Contracts at the OK corral: Conflicting terms

In today’s wild west of a construction industry, the weak are leaving town in droves, there’s a full scale shoot-out for any new commissions, and it’s a major battle to ensure any jobs run smoothly. All the while, the recession-induced “claims mentality” brings hails of legal bullets to dodge. To cap it all, you may have to fight even to get paid.

So many battles, so many casualties. And, alas, a number of fatalities, God rest their corporate souls. As if that were not alarming enough, there’s a fair chance you are engaged in silent battles that you don’t even know about. Known in legal speak as “the Battle of the Forms”, the issue was recently brought to the foreground by the case of AE Yates Trenchless Solutions vs Black & Veatch.

In order to understand how contracts can go terribly wrong, we first need to look at how they should go right. To form a contract in law, you need (among other things) an offer by one party and an acceptance of that offer by the other.

Yet it is frequently the case, particularly in the construction context, that parties exchange a succession of conflicting contractual proposals, neither ever accepting the terms they receive. In such circumstances, all terms subsequent to the first “offer” simply form “counter-offers”.

If it stops there, and each party rides off into the sunset, then the position is simple. No contract is concluded as there is no acceptance of any of the offers. The difficulty lies where the parties start to act as if they have a contract in place, for example by issuing or acting on instructions. Whose terms will take precedence when neither set has been accepted by the other?

This was the dilemma presented in the AE Yates case. The whole mental exercise was made rather more challenging by the fact there were two parallel sets of contractual exchanges going on between the parties, one concerning the main contract and another for materials, but we shall look only at the main contract exchange. The essential question was whether the IChemE Form (the “Brown Book”) terms were incorporated into the main contract. Gleeson, the contractor, was very much hoping they were, as they would work in its favour in relation to problematic ground conditions that its subcontractor, Yates, was claiming delayed and disrupted its work.

Yates never did confirm acceptance of the contract terms. However, it proceeded with the work, So was acting as if it did have some sort of contract in place. But which?

The story went as follows. Gleeson had invited Yates to submit a tender on the basis of the IChemE Form. Yates did indeed tender, but on its own terms, not incorporating the form. This tender amounted to an offer by Yates. Gleeson and Yates met to discuss Yates’ tender and agreed most of the terms. However, they could not agree on certain critical elements, including liquidated damage terms. As a result, this could not be deemed to be an acceptance by Gleeson of Yates’ tender.

Gleeson then sent Yates a proposed contract, once again incorporating the IChemE Form. This amounted to a counter-offer. Yates explained that it would send the contract to its head office for approval. This was clearly not an acceptance. On the other hand, it was not a rejection either.

In fact, Yates never did confirm acceptance. However, it proceeded with the work, accepted variation instructions, and eventually claimed compensation for delay and disruption to its work. So, significantly, Yates was acting as if it did have some sort of contract in place.

But which contract? Notwithstanding the conflicting exchanges, the court found that Yates’ conduct had effectively “accepted” Gleeson’s last set of terms. So the IChemE Form was incorporated after all, much to the dismay of Yates.

We all know how satisfying it is to sneak the last word into any argument, and this truism is reflected in the legal principle underlying the “Battle of the Forms”. The terms most likely to prevail are the last set of terms to be sent which are not actually rejected by the other contracting party – a principle which those involved in securing commissions would do well to remember. Or, reverting to our cowboy analogy, when it comes to a showdown, you want to be sure the final shot to ring out is your own.