In the construction industry, few phrases are as common as “we just cracked on.” It captures a familiar pattern. There is pressure to mobilise, dates have already been promised to the client, labour and materials have been lined up and nobody wants to be the person holding up the job because the paperwork has not been finished. Commercially, that is understandable. Contractually, however, it can create significant problems.
Time and again, disputes arise because work started before the parties had properly established what terms applied, exactly what was included in the price or scope, or who carried particular risks. The reality is that construction projects do not always wait for every contractual detail to be finalised before work needs to begin. Where early mobilisation is necessary, the important point is to understand the basis on which the work is proceeding, what has been agreed, and which issues still need to be resolved before the project moves too far forward.
Can you start construction work without a signed contract?
One of the first misconceptions is that, if the formal contract has not been signed, there is no contract. That is not necessarily the case. A binding contract can arise through the parties’ words and conduct even where the formal document they expected to sign was never executed. Whether it has done so, and on what terms, will depend upon what the parties objectively agreed through their communications and conduct.
The well-known Supreme Court decision in RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14 illustrates the problem particularly well. The parties decided, for commercial reasons, to start work while negotiations continued. The contemplated final contract was never signed, leaving the Court to determine what contractual relationship had actually arisen.
The case of Cartwright Pond Ltd v Wild [2021] EWHC 1600 (TCC) provides another useful example. The tender documentation expressly contemplated use of a RIBA form of contract, but the formal contract was never completed or signed. The Court held that the RIBA form did not form part of the agreement and instead identified a simpler contract from the tender documents, correspondence and other material exchanged between the parties. The result can therefore be uncomfortable. Parties may have a binding contract, but not necessarily the contract they thought they were going to have.
What exactly have you agreed?
The difficulty is therefore often not simply:
“Do we have a contract?”
It is:
“What exactly is our contract?”
That question becomes particularly difficult where negotiations are still ongoing when work begins.
The main commercial terms may have been broadly agreed, while a schedule of amendments, tender qualifications or other contractual provisions is still being exchanged and revised. An employer or main contractor may have issued proposed terms, the contractor or subcontractor may have returned a marked-up schedule, and further versions may continue to pass between the parties after works have started.
It may also be dangerous to assume that provisions which have been marked as “agreed” during that process necessarily form part of the contract if the wider contractual negotiations have never been concluded. If the formal contract is never ultimately signed, it cannot simply be assumed that the latest version sitting in somebody’s inbox represents the agreement.
Arguments can then arise over which terms were accepted, which remained under negotiation and whether starting or continuing the works demonstrated agreement to any particular version. That uncertainty creates risk for both sides.
A contractor or subcontractor may discover that a qualification or exclusion it thought had been agreed does not form part of the contract. Equally, an employer or main contractor may find that an amendment or protection on which it expected to rely was never incorporated at all.
Starting work does not necessarily bring those negotiations neatly to an end. It can instead move the debate from what the parties are prepared to agree to the much more difficult question of what they have already agreed by their words and conduct. Those questions are much easier to resolve before significant sums have been spent and the answer has become commercially important.
Make sure the scope is clear
Scope is one of the areas most vulnerable to the “just crack on” approach. A contractor or subcontractor may price a particular package on the basis of drawings, specifications, tender clarifications and qualifications exchanged during negotiation. Work begins while the contractual documents are still being assembled or when the design is still being progressed.
Months later the parties may disagree about whether particular work was:
- included within the original price;
- excluded or qualified at tender stage;
- required to complete the agreed works; or
- genuinely additional work.
If the parties cannot clearly identify the original contractual scope, it becomes much harder to establish whether something is actually a variation from it. The same issue arises where tender qualifications have not clearly found their way into the eventual contractual documents, or several versions of drawings, specifications, orders and amendments are circulating. At a minimum, there should be clarity about the documents defining the scope and any important exclusions, qualifications or assumptions.
Know what the payment terms actually are
Payment is another area where uncertainty at the outset can quickly become expensive. The parties may be negotiating detailed payment provisions covering application dates, due dates, final dates for payment and notice requirements. If work starts before those terms have actually been agreed, it may later become necessary to establish whether the proposed payment mechanism became part of the contract at all. That can produce an unwelcome result for either party.
