Contract Formation

What is a Contract?

A contract is an agreement between two parties which can be legally enforced.

How do we know whether the contract is legally enforceable?

In order for a contract to be enforceable there are five essential elements which need to be present;

1. Intention

There must be a clear intention for the parties to create a binding obligation.

2. Capacity

The parties must clearly be capable of forming a legally enforceable relationship. Incorporated companies, partnerships and individuals all have the capacity to create a contract. In contrast infants or insane persons do not.

3. Agreement

This is probably the most important element. Its presence is fundamental to the formation of a legally binding contract.

In order for the courts, an arbitrator, or any other party with jurisdiction to determine that agreement has been reached a clear offer and unconditional acceptance needs to be present.

4. Certainty of Terms

It is not necessary that every term is agreed for example a building contract could be let using a bill of quantities based on approximate quantities. However, there must be general agreement as to the terms of the contract.

5. Consideration

Under English law consideration may be defined as the giving of a benefit of some kind to the other party with whom you have or wish to contract. Usually this takes the form of money in commercial contracts although it could be quite literally be given in any form.

For example in the Joint Contracts Tribunal NSC/W collateral warranty agreement between an Employer and Sub-Contractor consideration is typically in the form of a pledge that the Sub-Contractor will carry out and complete the sub-contract works in such a manner as to not require the Main Contractor to seek an extension of time and a reciprocal pledge by the Employer to operate direct payments to the Sub-Contractor where the Main Contractor has failed to discharge payment in accordance with the terms of the Sub-Contract.

In a contract between a Main Contractor and Sub-Contractor, consideration is the pledge of money by the Contractor on the one hand and the supply of labour, plant and materials by the Sub-Contractor on the other.

Consideration is not necessarily required where a contract is executed as a deed i.e. there may be one way obligations by one party with no benefit being provided by the other,

Under Scottish law voluntary obligations assumed with the absence of any consideration may be enforceable.

OFFER, ACCEPTANCE, COUNTER OFFER

Invitations to Tender

An invitation or a request for a quotation is not regarded in English law as an offer. A decision taken to submit a tender does not form a legally binding Contract. A quotation is nothing more than an offer.

Whilst you are not under any obligation to accept an enquiry or invitation to tender there may be commercial pressures which may encourage you to comply with the request. For example, the fear of being removed from a standard tender list.

Enquiries and invitations to tender are termed “invitations to treat” meaning that they are an offer to negotiate. Suppliers literature, price lists and the like are invitations to treat and do not bind the parties in any way.

Forms of Offer

Fee quotations, estimates and quotations are all forms of offer. The terms of the offer can be numerous and can be varied if a quotation is being sent to a number of parties, for example: Specialist Sub-Contractors, invariably receive invitations to tender from several Main Contractors on the same project. In this situation there is nothing to prevent the Specialist from sending out different offers to each of the Contractors concerned. Indeed, unless the terms of all the enquiries received are identical (which is highly unlikely) the offers sent out should vary.

Expiry and Withdrawal

It is possible to restrict the time scale in which an offer is open for acceptance by simply referring to a date in the terms after which the offer will expire. This makes the offer incapable of acceptance after the date of expiry.
Under English law; an offer may be withdrawn at any time even if the offer contains a statement or pledge to hold the offer open for a specified period.

Acceptance

A contract is formed when one party makes an offer which is unconditionally accepted by the other.

Acceptance may be issued in writing, given orally or may be deemed to have taken place because of the conduct of the party in receipt of the offer.

A purported acceptance which contains terms different to the offer is not acceptance. This is called a counter offer which may be accepted by the other party or subject to a further counter offer.

The Last Shot Principle

In practice legal disputes concerning the Construction and terms of a particular contract abound, consider the following typical scenario;

Following numerous and difficult negotiations an order is placed by telephone subject to written confirmation. The written order then has terms and conditions on the back (often in small print). Assuming there is the incorporation of these terms by direct reference on the front of the order then the person receiving the order responds by sending out a similar document indicating different terms and conditions upon which they are prepared to do business. This leads to subsequent exchanges of correspondence and by this stage the parties can not agree on what are the terms of the eventual contract.

At one time the courts appeared to resolve this issue by adopting what has been called the ‘last shot principle’. In other words, the courts would look at the last offer which had been accepted in an unqualified way and this would then determine the conditions of contract. However, this principle cannot be regarded as a hard and fast rule which applies in every case. The court will endeavour to establish and give effect to the intention of the parties, but it will not create an agreement where one does not exist.

A good example of how complex the analysis can be is to be found in the case of Chichester Joinery Ltd -v- John Mowlem plc (1987). Briefly the series of events was as follows;

Chichester sent out an open quotation for joinery based on their standard conditions;

Mowlem sent Chichester an enquiry seeking a further quotation based on Mowlem’s conditions;

Chichester sent a letter to Mowlem restating Chichester’s conditions;

Mowlem sent an order to Chichester based on their Conditions.

Chichester sent Mowlem an acknowledgement of order based on Chichester’s Conditions;

Mowlem subsequently accepted Chichesters joinery when delivered to the site.

