Payment has always been a major cause of friction for construction projects – greater transparency and fairness for suppliers was one of the drivers behind the Construction Acts 1996 and 2009.
Many construction disputes, especially adjudications, revolve around whether the supplier has been paid what it believes is a ‘fair’ or reasonable price for the works provided.
Cash is king, or as the judge Lord Denning once said the very lifeblood of the enterprise (Gilbert-Ash v Modern Engineering, 1973). Knowing how much will be paid and when is crucial to you/your client and your supplier.
According to the 2022 World Commerce and Contracting Survey, Top 10 Most Negotiated Terms, price is the second most negotiated term and, together with price changes, the most frequently cited cause for claims, disagreements and disputes.
Getting it badly wrong
Back in 1997, a main contractor persuaded a subcontractor to start work before a contract had been agreed – the subcontractor agreed because it meant it would get the job. Nothing new there!
Although a contract was prepared, it was shoved in the boot of a car and ignored. Also nothing new.
The court said It is remarkable that this question [“Is there a contract?”] is probably the most frequent issue raised in the construction industry. On projects involving thousands and sometimes millions of pounds, when a dispute arises about payment, the first issue very often is to decide whether there was a contract and if so what were the terms of the contract, if any … Are they to be paid pursuant to a contract, and if so what contract, or are they to be paid on a quantum meruit? In money terms there is a considerable difference between the parties.
[This post explains the jargon quantum meruit]
No price, no problem?
If you don’t agree and state a price in your contract, then commercially you/your client doesn’t know what its payment obligation is and your supplier has no idea whether it is going to get properly compensated.
If you don’t include the price in your contract then legally there are two very unpalatable alternatives that could apply.
NO CONTRACT: First, the court could decide that there is not enough certainty for a contract at all. This would allow your supplier to be paid under the rules of equity and unjust enrichment. It will get paid but no other terms and none of the remaining 10 essentials will apply to your relationship. Nothing on time, quality, remedies, processes etc.
NO PRICE: Second, the court could decide that there is a contract and that – because no price was agreed – the supplier will be paid a reasonable sum. That may create a considerable difference between what the supplier thinks is reasonable and what the client does… and the court can come to its own conclusion.
What should you do?
Assuming you want to work with your supplier, your contract should provide a fair reward for the scope of goods, works or services being provided. The simplest way is to include a fixed price for the scope, a schedule of payments, and a right to change the price for certain events.
Where your contract is a construction contract for the purposes of the Construction Acts 1996 and 2009 (English law) then it also needs to meet certain minimum requirements on the payment process.
This post is based on a chapter in four of the books in the series on Construction Contracts in Just 500 Words (Chapter 10 for consultant appointments, Chapter 11 for small works contracts and subcontract agreements and Chapter 12 for letters of intent). Each of these chapters also illustrates the perils of getting it wrong, based on a real-life case study as well as how you can write it simply.
Case: VHE Construction Plc v Alfred McAlpine Construction Ltd [1997] EWHC Technology 370.
