Verbal agreements: Is your word your bond?

Every day purchases are made from shops and other places without there being any written terms or a signature being obtained. This does not mean there is no contract but more likely that an oral contract will exist because the essentials of a valid contract have been fulfilled: a contract that is governed by a legal framework of common and statutory law. Generally, the receipt of goods at the immediate point of payment will operate without problem but what happens where it does not? One is required to determine whether a contract has in fact been created and if so upon what terms.

The oral contract generally works in such situations because the nature of the transaction is usually straightforward and therefore, as a rule, a detailed record of what is agreed is unnecessary. However, change the context so that payment is made for a product yet to be delivered. Are we then just as content to rely on an oral contract? It depends on a number of things not least the trust one places in the supplier. Generally, one starts to look at specifying requirements in writing so as to provide evidence as to what is agreed to be supplied - you will want what you ordered and possibly within a stated time. The transaction is no longer oral; it is still fairly straightforward but we naturally look to remove uncertainties.

Compare such a situation with carrying out even the smallest of construction works and one quickly realises that it is prudent to cover in writing the many aspects involved. The exchange of such information will usually contain the necessary essentials to create a valid contract and one that is substantially in writing. It is not essential that a formal written contract or indeed a standard form of contract is entered into but it is highly desirable.

If that is so with small construction activities then it follows that with large construction works there is even greater need for a formal written contract. Ideally a standard form of construction contract because by its nature it reduces both risk and transaction costs. But some have questioned the need for a written contract, particularly when partnering.

Sir John was right in that partnering does not rest on contracts, it is dependent upon behaviour. However, an end on the reliance of contracts is another matter

Sir John Egan said that “effective partnering does not rest on contracts” and that he “wished to see an end to reliance on contracts”. Sir John was right in that partnering does not rest on contracts, it is dependent upon behaviour. However, an end to the reliance on contracts is another matter.

What the partnering parties to construction work seek is established in their relationship - however, there is no suggestion that it is not intended to create a legal relationship (nor should there be) and consequently a contract will exist, except on rare occasions, whether or not a standard form of contract has been executed. This contract will expressly or otherwise set out what is expected so how can one possibly conclude that one should end reliance on what the parties seek to achieve?

There is little doubt that Sir John was attempting to move the industry away from wasteful disputatious matters but some of his comments have proved confusing and less than helpful. When his various comments are read together one might conclude that it is formal contracts to which he is referring. If so, this is long way from advocating that no contract should exist and it is unhelpful because anyone who, as a result, relies upon an oral contract (whether or not evidenced in writing) or a collection of documents that is not regulated by a formal contract (preferably a standard form of contract) is clearly inviting big problems.

The various documents that may comprise the contract should communicate all the matters relevant to the construction and regulation of the project. Each and every requirement needs to be spelled out: whether they are actually set out; if so, where they are set out; what documents comprise the contract; and which document prevails. These are all issues.

Documentation containing all the relevant components of a properly constructed standard form of contract is still necessary so why not use such a form, which will aid communication, rather than confuse, ensure all matters are dealt with and provide a record in the unfortunate event of a problem?

Just as importantly it provides a benchmark of good practice and a fair allocation of risk. Oral contracts and those without a formal contract have little use in construction. It is a myth that no contract is
the answer.

Peter Hibberd is chairman of the Joint Contracts Tribunal