The judge accepted that it was a very difficult case and stated that it highlighted the risks facing parties who sought to impose their own respective conditions rather than using some well established form of contract.

However, he held that there were a series of offers and counter offers with Chichester’s acknowledgement of order being a counter offer and the acceptance by Mowlem of joinery constituted an acceptance of Chichester’s counter offer.

In the leading practitioner’s book ‘Chitty on Contracts’ the discussion on the ‘Battle
of the Forms’ concludes with the following statement:-

“Thus it is possible by careful draftsmanship to avoid losing the battle of forms, but not (if the other party is equally careful) to win it …The most that the draftsman can be certain of achieving is the stalemate situation in which there is no contract at all.”

An important consequence of there being no contract is that the Housing Grants Construction and Regeneration Act 1996 (HGCR Act) will not apply (see chapter 12).

Incorporation of Contract Terms by Reference

It is common practice to incorporate terms and conditions of contract by reference to them without there being any signed form of contract. Whilst this is not a particularly good practice it is of course expedient and provided it is done carefully and clearly there should be few problems created by such a practice. One danger is if the words used do not make it clear precisely which form of contract, or indeed how much of it, is being incorporated. This can cause enormous problems.

While the courts will not make contracts for the parties, they will do their best to define the true presumed intention of the parties and to identify the actual terms of the agreement notwithstanding the use of inappropriate language.

Conflicting Terms

The terms governing a contract can come from a number of sources.

Express Terms

These are the elements of the contract specifically agreed by the parties. They may have been set out in writing or agreed orally. Such terms typically include price, timing, the services to be provided and the like.

Implied Terms

In the absence of express terms, the parties will usually, and if they do not the courts will recognise implied terms which have been incorporated either unilaterally or mutually by the parties concerned.

For example if the contract is for the construction of a house and there is no express term confirming that the building Contractor will obtain payment for the services provided then there will clearly be an assumption by the Employer that he will have to make payment for the services provided and an assumption by the Contractor that he will receive payment.

In cases of dispute where the parties are unable to agree on the implied terms of a contract e.g. the standard and quality of design, workmanship and materials the courts will do this for the parties concerned. In doing so the courts will seek and find terms implied which allow the contract to operate with business efficacy (as expected in the normal course of business dealings).

Statutory Provisions

If the scope of the contract is referred to in acts of parliament then, subject to any express exclusion in the written terms of the contract, these provisions will be implied by the courts.

Common Law Rights

These are rights and obligations which will be implied by the courts. These provisions follow from the courts decisions in previous disputes in which a precedent is set. Such rights could relate to the interpretation of a specific clause of a standard contract or may introduce completely new rights and obligations of which the contracting parties are ignorant.

Ambiguities

If ambiguities arise during the tender period these should be dealt with at this stage and the basis upon which the offer is made should be made absolutely crystal clear. This may sound like a case of teaching grandmothers to suck eggs but we are constantly being asked to resolve disputes which have arisen because this fundamental principle has not been applied.

In regard to ambiguities which are only discovered once the contract has been formed it may be possible to rely on a principle or rule of contract interpretation referred to as contra proferentum. This principle is admirably described in the following extract from learned text on contractual matters;

“If there is an ambiguity in a document which all the other methods of interpretation have failed to resolve so that there are two alternative meanings to certain words, the court may construe the words against the party seeking to rely on them and give effect to the meaning more favourable to the other party.”
D Keating – Building Contracts 7th edition

It is submitted that the rule may apply as between different sections of the same document which have the effect of giving the document two alternative meanings. However, the rule does not apply universally in all situations and the construction of the contract terms as a whole requires careful consideration of all documents and the circumstances in which they came into being.

PRIORITY OF DOCUMENTS

The question often arises as to which contract document is to be given greater weight where it conflicts with another contract document.The different standard forms have different policies with regard to this question. For example, DOM/1 states at clause 2;

2.1 Nothing contained in any descriptive schedule or other like document issued in connection with and for use in carrying out the Sub-Contract Works shall impose any obligation beyond those imposed by the Sub-Contract Documents.

2.2 If any conflict appears between the Sub-Contract Conditions and the Appendix, then the Appendix shall prevail. If any conflict appears between the terms of Sub-Contract DOM/1 and the Numbered Documents, the terms of Sub-Contract DOM/1 shall prevail. If any conflict appears between the provisions of the Main Contract and the terms of the Sub-Contract Documents, the terms of the Sub-Contract Documents shall prevail.

On the other hand the ICE Conditions establishes no priority of documents. It states “The several documents forming the Contract are to be taken as mutually explanatory of one another…”

Where the Contract is silent as to priority of documents the general legal rule is that a more detailed document will override a more general document with which it conflicts. Applying this rule it is perfectly possible for a clearly drafted Specification Clause to override Standard Conditions of Contract, as the Specification would be deemed to be the more particular document. By the same token detailed working drawings would override a specification.

It is important to note that the “Contract” will also comprise documents referred to in the documents which themselves comprise the contract i.e. if there are references to British Standards and Codes of Practice (which there usually are) in either the Specification or the Bills of Quantities, then those Codes and Standards become part of the Contract.