Disputes arising out of Building Contracts

Disputes commonly arise out of building contracts. These could include arguments as to quality or price, being kicked off site or being asked to do more than what was initially agreed. Joanna Thompson, Commercial Litigation and Dispute Resolution department, provides an overview of the relevant legal issues in this area and how to avoid unnecessary disputes.

Contract

There is regularly confusion as to what constitutes a contract. To form a contract, there must be an offer (usually provided in quote form in these circumstances) and acceptance of that offer (this can be in writing (which includes emails as well as letters) or verbally). There must also be some consideration from both parties i.e. services provided for money. If these three main elements are present, then it is highly likely that a legally binding contract has been formed.

It is sensible, however, to put the specific terms of any contract in writing. Although a quote and acceptance of the quote type-scenario does form a contract, it can be difficult to deal with if a dispute were to arise. This is mainly because the argument becomes one person’s word against the other as to what terms were agreed. A dispute is also more difficult to resolve when there is no written contract due to the lack of specific information provided.

If there is a written contract, the courts (following the Parol Evidence Rule and reinforced in the recent case of Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (trading as Medirest) (2013)) are likely to find that any verbal agreement that attempts to change or add to a written agreement that appears to be whole does not form part of the contract. It is therefore very important for all parties’ sakes to include all agreed terms in any written contract.

Express Terms

Within any written or verbal contract, there will be express terms. These are terms which both parties agreed to and which form the basis of the agreement. Examples of express terms could include timescales, materials, and/or price. Clearly, it will be easier to prove whether a term was express if it is in writing.

Implied Terms

In addition to the express terms of the contract, there are terms implied by statute into every contract, whether the contract is verbal or written and irrespective of whether the parties agreed to them forming part of the contract. Terms can be implied into a contract through a number of avenues:

  • usage or custom;
  • parties’ previous course of consistent dealing;
  • intention of the parties;
  • common law, where the implied term is a necessary part of a particular type of contract; and/or
  • statute (see below for further information on completing works with reasonable skill and care and within a reasonable time).

Reasonable Skill and Care

There is no definition of “reasonable skill and care” in the relevant legislation, leaving this open for interpretation depending on the situation. What is reasonable for one line of work may not be reasonable for another and every job is different. Therefore, when judging whether services have been carried out with reasonable skill and care, the workmanship throughout is reviewed. There is no assessment of the end result.

Reasonable Time

This is only relevant where no time limit has been set out or there is no mechanism for determining the time for performance. Again, there is no specific definition in the legislation, allowing for decisions to be made on the facts. A useful example is given in s.52(2) of the Consumer Rights Act 2015 explanatory notes:

“An individual engages a builder to rebuild a 1 metre high, 25 metre long garden wall. At the outset, the individual agrees the price with the builder, but not a deadline for completion of the work. If, six months later, the work had not been completed, the builder would most likely not have carried out the work within a reasonable time.”

Implied terms are more difficult to prepare for pre-emptively if you are not experienced with such issues, however, they can be excluded in some contracts (subject the relevant provisions in the Unfair Contract Terms Act 1977 and now the Consumer Rights Act 2015). Advice should be sought if you are in any doubt whatsoever about the terms implied into a contract (contact details can be found at the end of this article).

Variations to the Contract

If there is any change to the agreed terms of the contract, this will be classed as a variation. It is a good idea to provide in a written contract clauses in relation to what procedure to follow should there be a variation, including how to value the change. As previously mentioned, the courts are not likely to find that a verbal variation has occurred, so all variations should be made in writing.

If there is no written agreement in this regard, then “quantum meruit” may occur (see below).

Quantum Meruit

The Latin phrase “Quantum meruit” literally translates into “what the job is worth”; this is in relation to work done outside of the agreement and is usually judged at a fair commercial rate (including cost of materials). Quantum meruit occurs if the parties have:

  • not agreed a contract or not agreed all the terms, including the price for the work;
  • agreed to pay a reasonable sum for the work done; or
  • agreed a scope of work under the original contract and the work falls outside that scope (where the parties did not have or did not use a variation procedure in the contract).
  • A contractor may sometimes claim a quantum meruit if it has worked under a letter of intent.

If you are a business that deals mainly with consumers, please click here to read about the changes in the law that specifically affect consumer transactions.