In your quote, estimate or proposal, do you say it is ‘subject to contract? Would you have an email footer saying ‘Any offers made in an email or attachments are subject to contract’?
Do you even really know what this phrase means?
When I first practised as a lawyer, lots of process documents were marked ‘subject to contract’ – including invoices… But, if you’re still trying to deny having a contract when you are sending an invoice, your contract process is in deep trouble.
The data continues to show that 1/3 of UK construction projects start without a contract in place. Because English law has few strict formalities, a contract can be formed based on a few agreed facts and how the parties behave.
Every year, the English courts have to determine whether there was a legally binding agreement between two organisations – a judge even admitted that this question is probably the most frequent issue raised in the construction industry.
You shouldn’t really be starting work without a contract of any sort… although you wouldn’t be the first! In fact, it seems we are often caught in a million-dollar hamster wheel.
Subject to contract is intended to be used only when you want to prevent a contract arising before all the relevant terms are agreed. If you are still discussing or negotiating your contract, then it may prevent a contract occurring prematurely. But it won’t work if:
- you add it to a wide variety of pre-contract and post-contract documents from brochures to invoices
- you don’t have processes that ensure you get clear contracts signed
- you start work without getting your terms finally agreed (starting work can be acceptance of their terms).
As with most aspects of contract process, using ‘subject to contract’ without knowing your exit strategy is risky. It’s unclear whether you mean: I’d like a formal contract to record what we have already agreed, I need a formal contract to record our agreement or I am not ready to agree to these terms.
The courts do not necessarily agree with your interpretation of the position: “the mere fact that the letter giving instructions to proceed envisages the execution of further documentation, does not preclude the court from concluding that a binding contract was nonetheless entered into, provided that all the necessary ingredients of a valid contract are present.” (Harvey)
What could it mean?
The problem with ‘subject to contract’ is that it could mean either:
- until there is a signed (or sealed) formal contract between us, we have no contractual obligations to each other ie a contract is a condition precedent to liability, or
- we expect a formal contract but in the meantime we will work on whatever basis we agree ie the phrase is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through.
It’s all a bit like the ambiguity in bi-monthly!
And for the real nerds, this post includes the ‘textbook answer’ from Megarry & Wade’s Real Property.
What should you do?
The truth is that you should only use ‘subject to contract’ where you want to be bound by a formal contract AND can guarantee a formal contract will replace the current paper trail. You might be better off with an oral or part oral-part written contract than no contract at all.
If you do use this phrase, be consistent about when your team can start and when they must stop using it. You also need to make sure you record the agreement, and then sign it, or be prepared to walk away.
Subcontracts are used throughout the modern global economy.
On a construction project they enable a contractor to buy in expertise. The contractor stays legally responsible for carrying out all its scope of works, and will try and safeguard its position by mirroring key obligations, processes, and quality requirements from the main contract in the subcontract. This is known as making sure the main contract and subcontract are ‘back-to-back’.
Subcontract options
There are a number of strategies for creating such a subcontract:
- Use a subcontract created specifically for the main contract, as then the obligations will match – this relies on an unamended main contract; if there are amendments then the subcontract will need similar amendments and option 3 applies
- Use any subcontract but add extracts from the main contract ie scope, quality, testing and processes to create express and clear obligations on the subcontractor – this enables the main contractor to ensure the subcontractor will help it to comply with its own obligations
- Attach a copy of the main contract documents and insert a general requirement for the subcontractor to comply, coupled often with an indemnity – this enables the main contractor to pass on any costs incurred if it or its subcontractors do not comply with the main contract obligations
- Create a bespoke subcontract with clear, fair and transparent terms which reflect the main contract (which the main contractor negotiated to be clear, fair and transparent).
The quickest ways to create a subcontract are options 1 and 3. However, as we rarely see unamended standard forms, let’s park option 1. Option 3 is the most common, but pretty lazy as it relies on negative enforcement ie the indemnity to ensure compliance, rather than positive obligations on the subcontractor (options 2 and 4).
