Can You Contract with a Handshake?

As a contract drafting lawyer, you might think that asking you to consider ‘should you bother with contracts?’ is a little like asking the proverbial turkey to vote for Thanksgiving or Christmas!

Construction contracts in the UK have been around for about 150 years, with published standard forms a product of the 20th century. Construction on the other hand has a much longer history. The first laws to regulate the construction industry, the Code of Hammurabi, date back to 1750BC.  But that’s another story, and another blog…

Are contracts necessary?

These views suggest that contracts are not necessary:

“Contracts can add significantly to the cost of a project and often add no value to the client. If the relationship between a constructor and employer is soundly based and the parties recognise their mutual dependence then formal contract documents should gradually become obsolete.” (Construction Task Force/Egan Report 1998, Rethinking Construction, paragraph 69)

“No contract can require particular forms of behaviour, style or approach. If people do not want to work together, they will not, whatever the contract says.” (Peter Hibberd, Collaborative Working (2007) 18 4 Cons Law 6)

[Actually, the statements are referring to contracts for collaborative working and whether contract terms alone encourage integration. Sorry for being mischievous!]

Is there an effective alternative to a written contract?

Can you rely on a handshake?

If clients don’t use contracts, what else is there? A handshake or gentleman’s agreement?

The influential book, Which Contract?, cautions against using a handshake or gentleman’s agreement, as it is “total folly to rely on some ‘understanding’ that has not been properly documented.” It goes on to quote architect Ronald Green who famously said:

“the difficulty about a gentleman’s agreement is that it depends on the continued existence of the gentlemen.”

The authors are not alone in this view.  Peter Hibberd, then Chairman of the JCT, said in their April 2012 newsletter:

“a contract is important not just because of its legal effect and possible consequences but because it gives gravitas to underlying moral obligations. The so called gentleman’s agreement, which relies upon the honour of the parties had some time ago passed its sell by date (for more than one reason) for most commercial transactions…A contract is an essential requirement of any construction project, whatever its nature and whatever its size. It is the expression of agreement that has been reached…”

What should you do?

The construction industry is at the centre of a considerable weight of legal analysis and judicial interpretation on contracts, partly due to its stubborn insistence on using letters of intent. These are little more than an improperly documented form of gentleman’s agreement.

Whatever your project, you should heed the warning from RTS v Molkerei:

The moral of the story to is to agree first and to start work later

I would refine this to ‘agree first, document second and only then start’.

Ref: “Which Contract?” by Clamp, Cox, Stanley and Udom (2012, 5th edition, RIBA Publishing). RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Company KG (UK Production) [2010] UKSC 14

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