Lost for words

30 April 2014

Without a formal contract implied terms come into play. It’s a complex area.

Negotiating professional appointments and building contracts can take up a lot of time at the start of a project. There is good reason for this however as it ensures that the parties’ rights and obligations are clear and evidenced in writing from day one. But what happens when there is no formal agreement in writing or the agreement does not address all the issues? How are the parties’ rights and remedies of contracting parties established?

Terms can be implied into contracts either by statute or at common law (i.e. developed over the years by the courts).

The main statutory implied terms which apply to construction contracts come under four acts.

  • The Construction Act requires construction contracts (including building contracts and professional appointments, but excluding such agreements with residential occupiers) to include specific arrangements regarding payment and the settlement of disputes by adjudication. If the parties’ own terms do not comply with the Act, default payment and adjudication terms will be implied into the contract.
  • The Supply of Goods and Services Act implies terms into contracts relating to the provision of goods and services. In contracts for the provision of services, the person providing the services must exercise reasonable skill and care and complete the services within a reasonable time. If the contracting party is to provide materials, these must be of satisfactory quality. In the absence of agreed payment provisions, the employer is to pay a reasonable price for the goods or services.
  • Under the terms of the Sale of Goods Act, the contractor must use materials of satisfactory quality and ensure that goods are reasonably fit for purpose (if any particular purpose is made known to the contractor).
  • The Defective Premises Act applies to works to residential properties. It requires any person taking on work for or in connection with a “dwelling” to see that the work or services are carried out in a workmanlike and professional manner - to ensure that the property will be “fit for habitation” when completed. This has been covered fairly frequently in these pages in the past few years.

Opt out

Although terms can be implied into contracts, in some circumstances it is possible to contract out of them; it depends on the terms. For example, you cannot contract out of the Construction Act.

Outside the world of terms implied by statute, the common law will imply terms in certain circumstances. Examples of these are an implied obligation on an employer to allow a contractor possession of the site in good time and not to hinder the contractor in the performance of its work.

However, the courts have made clear that they will not imply certain obligations into a contract.

  • They will not imply an obligation for a contractor to work regularly and diligently by reference to a contract programme.
  • There is no implied term that a building will be fit for purpose if it is built in accordance with plans prepared by the employer.
  • There is no implied term that the employer will give the contractor uninterrupted possession of the site.

The world of implied terms can be a bit of a minefield. While it can give parties protection in certain circumstances, the courts will not always imply terms that may, to one party, seem obvious. The solution is to make sure that you have clear contractual terms. It should then be possible to avoid potentially expensive and unnecessary disputes about the nature of contractual obligations.

Periodic payments

The Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009 the Construction Act - imposes specific requirements on construction contracts in two specific areas: payment and adjudication. Since 2011, it has applied to oral contracts as well as those in writing. The Act does not apply to contracts with residential occupiers.

Under the Act a construction contract must include provisions for periodic payment unless it is expected to run for less than 45 days. Where the payment provisions in the Act apply, the contract must provide for the issue of payment certificates (by either the payer or the payee) setting out the proposed sum for the contractor or consultant for the period in question, plus the basis for the payment. If the payer proposes to pay less than the sum certified, it must serve a pay less notice, setting out what it proposes to pay.

Construction contracts must include adjudication provisions which comply with the Act. Adjudication is a short form dispute resolution procedure under which the adjudicator is generally required to makes its determination within 28 days of referral. Where the contract does not include Act compliant adjudication provisions, these will be applied under the statutory Scheme for Construction Contracts.

Source: RIBA Journal