Written with input from Alan Wrigley, Partner at McCullough Robertson Lawyers.

Let’s paint the scenario: you are an Engineer assigned to a project in the start-up phase.  There is a rigorous procurement process for your company to ensure that value for money and contractual risk is managed effectively prior to mobilising the subcontractor.

 This is the typical Request for Quote (RFQ) process: 3 quotes, comparison, approval, contract negotiation, approval, execution process that most companies require in some form or another.

 You check the program timetable and you have 5 weeks before the subcontractor is to be mobilised.  Plenty of time (you think) as you start requesting quotations from the market.  By the time you have completed the comparison and received approval for expenditure, the 5 weeks have evaporated.  Now you have one week to get the subbie mobilised and they have just sent back a list of departures 3 pages long.  There is no way you will sort through the departures prior to the programmed start date.  If you delay the subbie mobilisation, you will cause the project to standdown and potentially, be delayed.

 Don’t worry, this has happened to nearly every engineer at some point in their career.  Usually, despite the Commercial Manager insisting no mobilisation without a fully executed and binding contract, the subbie ends up on site without ink on paper.  Ultimately, Project Managers and Operations Manager prefer a potential risk in an unsigned contract over the certainty of a delay and standdown costs.

 This all-too-common scenario can be avoided by various management processes, including: 

• allowing sufficient time for the procurement process;

• providing sufficient resources during project start up; and

• emphasising the importance of executed contracts.

However, no matter how much we try to avoid it, this inevitably keeps happening on every construction site, and the question no-one can seem to answer, is

“what’s actually is the risk?”

In this article, I attempt to answer this question and detail some of the risks which might arise. 

To answer this question, we will go back to basics to discuss the following questions: 

• Why do we need a contract in the first place?

• What constitutes a contract in the legal sense?

• How does the concept of offer and acceptance translate to legal obligations between parties?

• What is the risk I am exposed to having a Subbie on site without an executed agreement?

• Can this risk be controlled?

Why do we need a contract in the first place?

The major benefit of a contract is to provide certainty.  A written contract will, in most cases, avoid disputes about the legal rights and obligations of the parties, including where risk lies.  If a contractual dispute does arise, the contract will usually dictate how the dispute is handled.. For example, a supply contract may stipulate that the supplier is responsible for the goods during transit and delivery.  So, if the delivery truck overturns and the goods are damaged, this is the supplier’s responsibility.  Although this may never happen, both parties understand how to act in this situation should it arise, and each party can calculate the risk into their offer from the outset.

The more complex the scope of work, and/or the higher the collective risk of the works, the more important it is for both parties to understand clearly who assumes what risk and obligations during the performance of the contract and thereafter.  Typically, Commercial Managers have a flow chart or a matrix to define what kinds of agreement are required for what scopes.  Usually, this is defined on the basis of the contract value (in monetary terms) and overall risk.  Hence ordering stationary, doesn’t require a 20-page contract, whereas, piling does.

It is important in contract negotiations for both parties to be transparent and get it all out on the table. The point of the contract is for both parties to be completely aware of their obligations to be able to fulfil them.  This transparency benefits both sides of the contract.

What constitutes a contract in the legal sense?

A contract is a fundamental element in both personal and business transactions, serving as a legally binding agreement between two or more parties.  Here’s a brief overview of what constitutes a contract:

Key Elements of a Contract

·        Offer and Acceptance: A contract begins with an offer by one party and the acceptance of that offer by another.  The offer must be clear, definite, and communicated to the offeree, who must then accept it unequivocally;. 

• Consideration: This refers to something of value that is exchanged between the parties.  It can be money, services, goods, or a promise to perform (or refrain from performing) certain actions.  It is sometimes described as the “price for the promise”; 

• Mutual Assent: Both parties must have a mutual understanding and agreement on the terms of the contract. This is often referred to as a "meeting of the minds".  The parties must intend by their agreement to create a legal relationship, capable of being enforced.  In determining if there is contractual intent an objective approach is taken; it doesn't matter if one party secretly did not intend to be legally bound if it would appear to a reasonable observer that they did; 

• Capacity: The parties involved must have the legal capacity to enter into a contract. This generally means they are of legal age and sound mind; 

• Legality: The contract’s purpose must be legal and not against public policy.  Contracts involving illegal activities are not enforceable.  There may also be statutory requirements for certain contracts, such as those involving companies or contracts involving the sale of land.

