The Fundamentals of Contract Formation and How To Avoid Getting Caught Out!

Today’s blog post has been prompted by a discussion about the fundamentals of contract formation, which has attracted over 80 comments in our exclusive LinkedIn Group of some 2,000 Specialist Contractors!

If you are in the group you may have already seen it, but if you are not in the group, then please come and join us – just CLICK HERE. Either way I have summarised the key points for this week’s Wise Up Wednesday”.

Do Not Start Work!

What I said in the group was “DO NOT start work, order materials, or do any design work, unless and until you are absolutely certain as to what the terms of the contract actually are.”

That is NOT the same thing as not having received contract documents from the Contractor.

In simple terms you don’t have a contract unless you

a) Have an unconditional acceptance of your offer, or

b) Have a signed order / contract agreement, or

c) Have received an order / contract agreement before you started work and have begun work without contesting it.

If the contract is not properly formed then you do not know what your obligations are.

“The Last Shot” Principle

If your tender (in law an offer capable of acceptance), is made on your terms and conditions and you are asked to start work, then if you make it clear that you are only starting work on the basis of their unconditional acceptance of your terms and conditions, then it is your terms that will apply.

This is called the “Last shot” principle.

If they have sent you nothing but still allow you to start work, then this is their acceptance of your offer, which includes your terms, and a contract is formed on that basis.

If they then subsequently send you an order and/or terms and conditions, you need to advise them that it’s too late, because the contract has already been formed on your terms.

One word of caution. You need to make sure that you do actually have your own terms, and that your terms are favourable to you!

Is There A Binding Contract?

Some contributors to the discussion said that they were put under pressure to get on with the work irrespective of the contractual position.

Our advice is don’t be bullied.

If you have sent an offer and received nothing from the Contractor, or they have sent you an order / contract – that is not an unqualified acceptance of your offer, then their order / contract is a counter offer and you don’t yet have a contract.

If there is no contract, then there is nothing to be in breach of.

At this point, it is up to you whether or not you accept their terms or negotiate better ones. You cannot be deemed to have accepted them unless you start work, or sign the contract.

Don’t Accept Onerous Terms!

If you agree to onerous terms and/or an unrealistic period for procurement/installation, or worse still onerous payment terms, then you are putting your head in their noose!

Don’t do it!

Watch out for contracts that say that no payment becomes due until you have signed the sub-contract and sent all the warranties and bonds and guarantees.

If you receive such an order / contract and start work, you are deemed to have accepted these ridiculous terms. You then find that you can’t receive ANY money until you sign – then you sign and find all the onerous clauses, that you never agreed to, being used to reduce your payments.

Stand Your Ground

We know it is tough but as Julian (one of our contributors), rightly said you have to stand your ground. There is only a brief window in the whole procurement and delivery process when you have the upper hand. As he says;

“When you are bidding the Contractor has what you want – the order

When you are working / have finished the Contractor has what you want – the money for what you have already done

When you have been given the job but haven’t started you have what the Contractor wants – your specialist skills and equipment to perform the work that he needs. This is the only time when you have real strength in negotiations and the choice to walk away.”

We are NOT advocating that you use this position to try to gain unfair advantage – what we are advocating is that you use the opportunity to secure a written agreement that reflects your offer and any negotiations that have taken place up to award.

This should include, as a minimum, clear payment rules, a clear programme and a clear scope of works.

Again as Julian rightly says;

“You will get all sorts of abuse, you will be accused of being “contractual”, you will be accused of “holding a gun to their head” they will threaten to give the contract to someone else.

Ignore it all – if your client is not prepared to have a grown up discussion about the fundamentals of your contract before you have spent tens or hundreds of thousands of pounds doing the job, what chance is there of having a sensible conversation when you have given him everything he needs from you and he still has a big bag of your money.

If he would rather give the contract to someone else, rather than formalise what he has already agreed in writing, what does that tell you about his motives?”

Sometimes you have to be prepared to walk away.

Don’t Underestimate Your Value

Don’t underestimate the value that you bring to the Contractor – if they can get away with imposing ridiculous terms on you then they will.

But it is currently a seller’s market and you should be in a position to reject onerous terms and still win work. If you aren’t in that position then we need to talk about your marketing, but that will have to wait for another blog post.

If you need an immediate solution in the form of initial free advice* from our nationwide team of highly qualified and experienced professionals, please give us a call on 01773 712116, or email us at info@streetwisesubbie.com (please don’t click reply to this email as it will not be picked up as quickly).

If you are looking for free information please check out our main web site; HERE IS THE LINK

StreetwiseSubbie’s Nationwide Network of Consultants are experts in helping you to deal with everything the harsh world of construction and engineering throws at Specialist Contractors. So if you would like a confidential chat please call us for initial free advice on 01773 712116.

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It’s Wise Up Wednesday! Give A Man A Fish or Teach Him To Fish?

You’ve heard this old saying before;

“Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.”