Indemnity issues
When I review subcontracts I come across a number of issues with indemnities – which specifically should only apply where the subcontractor is in breach of its own subcontract. This is best illustrated with this tricky legal conundrum which I came across.
The subcontract said (edited for simplicity):
The subcontractor will observe and comply with the terms of the main contract that relate and apply to the subcontract works… The subcontractor indemnifies the contractor for acts and omissions which involve the contractor in any liability to the employer under the main contract
There were many inconsistencies between the subcontract and the main contract – with no attempt to make them back-to-back. One way around the inconsistencies is to slap in a subcontractor indemnity and hope it all works out (option 3).
To give you a flavour of the issues in this subcontract, let’s delve into just one area:
- The subcontract included no obligation on the subcontractor to provide warranties.
- The main contract included a requirement on the main contractor to get warranties from its subcontractors.
- If the main contractor does not get those subcontractor warranties, the main contract could allow the employer to (1) withhold all money from the main contractor – if warranties are a condition precedent to payment (ie no warranties, no money) – or (2) withhold agreed damages for failing to provide them.
- The subcontract does not include a discrete right to withhold payment or damages from its subcontractor because of the lack of warranties.
- The subcontractor indemnifies the main contractor for acts and omissions (eg failing to provide warranties) which involve liability to the employer.
So whilst the subcontractor has complied with its oblgations under its subcontract – which do not include providing warranties – the main contractor can still refuse to pay its subcontractor for failing to provide those warranties through the indemnity mechanism.
Bonkers!
What should you do?
If you are a specialist subcontractor, you need to understand how the web of contracts, insurances and indemnities can act against you on a project.
If you are a main contractor, focus on creating positive obligations in the subcontract so your subcontractor knows precisely what it needs to do to comply, rather than relying on negative remedies if they don’t… particularly where those obligations are hidden in the numbered documents or main contract package.
Did you or someone in your team ask another company for a copy of their terms so you could copy it/ be inspired by it/ steal ideas with pride? I know quite a few companies whose terms were ‘borrowed’ from a previous business, supplier, competitor, or employer.
Bad for business
The problem with contracts that were copied are that they are like a bag of pick and mix sweets… with everything but the weirdest items (in my case liquorice) included, yet missing some of the key ingredients. The equivalent of a cut and shut car… like the infamous pizza/ferry company during the Brexit fiasco.
Copied contracts don’t sell your business and what’s unique about you. Your contract should be part of your marketing, selling your skills & expertise, explaining your values, and describing what it’s like to do business with you.
They may also contain clauses which come from another legal jurisdiction or which make no sense in your sector. These damage your reputation and will lead to negative consequences if you ever end up trying to defend them in court.
Breach of copyright
But copying someone else’s contract is not just bad for your business, it’s bad legally. Someone owns the copyright in that document – even legal documents acquire rights to prevent others from copying or sharing it without the author’s permission. Copying that contract puts you in breach of copyright, and the owner can take action and send you a ‘cease and desist’ letter.
The problem is that copyright or other ‘intellectual property’ rights are intangible and we find it much easier to consider ownership of tangible items. For example, I own my home, including its porch. The architect who did the designs for our porch owns copyright in those drawings and licensed my builder to use the drawings for constructing the porch. If my neighbour takes a photo of my porch, John owns copyright in that photo but has no rights over the porch or the drawings. If Carole takes a photo of the drawings, she is in breach of the architect’s copyright, as that is copying.
What should you do?
Before you send your terms to a prospective client, check that they are your own words and that they do justice to what’s unique about your business.
Don’t copy and paste!
How are you at treading the high-wire?
Whilst it may not seem relevant, I’m asking because high-wire acrobatics is nearly as hard as treading the fine line between suspending works and abandoning the project.
Because of this, my 500-word contracts do not include a right to suspend carrying out works or providing services. If there is nothing in your contract then your options include statutory suspension, termination, or negotiating a change to the terms.