A contractor or subcontractor may find that the application, valuation or payment procedure it expected does not apply. Equally, an employer or main contractor that intended to secure a longer payment cycle may find that those proposed terms never became binding and that the statutory payment regime applies instead.
For qualifying construction contracts, the Housing Grants, Construction and Regeneration Act 1996 requires an adequate mechanism for determining what payments become due and when, together with a final date for payment. Where the parties have not agreed compliant provisions, relevant provisions of the Scheme for Construction Contracts can apply.
The resulting payment timetable may be materially different from the provisions the parties had been seeking to negotiate. Before significant work is undertaken, both parties should therefore understand:
- when applications are to be made;
- how the amount due will be assessed;
- when payments become due;
- the final date for payment; and
- the applicable payment and pay less notice requirements.
Do not overlook the programme and delay risk
The same applies to time. Both parties need to understand what has actually been agreed regarding the contractual completion requirements and any important milestones.
For the party carrying out the works, that means understanding the circumstances in which additional time may be available, what needs to be notified if delay occurs and the potential exposure to liquidated damages or other delay losses.
For the employer or contractor above them in the supply chain, it means being clear about what completion obligations have actually been imposed and whether the contractual protections intended to deal with late completion form part of the agreement.
In more serious cases, problems with the contractual time provisions can result in time becoming “at large”. Broadly, this can arise where there is no effective contractual completion date, or where the contractual machinery cannot properly deal with delay for which the employer or contractor is responsible. The obligation may then become one to complete within a reasonable time rather than by the original contractual completion date.
That can have significant financial consequences for both sides. An employer or contractor may lose the ability to rely on contractual liquidated damages tied to the original completion date, while the contractor or subcontractor may also face uncertainty over contractual extension of time and associated loss and expense entitlements. Claims may instead have to be assessed under more general contractual principles.
What about a Letter of Intent?
Sometimes there is a genuine commercial need for work to begin before the full contract can be completed. A properly drafted Letter of Intent can provide a controlled mechanism for limited work to proceed while the remaining terms are finalised. But a Letter of Intent should not simply become an indefinite substitute for completing the contract. It should be clear about matters such as the work authorised, the financial limit, the period for which the authority applies and the terms governing that work.
The danger comes when a limited authority intended to cover a short period of preliminary activity quietly becomes the basis on which a substantial proportion of the project is delivered. We have considered Letters of Intent in more detail separately, but the same overall lesson applies: understand the contractual basis on which work is proceeding and do not allow a temporary arrangement to continue indefinitely simply because everybody is busy delivering the project.
What should be agreed before construction work starts?
Where the full contract cannot immediately be completed, the parties should at least identify the important matters that have been agreed and those that remain outstanding.
- Contract documents: Which documents, and which versions, actually form the agreement?
- Scope: What exactly is included, and what important exclusions or assumptions apply?
- Payment: What payment mechanism and timetable govern the works?
- Time: What are the commencement, completion and milestone requirements?
- Risk: Who carries the important design, site, delay and other project risks?
- Notices and records: What needs to be notified or recorded during the works to preserve each party’s position?
There is little value in spending weeks negotiating detailed contractual protections if the parties then start work on a basis which means those protections never become part of the agreement.
The paperwork is part of delivering the job
Time taken to get the contractual position clear at the start can save significant time and money dealing with the issues that arise when the position is not clear. When parties start work before negotiations are complete, neither side should assume that the contract they intended eventually to sign is necessarily the contract they have actually made. The question will ultimately be what their words, documents and conduct objectively demonstrate they agreed.
How CCC can help
Contract & Construction Consultants (CCC) advises employers, contractors, subcontractors and consultants on construction contracts and commercial project management.
We can review proposed contracts and amendments before work starts, identify the provisions carrying the greatest commercial risk and assist with negotiating workable terms. Where negotiations are still ongoing but the project needs to mobilise, we can also help identify what needs to be settled or documented to reduce uncertainty over the basis on which work is proceeding.
Where a project has already started without the contractual position being properly resolved, we can review the contractual documents, amendment schedules and correspondence to help establish the parties’ position and advise on practical steps before that uncertainty develops into a dispute.
Contact us for a free initial consultation.