And thanks to Bruce Kasanoff for his blog on this subject and inspiring today’s Wise Up Wednesday!

Bruce’s proposition is that this saying is all wrong!

He goes on to say that “When a person is “starving”, that’s not the time to fill their head with knowledge. The right thing to do is to first give the person a fish – banishing their hunger – and only then teach them to fish.”

And I reckon that there is a good deal of truth in what he says.

As he rightly points out, few of us understand the anxiety, confusion, and uncertainty that comes with overwhelming need. People in the midst of personal or business disasters are reeling. They can’t think straight. Their nerves may be shot. Their confidence may be non-existent.

That might sound a bit extreme but I have spent a lifetime both in Specialist Contracting and advising Specialist Contractors, and I have both experienced and seen what he means first hand.

Do You Know A Specialist Contractor Who Could Do With Some Support?

Sometimes even affluent, outwardly successful business owners and directors lack confidence and – at least temporarily – the ability to think straight.

Sometimes the treatment meted out by unscrupulous Contractors is just too much to handle, especially if starves their firm of cash and threatens its very existence.

We know that rushing to offer a struggling person long-term advice is a waste of time, because what they need is a short term solution.

As Bruce says, it makes far more sense to help them regain their equilibrium. Once this happens… once their ears, heart and mind open, then you have an opportunity to help them learn that new skill. But for now we know they need that fish on a plate ready to eat!

And that’s the whole point of today’s Wise Up Wednesday.

Fish On A Plate and Free Fishing Lessons!

Whether you need that fish on a plate, or free fishing lessons, we have the answer.

If you need an immediate solution in the form of initial free advice* from our nationwide team of highly qualified and experienced professionals, please give us a call on 01773 712116, or email us at info@streetwisesubbie.com (please don’t click reply to this email as it will not be picked up as quickly).

If you are looking for free information please check out our main web site; HERE IS THE LINK 

StreetwiseSubbie’s Nationwide Network of Consultants are experts in helping you to deal with everything the harsh world of construction and engineering throws at Specialist Contractors. So if you would like a confidential chat please call us for initial free advice on 01773 712116.

I hope you enjoyed this week’s Wise Up Wednesday, and if there is anything you would like us to cover please email me at info@streetwisesubbie.com.

Once again thank you all for your support.​

P.S. Remember you can have a great discussion about all the issues we cover in Wise Up Wednesday with almost 2,000 other Specialist Contractors in our free to join LinkedIn Group here; LinkedIn Group

Why Specialist Contractors Aren’t Getting Paid…

Sadly yet another Specialist Contractor went to the wall  this week as Wrexham-based specialist steelwork contractor L M Engineering Services went into administration.

No doubt that when the details come out they will show that the firm, which specialised in stainless steel structures for the nuclear and process industries, didn’t get paid on time!

It’s that simple!

Businesses fail because they don’t get paid when they should!

Businesses fail if they don’t get paid, even when they are profitable!

Scarily businesses fail faster when they are growing!

We see a lot of discussions about payment, in our free  LinkedIn group (see below) the complexities of the payment process, the penalties that late payment should attract and the difficulties of using existing dispute resolution processes.

As one of our contributors rightly said;

“You can make the punishments as tough as you like but if you can’t establish your basic entitlement to payment quickly and cheaply, the penalties just won’t be pursued.

When the amount “Due” and the “Final Date for Payment” are clear, existing remedies such as Adjudication, Late Payment of Commercial Debts and Small Claims are quick and easy to use and effective.”

Justin went on to suggest that to make effective use of these tools you need to know only 2 things

HOW MUCH? (am I due to be paid)

and

WHEN? (am I entitled to receive it).

And I absolutely agree with him. If you know these two things with certainty then the process of ensuring you get paid what you are entitled to, and on time, gets a lot easier.

Notice that I said “the process of ensuring you get paid” and “gets a lot easier”.

That’s because getting paid has to be treated as a process and it’s a process that’s never entirely easy!

One of the biggest obstacles to overcome is the determination and ingenuity of certain unscrupulous Contractors when it comes to finding ways not to pay. As a result, many contractors have drafted payment regimes that comply with the letter of the Construction Act but completely avoid its intent.

So, the first part of the “process” is ensuring that you DO NOT sign up to contracts that you do not understand.

If You Don’t Understand It – Don’t Agree To It!

Very often that’s easier said than done!

Contractors know this and have put such convoluted payment terms in their “standard” contracts that it is very difficult to show that a payment actually became due at all.

Watch out for their ridiculous requirements for a “valid application” which is a precursor to a payment becoming “due.” These include full substantiation of all amounts applied for, copies of invoices, forecast final accounts with every interim application, etc.

That way they can say that your application doesn’t comply with the contractual requirements and no payment becomes “due”!

Don’t agree to these clauses unless you fully appreciate their impact. And don’t allow yourself to be pressured into doing so because you think you have no option because you want the work.

Do you want the work so much that you are prepared to do it for nothing?

