Since 2009 and the changes brought about by the Local Democracy, Economic Development and Construction Act 2009, the Construction Act is no longer exclusive to written contracts. Often we hear cries of the absence of a contract or that no contract was entered into. That is rarely the case. How it was constituted and what the terms might be is a different matter entirely.
What constitutes a contract under Scottish Law?
A contract is an agreement voluntarily entered into by two or more parties that becomes legally enforceable once validly executed. Four important elements are required for a contract to be properly constituted, namely the offer and acceptance of the contractual terms, consideration, and finally, the intention to create legally binding relations between the parties. Although commercial contracts in Scotland do not necessarily require for consideration to pass, it is unlikely that any business would readily provide goods or services for free and consequently, contracts will often contain provisions for payment.
The terms of the contract must be expressed clearly and all parties must be in full agreement of the same. While it is possible for an acceptance to be unqualified, meaning the outright acceptance of the offered terms, it is often the case that contractual terms will first be negotiated, or indeed new terms and conditions inserted, before the final contract is agreed.
Contract terms must be certain and cannot be too vague, incomplete or contradictory. The intention of the parties must be set out clearly as commercial contracts cannot be arranged by what people think in their innermost minds. Commercial contracts are arranged according to what people say.
It is important to note that written contracts remain the preferred method of contracting, as it is best practice to have a written record of the agreed terms in case of any disputes. However contracts can be entered into by any means: verbally, in person or over the telephone; by email, fax. telex or letter; by video or other means of communication; or by any combination of these.
The Construction Act previously only applied to contracts that are in writing (s 107(1)) and cast a fairly wide net in terms of what qualified as 'in writing':
- Traditional written agreements, signed or not (s 107(2)(a));
- Contracts constituted by an exchange of correspondence (s 107(2)(b));
- Verbal contracts that can be proved by written evidence (s 107(2)(c)) recorded by any means (s.107(6)), such as e-mails, faxes, hand-written notes and even voicemail.
The Act now does not impose a distinction between written contracts or contracts constituted by other means. That has the benefit of avoiding a dispute on whether the Act applies, but can have the added complication of a dispute over the terms of the Contract in question. What was to be done, by whom, when and for what price?
Essential elements to include in a written contract
While there are certain terms that we would expect to find in all written contracts (e.g. parties, payment provisions, duration and timescales, liability provisions, termination, dispute resolution), these will always need to be tailored to the specifics of each project to ensure contractual clarity. In a construction contract, if the provisions of the dispute resolution clause, or the payment clause, are not Act compliant then the Scheme for Construction Contracts will kick in. That is a topic for another day.
What about contracts constituted by other means?
Our recommendation is that a contract for construction operations should in almost every case, be committed to writing. A failure to do that opens up both parties to disputes over what the terms are, and therefore what their respective rights and obligations might be. In a perfect world a construction contract would always take written form.
We all know though that the construction industry is far from perfect from a lawyers' perspective. The nature of the work, and the collaborative aim of getting things done can mean that the niceties of forming a written contract are sometimes overlooked or perhaps more properly overshadowed by events. It is however important that a contracting party knows what it is supposed to do and the value of that undertaking. Even in the context of a less formal contract, constituted for example verbally, it is critical that there is understanding of these basic matters. It helps of course if that understanding is shared by both parties. Referring back to our earlier blog on what a construction contract is, the consequences of a failure of both parties to share a consensus on the terms, can result in a dispute, within a dispute. That, it strikes us, is in the interests of no-one.
Next week, dispute resolution.