When I ask clients whether a written contract was in place or whether variations had been documented, too often I receive the following response “no there was no contract, we just agreed to it” or “I didn’t think it was necessary it was a small job“.
Firstly, it is an incorrect assumption that just because an agreement is verbal, that there is not a binding contract in place. A contract can be verbal unless it relates to an interest in land or there is a statutory requirement that it be in writing, for example, a contract for “residential building works” where the value of the works is at least $5,000.00.
Secondly, whilst a contract can be verbal, regardless of the size of the job, all agreements, including variations, should be formally documented. This simple step can prevent many disputes and reduce a significant number of risks associated with carrying on a business.
A formal written contract can provide parties with the ability to:
- Confirm the agreed scope of works and any exclusions,
- Identify the correct contracting parties, so there is no issue as to which person company or trust a contract is with,
- Obtain payment of a deposit depending on the risk of the particular client,
- Stipulate when a variation will arise and how it will be priced,
- Dictate time frames to complete various stages or scope of works,
- Specify payment terms,
- Recover interest should payment terms be breached,
- Collect legal and debt collection costs in circumstances where a customer breaches payment terms,
- Obtain personal guarantees or other security for payment,
- Limit liability,
- Exclude liability for consequential loss,
- Suspend work, and
- Terminate the contract in certain circumstances.
The other common misconception with contracts in the building and construction industry is that terms and conditions on an invoice will form part of a contract for works completed. Once a contract is formed, which occurs usually when a written or verbal quotation is accepted, the terms of the contract cannot be altered without the consent from both parties. As such, terms on an invoice will not form part of the contract unless those terms had already been agreed at the time of the contract formation, for example, the acceptance of a quotation.
Further, by not having a written contract which specifies an agreed price for the works, or clauses that set out how the works will be quantified by way of hourly rates etc, then a contractor is left only with a “quantum meruit” claim if the other party fails or refuses to pay their invoice.
A quantum meruit claim is a claim for payment of reasonable remuneration for work undertaken that cannot be recovered under an enforceable contract. This means that the contractor would, at best, be entitled to the reasonable market costs of the work undertaken, regardless of what the contractor’s assert was its actual or agreed costs for the works. Such claims come with risks.
All contractors in the building and construction industry should engage the assistance of Solicitors experienced in the building and construction industry to prepare proper contract documents and insist on those documents being signed prior to works being undertaken. This can include customised contracts for large projects or standard form contracts for everyday contracting.
The initial expense and effort is minor when compared to the stress and costs of litigation should a dispute arise between the parties. There are always risks associated with running a business, however, these risks are reduced when proper contracts are in place.