Verbal contracts and the Construction Act

This year should see the Construction Contracts Act 2008 in force. The bill is currently passing through parliament and will amend the Construction Act 1996.

The Construction Act 1996 applies only to construction contracts in writing. However, consultations with stakeholders have revealed the desire by some parties for the Act to be extended to cover oral contracts. If the Construction Contracts Bill is not amended and becomes law, section 107 of the Construction Act 1996 will be repealed, opening the gates for oral contracts to be dealt with under the provisions of the new Act.

Considering that many construction projects are started on the basis of a telephone call without reference to a written agreement, for a contractor to be protected by legislation and have the right to adjudicate at any time would appear to be good news. In some cases it will be, but to rely on an oral contract is not a safe option as this often results in litigation and an unsatisfactory ruling.

A foible of the draft Bill is the requirement for adjudication provisions to be in writing. However, should a binding oral contract be established over the telephone or over lunch, it would be unlikely that the parties would even consider setting down the adjudication provisions.

The default position would then be for the adjudication provisions of the Scheme for Construction Contracts to apply. This procedure is likely to be the norm in the industry when oral contracts are relied on.

Legally binding oral contracts are made daily. A telephone call to order labour or materials is commonplace. However, complications can arise when delivery dates or prices are queried, revealing a misunderstanding of the terms.

For an oral contract to be legally binding, the essential terms must be agreed: programme, price, description of work to be done and the commencement date should be sufficient. If only minor terms (such as frequency of payments) have been agreed, but the essential terms have not been agreed, then there would not be a binding oral contract.

Difficulties arise with when the parties later dispute the terms. As there is nothing in writing, differing positions can be taken and the dispute is referred to court.

It is difficult even for a judge to establish the terms of an agreement made orally years earlier, and both parties have varying recollections. The court must examine the evidence available – an obviously expensive and time-consuming procedure.

The quest for evidence that a contract exists would ironically go in search of the written word. This could include contemporary notes taken by the parties – on the backs of envelopes, menus or napkins, diary entries, phone logs, and also the recollections of any witnesses to the alleged agreement.

The court would also apply a deal of common sense when trying to establish the intentions of the parties and would imply any minor terms that are missing to establish a contract that is workable.

To seek to ensure that an oral contract would stand scrutiny in court is in fact tantamount to producing a written contract, which is a far more beneficial route to take.

There will be the facility to refer disputes to adjudication under the new Act. In such cases the adjudicator would rule on the existence of a binding contract.

Generally careless talk must be avoided to ensure that business associates do not get the impression that one is taking part in an agreement to make a binding contract. Accidental contracts may well be formed and could be confirmed by an adjudicator or court as being in force.

Contractors’ staff should be made aware of the dangers and make it clear to clients that the company will not be bound until an authorised person has agreed terms and conditions. Endorsing any documents that may change hands with ‘Subject to contract’ on them should help, but getting it down in writing is still the best policy.