Honour and obey

Pre-contract discussions can be used in court to circumvent a written agreement, but not if entire agreement and non-waiver clauses are used to limit the terms, writes Daniel Atkinson.

IT IS EASY to enter into a contract: if you see something you want then the contract can be made by paying the agreed price. But it can be more complex and there may be extensive terms and conditions - we have all seen the small print attached to a receipt or a purchase order.

Construction contracts can contain a lot of small print. Before the contract is drawn up and signed there will usually be discussions and negotiations that might involve many technical issues such as how the contractor is to carry out the work. And when the contract is between a contractor and a subcontractor these discussions can be very extensive and detailed.

It is not unusual for people to try to avoid the terms of a written contract by looking for some chance remark or statement made in the course of these preliminary negotiations. Such a remark is then used to establish another agreement, which can be used to vary or add to the terms of the principal contract. The difficulty, of course, is that such statements are often long forgotten or difficult to recall or explain.

In an effort to avoid such disputes many construction contracts now include terms known as "entire agreement clauses" The clauses usually state that the parties agree that whatever was said before the contract was signed is no longer relevant. The clauses usually state that the contract supersedes anything in writing prepared before the contract was made. An entire agreement clause prevents pre-contract statements having the legal effect of varying the principal contract.

These issues had their most recent airing in the case of North Sea Ventilation v Consafe Engineering. Ventilation was claiming payments for variations but was faced with the problem that the contract required written notice to be given for any extra work. The contract stated that, if there was no written instruction nor approval by Consafe, then no payment was due to Ventilation.

Ventilation referred to alleged statements by Consafe that the written terms were unworkable and would be ignored.

Consafe had even said that the contract would only be used "as a doorstop" claimed Ventilation. Moreover, Consafe had already made payments to Ventilation for variations irrespective of whether Consafe was strictly obliged to or not. This all meant that the two companies had varied the term in the contract requiring that extra work would only be paid if instructed in writing, said Ventilation, and as a result only oral agreement to the extra work was required.

The contract not only contained an entire agreement clause but also a nonwaiver clause. This stated that if at any time Consafe did not operate the terms of the contract this was not to be taken as a waiver of its right later to insist on strict performance. In the case of variations this meant if Consafe paid for some extra work that it had not instructed in writing, that action did not prevent it refusing to pay for other extra work.

The judge said that, in the absence of any express variation in writing or orally, Ventilation had to prove that Consafe had conducted itself in such a way as to show that the contract had been varied. There is a big difference between mere failure to stick strictly to the requirement for individual variations and total abandonment of the clause, said the judge. Ventilation therefore had to prove that there was an unequivocal variation to the contract.

It is important to note that the judge did not accept that this was a case in which the two parties had never worked to the strict written terms of the contract or that they had never intended to apply the contract.

And he did not believe that Consafe was only using the strict terms of the contract as a pretext to avoid due payment. It is a well-established legal principle that the courts will not allow one party, having led the other to believe that the strict rights under the contract will not be adhered to, to then seek to enforce those strict rights.

If he had thought this was the case here, said the judge, he would have given Consafe short shrift and applied 'practical justice'. As it was, Ventilation was unable to prove its case and the judge ruled in favour of Consafe.

Contractors would do well to make sure that, when the contract requires that extra work should only be carried out if instructed in writing, they refuse to carry out extra work unless so instructed by the employer. Of course in practice this will be difficult without effective management of the project team at all levels.

But at the same time, the employer should not assume that it can sit back and not insist on the strict terms of the contract until the work is carried out and then suddenly refuse payment by applying those terms.

The most important lesson, though, is the same for both parties: operate the contract as drafted. If the terms are considered impractical, do not simply abandon them; agree amendments to the contract in writing so as to improve the operation of the contract. Do this and you may improve your relationship with the other party and reduce the likelihood of disputes.

Key points

It is not unusual for people to try and avoid the written terms of a contract by relying on statements made prior to the contract.

Entire agreement clauses prevent pre-contract statements having the legal effect of varying the principal contract.

Employers cannot take a liberal approach to the contract terms and then, after the work is done, refuse payment by applying those terms strictly.

Both employer and contractor should operate the contract as drafted and agree any amendments to the contract in writing.