What is a contract?

At a basic level, a Contract is a legally enforceable document that binds one party to undertake a service to be paid for by the other. The contract is between are known as the contracting parties.

Yet people enter into simple contracts every day without being aware they have. For example when you buy a rail ticket between two points you have contracted with the Train Operating Company to take you between those two points, usually at a time dictated by the timetable. In the event the train is late by a pre-determined amount of time, the customer is entitled to compensation in accordance with the standard terms and conditions of travel. In effect this is a penalty clause

However these are simple transactions and the contract is effectively entered into when the full fare is paid, however for more complex issues such as when works are being undertaken then a written contract will be entered into. There can in effect be 3 options in this instance:

  • A standard form of contract where the terms and conditions are to a standard form, such as the Joint Contract Tribunal (JCT)
  • A variation of a standard form where some of the terms and conditions of standard form are amended to agreements that have negotiated between the parties to the contract
  • A bespoke contract where all of the terms and conditions are agreed between the parties.

The first two instances do not require any significant explanation as both have a starting point of a standard document and where the standard terms are varied these will under normal circumstances be to capture a particular element of what is being contracted for.

In a bespoke form of contract however a certain number of key clauses would be required for the contract to be able to be administered and not lead to a frustrated contract, which in effect would be terminated as unworkable. These types of contract will under normal circumstances be entered into by businesses on commercial terms. By their very nature they will be more critical than standard forms, particularly when disputes arise and the mechanisms available under the contract to avoid the expensive final remedy of litigation.

How do we ensure that any contract gives the necessary protection to both parties? By negotiation.

But for a negotiation to be effective and offer protection to both parties to the contract perhaps the simplest issue to have clear in the minds of both parties negotiating is actually the simplest part of the contract. What is being contracted for, for what sum of money, how has this contract sum been determined and to be delivered to what nominated date. That is of course at the simplest level, as there will be an Invitation to treat, offer and acceptance, but to get to the stage of acceptance there may be conditions attached and its vital that these conditions are documented.

By way of an example, a building contractor is sent a tender by a developer for a new housing development, which will require integration with existing infrastructure owned by the Local Authority, such as roads. The tender, is the “invitation to treat” and is to complete all of the works required to complete the development. The contractor in his tender return, which is the “offer” provides a quotation to do all of the works, save for the integration with the Local Authority infrastructure. In effect the offer is conditional. In the event the developer accepts the tender return together with the exclusions then a contract can be entered into as acceptance has been made of the conditional offer.

However in this case primarily to protect the interests of the contractor, the exclusion must be stated in the contract because at face value if the scope document, which has been included in the tender, is bound into or referenced in the contract but not the exclusions. This is an avenue where a dispute could potentially occur if later the developer tried to maintain that the contract sum was to deliver the scope document, particularly if the negotiation was done without minutes being produced or any document that could demonstrate the exclusion was absolute.

Next time, what is needed to ensure a balanced and equitable contract.

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