Option 1: Statutory Suspension
Under English law, if you are working under a construction contract (most contracts for works or services on a construction project), then you have a statutory right to suspend any or all of your duties if you don’t get paid in full on time.
You must give at least 7 days’ notice to the errant payer of your intention to suspend explaining why you have that right (the grounds for suspending).
Suspension does tend to get you the payer’s attention in a way that stroppy emails don’t.
This is a powerful tool to deal with a worldwide key cause of friction. You can suspend all of your duties and ‘down tools’… but a ‘softer’ alternative is to suspend some of your duties such as insuring the works, applying for consents, carrying out new instructions or withdrawing your copyright licence. These provide sufficient leverage without completely undermining the project or your reputation.
Option 2: Termination
Abandoning a project doesn’t mean one day away, but days and days… with no intention of returning to site. Refusing to perform the work (abandoning) is a fundamental breach of contract as it indicates you no longer intend to comply with your duties under the contract. If the other party agrees and treats the contract as at an end, it is now terminated.
Option 3: Negotiation
If all else fails, you will have to sit down and agree a new deal. Any contract can be varied. If there is a mechanism within your contract, please follow it. If not, you’ll need to follow the essentials for a new contract – as well as agreeing how to end the existing one. Whatever you do agree, get it in writing and ideally signed by both parties – this is a panacea for forgetfulness.
What should you do?
If you are struggling to work with your client on a project – however tempting it may be to flounce off in a huff aka ‘down tools’ – check what your agreement says. If there’s nothing, it is worth getting legal advice as suspending without any right will allow your client to claim damages and can be very expensive in the long term.
Even large companies get this wrong – such as the subcontractor on the Wembley football stadium project.
The purpose of a contract is to give you both the right and the duty to provide the entire scope envisaged in your agreement ie all the agreed goods, works and/or services.
But what if you want to split up before then?
As my book on Small Works says As all construction projects [and most other longer term projects] rely on trust and collaboration… once that trust has gone and it’s turned into a sort of turf warfare, then it makes more sense to go your separate ways than continue. [Chapter 19]
If you are working under English law with consumers – people not acting in the course of a trade or business – then the Consumer Rights Act 2015 requires you to allow them to cancel the contract for 14 days after signing – this is a cooling-off period. [See Chapter 18, Small Works]
After that, normal freedom to contract applies which means you can set out the terms on which you can split up. Termination or cancellation clauses are often a mix of:
- A right for the client only to end the contract on notice without giving any specific reason – the equivalent of a no-fault divorce. In reality there is no reason why you shouldn’t allow your client to cancel, provided they compensate you for loss of profit on work you didn’t do, or costs incurred and not yet invoiced.
- A right for both parties to end the contract immediately for insolvency ie an inability to pay their debts.
- A right for both parties to end the contract on notice for certain trigger events – this might include failure to give access, failure to pay, incompetence and so on. Unsurprisingly pandemics and wars are now increasingly featuring on these lists.
Termination should never be wholly one-sided with no right for the provider/supplier to end the contract.
If there is nothing in your contract on termination, then you can only end the contract for fundamental (also known as repduiatory) breach. These are acts which indicate a party no longer intends to comply with its duties under the contract.
This is a tricky area and although abandoning a project or refusing any further payment could be enough, you may not always be able to rely on that action as ending the future obligations under the contract. The law gets complex at this point!
This is why a simple balanced termination clause is one of my must-have clauses… even in a 500-word contract!
What should you do?
Check that every contract you sign has a right for both parties to end the contract before all their obligations are complete – but that the consequences of splitting up are clearly set out.
Except where this is a commercial deal that suits you, do not sign contracts allowing the client to cancel the contract without any reason and without compensating you for lost profits.
I first came across lame clauses in 1995 when I read the back of a bungee jump ‘certificate’ and realised participants had effectively signed their lives away!
