How to Form an Effective Contract

Ensuring that you have an enforceable agreement with your contractor (and designer) is an important insurance during a project. Chris Reeves explains how

The Quick Read

• A contract is formed when there is an ‘offer’ to perform a service and a clear acceptance of that offer.
• The contract can take many forms as long as the offer and acceptance are clearly understood by both parties — from verbal agreement through to formal contract.
• Those using a main contractor would be wise to use a formal contract such as the JCT Minor Works, but in all cases, try and get something in writing.

Most projects run without a hitch — the job is completed largely on time, largely defect free and, give or take, on budget. This is generally how the homeowner carrying out a self-build or renovation project will judge success. On the other hand, the solely important outcome for the contractor is whether they have been paid. Of course, your aims, and those of your contractor, are interlinked — problems with quality and scheduling tend to cause issues with payment further down the line.
All very well, but what happens when things go wrong? How do you mitigate for the project that veers off this course? The number of people suffering at the hands of their contractors is significantly below the reality (the bad projects tend to be talked about more) but it is important nonetheless to deal with potential pitfalls and for that, the first port of call is a contract.
A contract sets the rules about what is required in terms of time, quality and cost, and more. Contracts are legally enforceable, but without one, what are the rules? Without a clear understanding of the rules, how certain are we about the outcome of a dispute if it goes to court?
Of course, one of the key things to ascertain is what a contract actually is — what is the legal definition and what is the practical difference between a formal contract, an exchange of letters or simply a handshake.

Definition of a Contract

When considering whether there is a contract in place and what its terms are, the court will look for an ‘offer’ to do the work and a clear acceptance of that offer. It’s worth noting that any offer and/or acceptance does not have to be in writing. Indeed, many projects start and finish on the basis of a verbal contract only — you do not even need a handshake.
The court also requires ‘consideration’ — which is a concept that is easier to recognise than describe. Consideration is what each party is promising to do in return. In the case of building contracts, the consideration is the price to be paid on the homeowner’s side in return for the contractor carrying out the work — or at least promising to carry out the work.
The law also requires that each party to a contract must have the legal capacity to enter into it; some contracts must be in a particular form before they become enforceable — a good example of which is the transfer of land.
Note that the courts will not consider enforcing any contract that includes illegal clauses. I once saw a letter from a contractor to a homeowner that went along the lines of: ‘If you pay me in cash then I will not charge you VAT.’ This would have nullified any formal proceedings in this instance.
An innocent party may also be able to avoid enforcement of a contract if they were duped into entering into it through fraud or a misrepresentation. The law will also make certain contracts void in circumstances where a cooling-off period has not been given, such as a contract made in your home with a contractor. One of the contractor clients I represent was amazed to learn that as he had agreed the price for the job around the kitchen table he could not enforce payment in court as he had not given his customer a cooling-off period before starting work.
For a contract to be enforceable, the court will also want to be satisfied that the parties intended to create a legal relationship. In the context of building work, there should be little difficulty in satisfying this test, but how about work done as a favour? How about the friend that draws up some plans but does not charge you for it, or the mate who helps out with some DIY?

What Makes up a Contract?

Offer
Typically the principle of the builder’s proposal to carry out the work for you.
Acceptance
Your agreement to the builder’s offer. The offer should be made without undue pressure (i.e. giving you time to consider it) and include a cooling-off period
Consideration
Effectively the details of the offer — e.g. price, timescale and scope of the work to be carried out

Forms of Contract

The best practical way of formalising arrangements and offering some protection to the homeowner is to go for a tried and tested form of contract. There are many ‘contracts’ available, but the key to protecting what is important to you (presumably ensuring you get good-quality work within an agreed schedule for the price you were originally told) lies in not only selecting the right form but also ensuring that it is geared to your own project and covers you for any unusual risks.
The first question you should ask when looking to choose an off-the-shelf contract is: “who are the likely parties?” If the contract is between the homeowner and a builder who will be doing all the work, then you can consider one of the standard forms that the builders will be familiar with such as a JCT (Joint Contracts Tribunal) form of contract or the new form of contract published by RIBA (Royal Institute of British Architects).
The JCT contract first appeared in 1903 in a standard form, the terms of which had been agreed between RIBA and the Chartered Institute of Builders — so it’s safe to assume it is well balanced and has really stood the test of time. The JCT publish the Minor Works Building Contract, which costs around £25 plus VAT. The RIBA contract is the new kid on the block and is similarly priced — and as it’s published by RIBA, it is likely to become popular.
All of this assumes you’re using a main contractor to manage the whole project for you, which is only true in something like 40 per cent of all self-build and major renovation projects (the majority will use a main contractor for part of the project, or will use a package supplier, or the work will be carried out by the homeowner directly employing subcontractors).
In the case of the latter, the homeowner will need a contract for each of the subcontractors. The contractual side of things then becomes much more complex. The reason it is complex is that while you may have a contract with each of the subcontractors, there will not be any contract between each of them — and no contract means there are no rules and chaos can reign.
The JCT publish a standard form of trade contract for engaging separate subcontractors, but the term ‘subcontractor’ suggests that each trade is operating under a ‘sub’ contract to a main form of contract between the builder and the homeowner mentioned above. The phrase ‘subcontractor’ is therefore not an accurate one to use in circumstances where the homeowner has decided to employ the trades direct — each trade is in fact a contractor in their own right and each one needs a contract that is geared to the work being done.
How about the specialist suppliers who rely on their own set of terms and conditions? If you give the go ahead to a supplier then the contract’s terms and conditions will apply if they came with the quotation. Each supplier has to be thought of in the same way as a subbie even if they are not fitting the goods being supplied.
Contracts for Design Work
Chances are you’ll be paying your designer a significant amount of money for an agreed service, and as such you’d want to protect this arrangement in the same way you would if you were using a main contractor or individual tradesperson. You should agree with your designer a detailed contact in which both you and the designer are clear about what work is being done and when payment is due.
Most projects have a clear set of milestones, such as the initial design brief, planning permission, detailed design and so on. These should always be outlined, along with the expected costs at each stage, in the initial correspondence.
If you’re using an architect (as opposed to a non-RIBA house designer), particularly for supervision services during the construction, you are likely to be offered a standard form of appointment published by RIBA. The RIBA forms align with ‘work stages’ and the architect will price each stage so the homeowner will know what fees are being incurred for each.
The RIBA form covers the situation where the project has to be abandoned at any particular stage, for example if an application for planning permission is not successful. RIBA publish the Domestic Project Agreement 2010 (2012 revision) which is currently priced at £20 plus VAT.
The next point to consider is whether the standard forms work for you. All the standard forms come with blanks to be filled in such as the commencement date, the price, the names of the parties and so on. You may also want to make some amendments to the terms to suit the particular project requirements. It certainly pays to get advice before signing up.

Email, Letter or Verbal?

Of course, the realities of a building project are that it is quite difficult to raise the issue of formal contracts with a tradesperson. The good news is that many jobs are happily completed on the back of an exchange of letters or other documents such as emails.
Even for simple work packages I would always recommend that when embarking on a building project the homeowner goes for some form of protection in writing —and ensures that the terms are agreed before committing to an agreement.



SOURCE  https://www.homebuilding.co.uk/how-to-form-an-effective-contract/