The Fundamentals of Contract Formation and How To Avoid Getting Caught Out!
Today’s blog post has been prompted by a discussion about the fundamentals of contract formation, which has attracted over 80 comments in our exclusive LinkedIn Group of some 2,000 Specialist Contractors!
If you are in the group you may have already seen it, but if you are not in the group, then please come and join us – just CLICK HERE. Either way I have summarised the key points for this week’s Wise Up Wednesday”.
Do Not Start Work!
What I said in the group was “DO NOT start work, order materials, or do any design work, unless and until you are absolutely certain as to what the terms of the contract actually are.”
That is NOT the same thing as not having received contract documents from the Contractor.
In simple terms you don’t have a contract unless you
a) Have an unconditional acceptance of your offer, or
b) Have a signed order / contract agreement, or
c) Have received an order / contract agreement before you started work and have begun work without contesting it.
If the contract is not properly formed then you do not know what your obligations are.
“The Last Shot” Principle
If your tender (in law an offer capable of acceptance), is made on your terms and conditions and you are asked to start work, then if you make it clear that you are only starting work on the basis of their unconditional acceptance of your terms and conditions, then it is your terms that will apply.
This is called the “Last shot” principle.
If they have sent you nothing but still allow you to start work, then this is their acceptance of your offer, which includes your terms, and a contract is formed on that basis.
If they then subsequently send you an order and/or terms and conditions, you need to advise them that it’s too late, because the contract has already been formed on your terms.
One word of caution. You need to make sure that you do actually have your own terms, and that your terms are favourable to you!
Is There A Binding Contract?
Some contributors to the discussion said that they were put under pressure to get on with the work irrespective of the contractual position.
Our advice is don’t be bullied.
If you have sent an offer and received nothing from the Contractor, or they have sent you an order / contract – that is not an unqualified acceptance of your offer, then their order / contract is a counter offer and you don’t yet have a contract.
If there is no contract, then there is nothing to be in breach of.
At this point, it is up to you whether or not you accept their terms or negotiate better ones. You cannot be deemed to have accepted them unless you start work, or sign the contract.
Don’t Accept Onerous Terms!
If you agree to onerous terms and/or an unrealistic period for procurement/installation, or worse still onerous payment terms, then you are putting your head in their noose!
Don’t do it!
Watch out for contracts that say that no payment becomes due until you have signed the sub-contract and sent all the warranties and bonds and guarantees.
If you receive such an order / contract and start work, you are deemed to have accepted these ridiculous terms. You then find that you can’t receive ANY money until you sign – then you sign and find all the onerous clauses, that you never agreed to, being used to reduce your payments.
Stand Your Ground
We know it is tough but as Julian (one of our contributors), rightly said you have to stand your ground. There is only a brief window in the whole procurement and delivery process when you have the upper hand. As he says;
“When you are bidding the Contractor has what you want – the order
When you are working / have finished the Contractor has what you want – the money for what you have already done
When you have been given the job but haven’t started you have what the Contractor wants – your specialist skills and equipment to perform the work that he needs. This is the only time when you have real strength in negotiations and the choice to walk away.”
We are NOT advocating that you use this position to try to gain unfair advantage – what we are advocating is that you use the opportunity to secure a written agreement that reflects your offer and any negotiations that have taken place up to award.
This should include, as a minimum, clear payment rules, a clear programme and a clear scope of works.
Again as Julian rightly says;
“You will get all sorts of abuse, you will be accused of being “contractual”, you will be accused of “holding a gun to their head” they will threaten to give the contract to someone else.
Ignore it all – if your client is not prepared to have a grown up discussion about the fundamentals of your contract before you have spent tens or hundreds of thousands of pounds doing the job, what chance is there of having a sensible conversation when you have given him everything he needs from you and he still has a big bag of your money.
If he would rather give the contract to someone else, rather than formalise what he has already agreed in writing, what does that tell you about his motives?”
Sometimes you have to be prepared to walk away.
Don’t Underestimate Your Value
Don’t underestimate the value that you bring to the Contractor – if they can get away with imposing ridiculous terms on you then they will.
But it is currently a seller’s market and you should be in a position to reject onerous terms and still win work. If you aren’t in that position then we need to talk about your marketing, but that will have to wait for another blog post.
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