Because that might very well be how it turns out!

Onerous Terms That Still Meet the Act!

If the contract complies with the Act then it is the contract which applies.

But remember, and beware, because the Act does not preclude the onerous requirements for substantiation and the like that certain Contractors may have put there!

If you are in any doubt about what the payment terms mean, or whether or not the terms and conditions are onerous you need to take professional advice and StreetwiseSubbie’s Nationwide Network of Consultants are experts in helping you to deal with such matters.

If you need help, you can call us for initial free advice on 01773 712116.

It’s Wise Up Wednesday! Onerous Conditions Can Cause Fireworks, And Not The Pretty Kind!

Remember remember the 5th of November…

And another thing to remember is that not all contracts are the same!

Onerous terms aren’t pretty, and you will usually find them lurking in the depths of Client’s or Contractor’s own “non-standard” documents,  but they can also arise as amendments to Standard Form contracts.

These terms are deliberately designed reduce your entitlements and increase your obligations. They will certainly make your life more difficult, they could end up costing you a substantial amount of money, and in the worst case scenario they may even cost you your business!

The simplest way to put onerous terms into context is to ask yourself this question; “Why, when there are all manner of Standard Form contracts around such as JCT, NEC and MF/1, does anyone need to produce their own terms?” It isn’t for your benefit!

So, what are the things you need to look out for? Here are some examples;

(a)          Extended payment periods

(b)          Long notice period before you are allowed to suspend performance

(c)           Pay when certified (unlawful in contracts to which the Construction Act applies)

(d)          Extended fixed price periods

(e)          Non-payment for unfixed materials

(f)           Excessive discount

(g)          Discount not linked to prompt payment

(h)          Excessive retentions and/or prolonged repayment periods.

(i)            Onerous set-off  and cross contract set-off clauses

(j)           Acceleration without payment

(k)          Vague programme information.

(l)            Design fitness for purpose obligations

(m)         Open ended co-ordination obligations

(n)          Restricted rights of recovery on variations

(p)          Protection of your  works

(q)          Client’s milestone dates for access

(r)           Excessive liquidated damages

(s)           Restricted extension of time entitlements

(t)           Restricted loss and expense entitlements

(u)          Delay notice periods made a condition precedent

(v)          Adjudication entitlements restricted or delayed

(w)         Costs of adjudication to be paid by the Sub-Contractor

(x)          Other Construction Act abuses

DON’T ALLOW ONEROUS CONDITIONS INTO THE CONTRACT!

Obviously the best time to find out about onerous provisions is at the enquiry stage before you have even submitted your price. You should always be clear about the terms and conditions you will be working under if your tender is successful.

If you don’t know or don’t have time to find out about terms and conditions you should always qualify your tender. For example you could qualify it by saying something to the effect of

“Our price is based on the assumption that an appropriate JCT Standard Form of Sub-Contract will be used and subject to agreement of all necessary details to enable Articles of Agreement to be completed”

Or

“Our offer is subject to the agreement of appropriate terms and conditions and we have not priced the risk of entering into any onerous or non-standard form of agreement”

If your tender is successful then you will be invited to enter into a contract or possibly sent an Order or Contract to sign. This is a very dangerous time because a contract, including the onerous provisions could easily come into being!

The first line of defence lies is recognising onerous terms and conditions in the first place.  Whilst you may be tempted to ignore the small print, you may subsequently find that a contract has come into force incorporating onerous terms which have fatal consequences for your business.

You need to act quickly and carefully. Don’t think that you can start work, even design work or ordering materials, and just because you haven’t signed the contract everything will be alright. It won’t!

The contract conditions should be carefully checked, particularly if they are contained in a completely non-standard form. Beware too of contracts that purport to be Standard Forms but then have pages and pages of amendments.

Unfortunately, you also have to be wary of clauses that are not there, as well as checking the ones that are!

For instance, if you are designing the works and the contract is silent about design liability, then you will have a very onerous “fitness for purpose” obligation. This is much worse than it sounds because you are literally guaranteeing your design will satisfy the Employer’s needs irrespective of what you knew or didn’t know about his business or industry.

In order not to be caught by onerous provision you must make it perfectly clear that you are rejecting their onerous terms. Notice I said rejecting their terms, not rejecting their order.

There may be times when you have to take a commercial decision to accept onerous terms and conditions of contract.  In this situation you need to be very clear about the risks you are running and manage them accordingly.

I hope you enjoyed this week’s Wise Up Wednesday.

If you are in any doubt about whether or not the terms and conditions are onerous you need to take professional advice and StreetwiseSubbie’s Nationwide Network of Consultants are experts in helping you to deal with such matters. If you need help, you can call us for initial free advice on 01773 712116.

Once again thank you all for your support.

Best regards

Barry

P.S. Remember you can have a great discussion about such matters as we cover in Wise Up Wednesday with almost 2,000 other Specialist Contractors in our LinkedIn Group here; LinkedIn Group