Oral contracts: messy and uncertain

Words:
Alistair McGrigor

Verbal contracts are legal now, but they remain very difficult to prove in a dispute

It can’t be very often that a High Court judge is called upon to analyse a 10-minute conversation that took place two years previously in a bus shelter in Camberwell. A recent case perfectly illustrates why lawyers like written contracts: it’s because writing down an agreement is the simplest way of definitively recording what’s been agreed. This case amply demonstrates the mess and uncertainty that arise when an oral contract is relied upon, on a construction project that is going wrong.

In December 2015, a mixed use residential and retail project in Camberwell was in trouble. The main contractor, HOC, was in dire financial straits, and potentially owed the employer a large sum by way of liquidated and ascertained damages. Site work had stopped and all the subcontractors had left.

HOC knew that new subcontractors were needed to finish the project, and on 2 December one of its construction managers asked Dacy, a subcontracting company, to attend site and start work the next day.

Dacy was known to HOC because it had worked on five previous projects for HOC – but on the fifth of those projects Dacy was left unpaid to the tune of around £170,000. Not surprisingly, Dacy did not want to enter into another subcontract with HOC.

Knowing this, HOC arranged for the contracts manager of IDM Properties also to attend site on 3 December, the key purpose of which seems to have been to introduce IDM Properties to Dacy. IDM Properties is a developer with a rather unclear relationship to the original employer company, possibly some sort of joint venture arrangement.

The fateful 10-minute conversation between Dacy and IDM Properties took place that day in a bus shelter by the site. Dacy’s owner took from the meeting the fact that IDM Properties (not HOC) would engage Dacy directly, and pay it for work carried out. HOC would remain involved to check Dacy’s applications for payment. Dacy certainly did start work on site, and its first three applications were paid by IDM. The last three applications were, however, not paid in full, and in May 2016 Dacy left the site and began adjudication proceedings against IDM Properties for the £247,000 it was owed.

The fateful 10-minute conversation between Dacy and IDM Properties took place that day in a bus shelter by the site

The central issue in the case was therefore whether the bus shelter meeting comprised an oral contract between Dacy and IDM Properties, or Dacy was instead engaged by HOC. IDM Properties claimed from the start that IDM was never going to engage Dacy directly, and that the 3 December meeting was about working together on future projects.

Unfortunately for IDM, the judge considered this version of events unconvincing – not least because the HOC construction manager had the same recollection of the meeting as Dacy’s. There were also draft letters prepared the very same week from IDM to HOC, which proposed that subcontractors on the project would be engaged directly by IDM.

The judge laid emphasis on the fact that it would have been be ‘verging on the commercially suicidal’ for Dacy to have agreed to work for HOC again, bearing in mind the £170,000 owed from the previous job and the rumours about HOC’s financial position.

As a result of the judge’s view that IDM Properties engaged Dacy, via the oral contract created in the bus shelter, the adjudication for unpaid monies was valid, and IDM Properties was required to pay the £247,000 it owed to Dacy.

Until 2011 when the Construction Act was updated, only written contracts could have been relied upon to enforce payment via adjudication. As a result, adjudicators and judges now have to try and work out from brief conversations such as this whether a contract exists and what its terms are. An agreement in writing would have been better – but when a project is on the ropes it is understandable that written contracts may not exist to clarify what was really agreed. •

Alistair McGrigor, CMS Cameron McKenna Nabarro Olswang LLP


In Plain English: Limitation periods

To prevent contracting parties from being forever liable for their breach of contract, a party can raise the ‘limitation period’ defence, which provides a time-bar on bringing claims after a certain period of time has elapsed.  For contractual claims, the length of that period will depend on how the relevant contract was signed.

A contract signed simply by a single signature will have a six year limitation period, whereas a contract signed more formally as a deed (ie with witnessing of signatures, or with two company directors signing rather than just one) will have a 12 year limitation period.

Almost inevitably you will be asked to sign appointment documents and warranties as deeds, to give the client or beneficiary the benefit of 12 years in which to bring a claim.  You may want to consider whether the project merits a 12 year limitation period.

Consider also when the period should run from: the date of practical completion of the project, or the date that you complete your services. Clients prefer the former for all parties on a project, to provide one consistent date when the limitation period ends, but that may mean a longer limitation period for you if your services have come to an end well before practical completion.


 

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