 For a contract to be enforceable in law, it must meet all the above elements.  If any element is missing, the contract may be void or voidable.

 Written vs. Oral Contracts: While many contracts can be oral, certain types must be in writing to be enforceable, such as contracts involving the sale of land.

 So a contract can be enforceable, even if it isn’t in writing.  So, why bother writing one up? As above, a written provides the contracting with certainty and enforcing a verbal contract can be difficult, given each side will inevitably have a different recollection and understanding of the terms which comprise the contract. 

How does the concept of offer and acceptance translate to legal obligations between parties?

As set out above, a central element of a valid contract is an offer which has been accepted.  The final executed written contract is the document which records the terms which have been agreed upon by the parties. The process from RFQ, to quote, to clarifications, to contract negotiations and departures are generally considered to be a series of offers and counter-offers.

However, it is worth noting that certain conduct can sometimes (by itself) be considered acceptance for the purposes of contract formation.  So, when a subcontractor commences works on site or a supplier commences supplying materials, the conduct of both parties can be interpreted as acceptance of a legally binding agreement.  For this reason, a written contract will provide a degree of certainty as to the terms of the agreement in place.

What is the risk I am exposed to having a Subbie on site without an executed agreement?

If all you have received was a quote, and then invited the subbie to commence works, it could be interpreted as your acceptance of their offer in the quotation, inclusive of all of their terms and conditions.

However, if you responded with a draft contract with proposed terms and conditions after the received quote, then it could be interpreted as the subbie’s acceptance of your offer.

Again, the benefit of a signed contract is that the parties know which terms are to apply.

Can this risk be controlled?

Best practice is to include a copy of the draft agreement when requested a quotation.  This way, the subbie/supplier can provide pricing based on the terms and conditions you have set forth.  The draft agreement can then be negotiated and ultimately once agreed, signed.

Most commonly, the subbie/supplier will respond with their quote including their own terms and conditions.  It is therefore important to discuss any substantial deviations between inclusions and exclusions. This is required in order to do an “apples to apples” comparison of quotes against budget.

This process should, ideally, happen prior to mobilisation.  Then the draft agreement can be updated to reflects the agreed inclusions and exclusions, as well as the offered pricing.  Once this is sent to the subbie/supplier, it will generally be considered as your counter-offer and the negotiations can continue (if necessary).

While awaiting a response for further departures, this will most likely constitute the default agreement accepted by the conduct of the parties’ commencing works.  Written correspondence confirming this position would also likely assist to confirm the existence of the terms in place.

This is one way of mitigating contractual risk and uncertainty where a subbie/supplier delays in signing a contract.  However, it should be noted that the priority should always be to have a written and signed contract in place.  Additionally, it should be noted that each situation will be different and the particular circumstances of each relationship may warrant a different approach being taken.

I am thankful for the editorial guidance and insights of Alan Wrigley, Partner at McCullough Robertson Lawyers in Brisbane.

Key Takeaways:

• Prioritize Executed Subcontracts: Ensure that subcontracts are fully executed before mobilisation. Allocate sufficient time in the procurement process to achieve this.

• Binding Contracts Without Signatures: Understand that contracts can be binding and enforceable even without signatures.

• Offer and Acceptance: Recognize that acceptance of a contract can be shown through actions. For instance, instructing a subcontractor to mobilise based on a quote or a draft contract can be seen as acceptance of the terms.

• Risk Management: Mitigate risks by providing the draft contract to the subcontractor before mobilisation, while negotiations are ongoing. This draft will most likely be considered as the default agreement prior to further departures and execution. Wherever possible, confirm in writing which terms are to apply.

• Transparency: Foster transparency by informing subcontractors of their contractual obligations early. Share the draft agreement at the RFQ stage to ensure clarity and mutual understanding.

This publication covers legal and technical issues in a general way.  It is not designed to express opinions on specific cases.  It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.