More recently, my teenage sons signed up for an unexpected engineering task when they agreed to the safety rules for the mountain carts in Grindelwald. The Safety Rules (T&C) stated that the hirer confirms they have been given a properly maintained mountain cart.
Wow! That’s a totally lame clause designed not to change behaviours ie get users to check the machinery, but simply to deflect blame in the event of an accident. Only the owner can tell if the carts have been properly maintained.
So what about the privacy notices for the websites you visit annually – how long would it take you to read those? As it’s one of the openers to my masterclasses I won’t reveal the answer, but the cost to the US economy was estimated at $781bn in 2008. Perhaps GPDR has made a difference to that figure… but if so, it is in the wrong direction! There are very few privacy notices which are easy to read and understand (Juro being the exception).
What about other terms for using websites such as social media? In 2018 I reduced what-was-then-called Twitter’s UK terms of service to just 97 words, down from roughly 5630 (with a reading time of nearly 25 minutes). My process was to take each clause and find the core of its intent, then represent that in as few words as possible.
This process highlighted some really lame clauses:
- You can contract with us – capacity is a matter of law, not one that the parties can agree on!
- You will share at your own risk – allowing Twitter to absolve itself from hate, discrimination and online bullying
- You allow us to exploit your content without paying you – I’m not an IP expert but copyright laws will have something to say about this
- We can change the rules when we like – if the rules mean anything and if Twitter wants to them to change behaviours, then users must be notified of changes.
What should you do?
Read your own terms and decide whether they have any legal, technical, operational or commercial value or are just lame words – delete the lame ones!
A few decades ago, we were ‘played’ as tourists at an Edinburgh restaurant during the Festival.
Steve, our knowledgeable host, ordered a specific bottle of wine. When the waiter returned, he said that wine was not available but suggested a ‘similar’ one. As a canny diner, Steve asked the price, which was triple the cost of the original! By daring to ask questions, we avoided a nasty shock when the bill came and an inevitable argument.
Once you’ve got a right to agree changes to the contract, you need two further items.
First, you need to record that change to solve the problem of inaccurate memories. For example, the Federation of Master Builders have a change of work form to ensure that any changes, and their impact on cost (and the completion date for the project) are noted and agreed. It helps to reinforce instructions given verbally, by text or email to confirm who said what.
Second, you need to ensure you tackle the linked consequences i.e. changes to other aspects of the contract. It is vanishingly unlikely that if you change the scope of the goods, works or services to be provided, there will not be some knock-on effects on: time, cost, quality, and other aims or objectives of the project.
The benefits of agreeing these details, apart from keeping trust and managing expectations, before you do the work include:
- Single agreed record of change and its consequences to help avoid disputes
- The programme, works/quality documents, budget and other KPIs can immediately be revised so the client and its provider know what they are now aiming for
- The provider can invoice against any changes to the price without the client getting an unwelcome surprise
- It allows you both to focus on getting the job done and not the paperwork you have left undone.
What should you do?
History is littered with projects which went over budget, over time or failed to meet client performance requirements. Although some of the more famous were due to unrealistic expectations or poor decision-making in government, many of the remaining legal disputes could have been avoided with an effective change process backed up by clear contemporaneous joint records.
Simpler contracts have loads of benefits and will reduce admin time, minimise quibbling, manage expectations, safeguard your business, speed up the process of finalising a deal, enhance trust, avoid disputes and so on.
This post brings together some videos which will help give you more confidence with your contracts. Alternatively, contact me for a masterclass (if you pay the CITB levy, they are part funded).
Basic
Each of your contracts should help you avoid misunderstandings (eg by using accurate terms) and help with your project.
Better
But that doesn’t mean you are totally in control of all the contracts your business has to sign. Your clients or suppliers can try and sneak in their own terms and conditions. You should create a simple process for objectively reviewing that contract – a good place to start is with my STAR checklist and its Guide.
