Preparatory works carried out before the agreement of the final contract?
Preparatory works? It is not an unusual situation for the contractor to carry out preparatory works prior to the formation of the contract between themselves and the client, often begun early to help ensure a flying start to help the client. Occasionally, between the period that the contractor starts work on site and the formation of the contract, the employer decides not to proceed with the work, which leaves the contractor open to losses of expenses to that date. In this scenario, the contractor will try to claim for the loss of expense from the contractor for completing the preparatory works, who often will deny liability.
What can the contractor do in this situation?
Sometimes, if the works are entered into on ‘express terms’ or ‘subject to contract’, costs associated with carrying out the works are incurred at the parties own risk and the party is not able to claim costs back from the other parties involved should no contract arise from the negotiations.
However, in the situation that the two parties mutually believe that a contract will be formed, and the employer requests or implies a requirements that the works be started prior to the formation of the contract, then the courts may order payment to the contractor should the requests be evidenced.
The contractor should look to obtain a letter of intent (LOI) detailing the employer’s intentions to enter into a contractual agreement. The letter of intent should at the very least include a description of the works requested to be carried out, alongside the request that the contractor begin preparatory works prior to the contractual agreement.
The letter of intent can act in one of three ways, as a non-contractual document, as an interim contract under its own terms, or as a final contract should no formal contract be agreed to replace it.
Should the matter go to court, the court will decide as to which category the letter of intent falls under, however there are three basic components required to form a contract which can help a contractor identify which theirs will fall under, these being; Certainty as to key terms, consideration (the price to be paid for the works) and an intention to enter into a binding legal contract. If it is considered that a contract of any form has been achieved then the contractor is more likely to receive a fair payment for the works completed so far.
So what liability do the parties hold under the various types of Letters of Intent (LOI)?
Non-Contractual – If the contractor carries out preparatory work under a non-contractual LOI, then they will be paid on a ‘quantum meirut’ basis, which means the maximum they can expect is reasonable payment for the works completed. Both parties can call for the work to be stopped on site at any time under no obligation. It is unusual that the courts will deem a LOI to fall into this category as they tend to try to establish a contractual agreement.
Interim Contract – Should an interim contract be entered into, it will need to be determined as to whether or not the interim contract has been replaced by a full and complete contract. This is especially important should the LOI be specified to expire on a set date yet the parties ignore the expiry and continue works. The main issue here is that if the agreed price for works is exceeded then there may be no entitlement for the contractor to be paid. Alternatively, it may be taken that the parties have entered into the full contract that they have been negotiating.
Final Contract– The LOI will be considered a final contract should the terms created be the ones intended to be included into the final contract, even if no written agreement is concluded. It is recognised by the courts that some parties may fail to execute a formal final agreement and therefore where an LOI indicates an intention to contract on standard terms it is likely that the courts will deem the parties to have entered into a contract on those standard terms, which may not achieve the best results for the parties.
To summarise, it is advisable that contractors take the contractual implications of their agreements into consideration before starting any work on site, and proceed with caution to ensure a mutually beneficial and balanced contract is achieved in a timely fashion to aid in receipt of fair payment and terms for works.