is left believing he understands what he has agreed to but the reality is different. So before work begins and a contract becomes binding it is prudent to be aware of the basics of contract and to check each step.
The six essential elements required to form a contract are: Offer, Acceptance, Consideration, Terms, The intention to be legally bound and Capacity.
The contractor’s tender, quote or price is his offer. He must be aware of the terms and conditions that apply in order to price it correctly. For example, he needs to be aware of payment intervals, the retention to be held and the release details as this information could have an effect on price.
The offer is a promise to do the work at the quoted price and, if accepted, to be legally bound. A period for acceptance must be set, after which the offer is no longer open, otherwise acceptance may be late, at an inconvenient time or when labour and material costs have increased. An offer may be withdrawn provided it has not already been accepted.
Acceptance may be oral or in writing or implied by the conduct of the parties. In construction, acceptance is often a ragged affair and far from straightforward.
For example, a subcontractor may be waiting for a contractor to respond to his verbal request for changes to the terms and conditions. The answer is a long time coming and the commencement date arrives and the subcontractor starts work.
This could later be interpreted as the client’s acceptance of the subcontractor’s offer based on the client’s terms and conditions. The subcontractor should have made sure that he agreed to all terms and conditions before starting work.
Frequently acceptance is only in part or qualified. The contractor may place an order for the electrical section of a tender and exclude the mechanical side. This is not acceptance of the tender as the offer was an electrical and mechanical price. The subcontractor need not accept this counteroffer unless he specifically agrees to it.
In construction acceptance is often a ragged affair and far from straightforward
There is an opportunity to negotiate on price to cover any under-recovery, which may occur due to the split. Orders that include discounts or other changes, which have not been previously agreed, are also counter-offers and are only valid if agreed by the tenderer. Non-agreement must be recorded in writing immediately.
Consideration in construction is usually money but generally it could also be another benefit such as the provision of goods or services. For a contract to be valid there must be consideration, but the price need not be fair, provided it is an agreed price. There are circumstances when consideration of only £1 is agreed in order to fulfil this requirement.
To form a contract the essential terms must be set and include: price, programme and a description of the work to be done. That would be enough to establish a binding contract but would be inconvenient without the facility for: ordering variations, extension of time or payment and so on.
The terms must be clear and in the event that a dispute is referred, the court may imply further terms in an attempt to establish the intentions of the parties. Account would also be taken of relevant statutes. It is better to establish all the terms: with the variety of forms of contract available this is not difficult.
It is essential to show the parties’ intention to be legally bound. Generally the tender procedure and documentation would fulfil this requirement. However, it is presumed in commercial contracts that the parties intended to be legally bound – this has to be proved in social or domestic contracts.
There are certain classes of person that the law considers do not have the capacity to enter a legal contract. They include minors, bankrupts, persons of unsound mind, alien enemies and drunks. If a party was drunk when he entered into the contract he may use this as a defence in any legal action.
Electrical and Mechanical Contractor
Ken Tracey is commercial adviser at the ECA