Best
Before you can properly review a contract, you’ll need to read and understand it. If you need confidence in translating legal terms, you can either grab a copy of one of my books, search my blog, or check out this selection of exclusive video explanations:
A few years ago, we took our kids to Paris and promised them a trip up the Eiffel Tower. Our timing could not have been worse… it was mother’s day and the Tower was rammed.
As the queues for the lifts were extensive, and we’d have ended waiting for hours, we did a deal: we climb using the stairs in return for an ice-cream. Of course, my kids are ace negotiators so they didn’t want soft scoop, whippy stuff – they insisted on proper ice-cream.
After our descent, we couldn’t find any ‘proper’ ice-cream… after some retrospective haggling over possible alternatives, we ended up walking for miles and then spending a small fortune on (admittedly) extremely delicious proper ice-cream at a café on the Champs Elysees.
Be flexible
Just like our promises that day, your contracts need flexibility – for a wide variety of events or triggers (including sanctions, pandemic restrictions, material shortages, wars or trade tariffs).
Your change process must be simple and easy to follow – if not, it won’t be used.
Ideally (as no-one likes a surprise bill) you should both agree the impact of changes, on key project objectives (time, cost, performance etc), before those changes are implemented. It also allows the client to choose between the original plan and the revised proposals, and decide if the impact on their key priority is acceptable.
Grab your current contract and check off these requirements for an effective change process:
- Can both client and supplier propose changes? Although many are driven by client decisions, the current climate means suppliers may need to change the design, timing, specific goods, and prices.
- Does the clause allow you to agree changes for events beyond your control ie the unexpected? This is increasingly important.
- Are changes limited in scope, price, time or quality? Any restrictions should reflect your business strategy. Remember under English law, changes cannot change the nature or character of the contract.
- Do you want to allow the client to remove goods, works or services? If so, ensure the supplier is compensated for omissions eg using pre-agreed damages.
- What process do you need for your governance: who has authority to instruct changes? can it be verbal or must it be in writing? Make it easy to use to avoid ending up in limbo!
What should you do?
Check your change process helps to manage changes, reduce surprises, focus on the key priority and be workable in practice. Make your process ridiculously easy for everyone to use.
A wide variety of global corporates are creating simpler contracts – to speed up transactions and to enable them to do business with SMEs. Many start-ups, innovators and niche specialists simply cannot afford the time/energy/money to review long complex contracts.
The problem
Many of the issues related to complex contracts are fairly well known across sectors – value erosion (lost profits), lack of understanding, cost of negotiation etc.
But perhaps it is best demonstrated with a story. An educational institution spent millions of pounds of money which was not theirs. At the completion of a multi-million pound construction project, the estate staff noticed it had money sitting in its accounts. It had not read or realised that they money was a fund known as retention which is not paid to the contractor until 12 months after completion. However, it is the contractor’s money.
No-one had understood the contract (it was over 150 pages long) and no-one had put in place the internal procedures to ring-fence that money. When the requests for that money came in, the institution was in big trouble.
The benefits
I know that contracts are not sexy, or exciting and it is often not easy to see the link between a bad contract and impact on your profitability. But I also know that because of their simpler contracts:
- a trade association has doubled the number of contract downloads, and their builder members can explain the contract to their clients easily
- an architect practice massively reduced the resources to prepare and agree contracts – time, energy and money they can invest in resolving issues when they do arise
- a small builder has improved their negotiating position because they can point to clear wording in their simple contract (rather than bamboozle their client/supplier with jargon which requires a lawyer to interpret)
- an engineer consultant has enhanced trust because they can ask the right questions at the right time
- an SME become more profitable, as their clients know exactly what is included and excluded from their scope, and they can clearly charge for ‘extras’
- an specialist subcontractor has total confidence and pride in their contracts – which also safeguard their business
- a family building company has eliminated objections from clients and suppliers.
What should you do?
Consider (or evaluate) the cost to your business of your current contracts – the return on investment for any simplification project is huge: efficiency, cost savings, faster deals, as well as greater trust within a supply network.
Why delay? Start today!