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Contract Formation – 5 Frequently Asked Questions
March 11, 2013 | Construction Contracts
In the challenging economic times, all parties within construction contractual chains are seeking to keep costs as low as possible in order to maintain profits. The best way for parties to keep themselves protected is by relying on well drafted contracts. It is therefore more important than ever to ensure that contracts have been formed properly. In this article, we identify 5 of the most frequently asked contract formation questions.
1. Do I need to supply a copy of my standard terms and conditions (“Ts & Cs”) in order for them to be incorporated?
It is good practice (but not necessarily essential) to provide a copy of your Ts & Cs to the party you are contracting with in order for them to be incorporated properly.
If your contractual document (which must state that your Ts & Cs apply) has been signed by the other party, it is likely that they will be bound by all terms, even if they have not read them. However, it is generally considered that, the “Ts & Cs apply” statement should be above any required signature box.
If your contractual document which states that your Ts & Cs apply does not require a signature (for example a purchase order) you are obliged to take “reasonable steps” at the time of contracting to bring all terms to the attention of the other party. Therefore, when providing the other party with your contractual document you must make it clear that your Ts & Cs apply and, if you have not provided a copy, that they are available on request.
The courts have construed the “reasonable steps” obligation fairly widely. For example, in the Court of Appeal case of Rooney v CSE  the court said that the wording “terms and conditions available upon request” alone would probably mean that the terms apply to the contract, even though that wording does not expressly state that any Ts & Cs apply. However, relying on this statement alone is a fairly risky tactic; it is best to ensure that, during the pre-contract negotiations, your Ts & Cs are specifically brought to the attention of the other party.
An additional point to note is that any post-contract documents (such as invoices) which refer to Ts & Cs will not effectively incorporate the Ts & Cs into the contract – the other party must be made aware of all terms before they enter into the contract.
2. What happens if I make a mistake when putting the contract together? Can it be rectified?
This will depend on the precise nature of the mistake that has been made and how obvious it would have been to the other party that the mistake existed. If you have made a mistake and it cannot be said that the other party should have realised, there is often little recourse in rectifying the mistake (unless the other party agrees to enter a deed of variation, which is discussed below).
However, as the court clarified in the case of Traditional Structures v HW Construction , if it can be said that a “unilateral mistake” has occurred, the court may rectify the mistake in certain circumstances. This will be dependent on the other party (1) knowing that a mistake existed and (2) their conduct in failing to point out the mistake being “dishonest” or “unconscionable”. In the Traditional Structures case, the sub-contractor’s tender document mistakenly stated (due to a clerical error) that steelwork and cladding would be £37,573.43 when in actual fact steelwork would be £37,573.43 and cladding would be £32,365.83. The court found, considering the sum which had been mistakenly excluded compared to the sum which had actually been quoted in the tender document, that the contractor must have known there was a mistake. The court proceeded to rectify the mistake.
3. What if I need to rely on a document that isn’t listed as forming part of the contract?
Generally, if a document is not expressly listed as forming part of the contract, then you will not be able to rely on it. However, occasionally contracts will expressly incorporate “all of the appendices” (or schedules). In these circumstances it is always worth thoroughly checking the appendices in case the document you want to rely on is referred to therein. If the document is referred to, then it might be the case that the document has been incorporated by virtue of the appendices.
An additional point to remember is that when looking at contract formation, the courts generally have regard to the intention of the parties and what each party has led the other reasonably to assume were the acts that they have promised to do. Therefore, if the document you want to rely on formed a significant part of the pre-contractual negotiations, it may be possible for you to argue that the document has been incorporated this way. However, this will greatly depend on the facts of your situation.
4. What’s the difference between signing a contract and executing a contract as a deed?
Generally, there are very few rules about how to effectively sign contracts, provided that it is a duly authorised person within the company forming the contract. This is because contracts do not need to be in writing to be binding.
The rules surrounding the execution of contracts as deeds are more complicated. For a deed to be binding it must be:
- Signed by two company directors,
- Signed by a company director and the company secretary, or
- Signed by one company director whilst being witnessed (the witness must sign to confirm).
Additionally, it must be specifically identified that the document is being executed as a deed.
The primary difference in effect of the two methods of executing contracts involves the length of the limitation period. The limitation period is the period which runs from when a breach of contract occurs to when the victim of the breach of contract is barred from bringing a claim for damages. Under a contract the limitation period is 6 years, whereas under a deed the limitation period is 12 years from the breach of contract.
In light of the above, it is very important to be aware that if you have executed your contract as a deed upstream, you will be liable for any defects for 12 years. However, if you use simple contracts (purchase orders etc.) downstream, your sub-contractors/suppliers will only be liable for defects for 6 years. In these circumstances, you will be left with a 6 year period (years 6-12 after completion) under which you will be liable for defects and you will have no one to pursue downstream. Therefore, it is important to execute any contracts downstream in the same way as you have executed them upstream.
5. What if we need to amend the terms of the contract after it has been signed?
If you need to change the terms of a contract after it has been signed you will need to enter into a deed of variation. A deed of variation formally amends a legal document in situations where the parties need to alter their original agreement.
It is very important to ensure that the terms and wording of the deed of variation easily coincides with the original document so that it can be read, and understood alongside it. In the case of Perriam v Wayne and Daly  the court was highly critical of a badly drafted deed of variation stating that the deed of variation in that case “would win no drafting prizes for precision or clarity. It included errors (the repeated use of the word “tenant” instead of the word “guarantors”) which are acknowledged by both sides, and it also struggled to convey the essential agreement reached between the parties”. In that case the parties (amongst other things) omitted from including an express date by which the variations would take effect. The case highlighted the importance of ensuring that your deeds of variations are clear and coherent in order for them to be effective.This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please contact one of our specialist construction lawyers.
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