Construction contracts - key issues to consider when entering into a contract

Holmes & Hills Solicitors has extensive experience in construction contracts. Understanding that these can be full of potential minefields (the “default” payment mechanism, instructing and valuing variations, claims for extensions of time and loss and expense, to name just a few).  To try to cover all of them in one article would not do any of the topics justice. Throughout the coming year, our specialist team of construction solicitors will release further articles detailing matters concerning construction contracts. However, Partner Sam Bawden discusses some of the fundamentals which we often see being overlooked, but which can have enormous effect.  

1. Who are you contracting with?

It seems like an obvious question, but do you really know who you are contracting with?  We frequently see construction contracts where one of the named parties is not a recognised legal entity (for example, the name of a limited company is used, but no such company is listed at Companies House). Trading names can also muddy the waters, particularly if the trader or company is not also identified by their correct legal name.  Further confusion is often generated where similar companies within a group structure seem to be used interchangeably. 

Clearly, if you do not know who your contract is with, you are not in a position to properly consider the risks of contracting with that party.  It also puts you in a difficult position when things go wrong; how do you know who to ask to remedy a breach of contract for example?  Perhaps more concerning is the risk of adjudicating or litigating against an incorrect party, and suffering the costs consequences that follow.

2.  Where do you find the contractual terms?

You may have opted not to enter into a lengthy written contract.  However, if you are, for example, contracting on the basis of a “simple” purchase order, are any standard terms and conditions incorporated?  Often, they may only be incorporated by reference, rather than being provided.

If you are hoping to contract on the basis of your own standard terms, has the other party done or said anything to displace those terms and substitute their own?  Pay attention to correspondence or other documents which either reject your terms, or state that the other party’s terms will apply, before works commence.  Often it will be in the small print.

Likewise, be mindful of starting on site without signing a contract.  In the absence of evidence to the contrary, you are likely to be bound by the contract.

3. Are the contractual documents clear and unambiguous?

We frequently see construction contracts that can be difficult to understand, even for our team of experienced construction solicitors, due to extremely poor drafting.  This applies as much to lengthy written construction contracts as it does to simple T&C’s.

Common issues include:

• Missing or improperly defined terms
• Clauses that contradict each other
• References to documents that are missing, or not clearly defined 
• On one occasion we even saw a schedule of amendments which purported to delete words from a standard JCT clause (which words were never actually present in the standard clause) and replace them with new words. 

Of course, if the contractual terms are incomprehensible (or even just mildly confusing), it can both a) increase the likelihood of construction disputes arising between the parties and b) make those construction disputes all the more difficult and costly to resolve.   

4. Simple contract or deed?  …and what’s the difference anyway?

Where one party breaches the terms of a “simple” contract (often a contract that is referred to as having been signed “under hand” – although confusingly includes oral contracts), the innocent party has 6 years from the date of that breach to start Court proceedings (known as the limitation period). 

It is not uncommon for construction contracts to be executed as a deed.  The reason is that the limitation period in respect of a deed is 12 years.  Therefore, the contractor is, for example, at risk of a claim from the employer in relation to defective works, for twice as long.

There are certain formalities for validly executing a deed; if the deed is not validly executed, it remains binding on the parties but takes effect as a simple contract.

In light of the differing limitation periods, it is important to know whether you are entering into a simple contract or a validly executed deed; the risk profile is significantly different and the parties need to plan accordingly.

Holmes & Hills’ team of specialist Construction Law solicitors are available to provide contract reviews, drafting and training for anyone entering into construction contracts.