As construction litigators, one of our first questions for a client with a prospective claim, or one which has had a claim raised or threatened against it, is "what does the contract say"? Hopefully at that point a fully and properly executed contract is produced, with reference to a familiar set of standard terms and conditions along with a complete suite of technical and ancillary documents. All too often though we hear the words "there is no contract."
That is of course almost never the case.
A contract can be formed when one party offers to do or supply something, often but not necessarily in return for some kind of remuneration, and that offer is accepted by another party. The ideal scenario is that there is something in writing of course, but a verbal contract is just as binding on the parties as a fully worked up set of terms and conditions. But the terms of verbal contracts, as you would expect, are more uncertain and the difficulty lies when one party thinks one thing was agreed (and contracted for) and the other has a different view. The worst situation of all is where parties have reached a "sort of" agreement, but the terms of that agreement are yet to be agreed.
Lord Braid recently issued a decision on whether a choate (i.e. complete), binding and enforceable contract was concluded between two parties at a meeting and, if so, what the terms of that contract was. Each situation is different, and necessarily turns on its own facts but this is a useful reminder of how a contract can be constituted under Scots Law.
The moral is to beware, not every deal needs pen (or electronic signature) to paper.
The case was Supaseal v Inverclyde (2022).
Supaseal manufactures and supplies double glazing units. Inverclyde supplies and installs replacement windows, glazed doors and conservatories. It was contended by Supaseal that a contract had been entered into whereby, amongst other things, Inverclyde agreed to purchase all of its glass from Superseal at prices agreed on an annotated price list and separately that Inverclyde was in breach of that contract.
Inverclyde in contrast argued that no binding contract was concluded on the basis that the verbal exchange between the parties was an agreement in principle, or an agreement to agree, which was never committed to writing.
It was not disputed that the meeting had taken place, that the principals of each party had annotated a price list following a discussion on supply of materials, or that Inverclyde had agreed in principle to enter into an exclusivity agreement.
So, the key point for the court was whether the parties had in fact reached a contractually binding agreement or whether agreements were reached in principle subject to contract at a later, undefined date.
Is there a contract?
Lord Braid's analysis set out six salient considerations when assessing whether, and to what extent, a contract is agreed between two parties as follows:
- Not every contract has to be in writing.
- Whether a binding agreement has been reached must be assessed objectively.
- The words and actions of the parties are key, rather than the intentions or thoughts of each.
- If parties to an agreement intend that a written agreement be entered into (i.e. If parties reach an agreement to agree only) they are not bound until that written agreement is executed.
- The bare fact that parties intend to enter into a formal contract does not of itself mean that they are still negotiating.
Agreement must be reached on the essentials, which will vary from contract to contract.
Ultimately the test of whether a verbal agreement is enforceable is whether it is sufficiently specific as to enable enforcement by way of specific implement. In this case the parties entering into the contract, the subject matter, the term and the price were all agreed, which was enough to form the contract. Lord Braid noted that undoubtedly if a solicitor were charged with drawing up an agreement it would likely have "bells and whistles" attached, but that that did not impact on the basic fact that the essentials had been agreed in sufficiently precise terms.
In the construction industry, where work is done, and paid for (or not) there is almost always a contract whether or not committed to paper. However, where there is nothing in writing, identifying what the contract requires of each party, how and when, is not always such a simple task.