Contracts–Why owner builders should use contracts
Written by legal advisor Lance Guymer
Australian Owner Builders Factsheet 12 AOBFS12
We often hear the comment from people seeking legal advice that they believe they do not have a contract because it is not in writing. Nothing could be further from the truth. A verbal building contract is usually enforceable. The main problem is that while verbal contracts are binding and enforceable, they are more open to dispute because each person involved may have a different recollection of what was agreed, or one person may try to take advantage of the fact that the terms had not been written down to try and incorporate other terms or to challenge the terms.
Sometimes the person who originally negotiated the contract may have left the company they worked for, or may no longer be contactable. A verbal contract is therefore generally less certain in terms of an outcome between both parties and in the event that there is a dispute and someone needs to decide the rights or wrongs of the dispute.
Owner builders should record their contracts in writing to ensure that if they need to enforce their rights (whether through discussions, correspondence or at worst through some sort of legal process), those rights are clear in writing and identified with them as against the person with whom they contracted.
Traditionally lawyers are taught there are five elements for a legally binding contract, which are as follows;
Privity – this simply means the contract should be between the parties to the contract and not someone else. The contract should therefore name the owner builder and name their supplier or tradesperson with whom they are dealing.
Consideration – this simply means there must be something of value being exchanged between the parties. In the case of an owner builder contract this will mean the owner builder will be paying for certain services or goods and the contract should identify exactly what those goods are and the price to be paid.
Offer & Acceptance – this is probably the simplest of the elements but quite commonly the least understood. If a contractor gives an owner builder a quotation and the owner/builder verbally accepts and the work is carried out, then a contract has been formed and is binding – even if the acceptance may not be in writing. A better way to proceed is for the owner builder to first obtain a written quotation and then enter into a more formal written agreement with the contractor to verify what exactly is being done. Alternatively if the quotation is sufficiently detailed, the owner/builder could write to the contractor or supplier to accept the quote and request them to proceed with the works.
Capacity – this means that both parties must have the ability to enter into the contract. For example, companies which are in liquidation or under administration, or minors under the legal age of majority, generally cannot enter into contracts without the permission or authority of another person, in the case of a minor, their parent or guardian. In the case of a company in liquidation, the liquidator. Owner/builders dealing with lesser known companies or entities may wish to obtain a check business name search or company search to ensure that before they pay any deposits or enter into any binding contract they have established that the identity of the company or business they are dealing with is clear and can be set out in the contract documents.
That the contract is not illegal – for a contract to be enforceable it must not be against public policy. Therefore a contract which is illegal or fraudulent by nature may not be enforceable by the party who has promoted or arranged the illegality. Again owner builders are best advised to put all contractual arrangements in writing with all elements disclosed in order to avoid anything illegal.
The reader will note a number of important elements are required legally for the contract between an owner/builder and a contractor or supplier to be enforceable.
Apart from these two overriding considerations of giving the contract certainty and making sure it can be enforceable., probably the third major reason why contracts should be in writing is that there are consumer protection schemes across the states within Australia which require building contracts or related contracts to be in writing, and in some instances for the contractor or supplier to be either registered or to provide some kind of warranty or insurance in relation to their product or workmanship.
When getting down to the detail of the actual contract, a number of important issues usually arise which need to be carefully considered in order to achieve the overall aim of both certainty and enforceability of the contract.
These are as follows;
Identity of the parties
Make sure your name or names as owner/builders are included and that the names of companies providing materials or services or goods is clearly stated. Under GST rules there is no obligation on a supplier to issue a tax invoice if the amount of money involved is under $50.00. If it is over $50.00 a tax invoice needs to be provided within 28 days of the sale. If the value of the goods or goods is more than $1,000.00 then further information must be provided including the name of the purchaser, the purchaser`s address or his/her ABN if applicable and details of the item and the quantity. If all this information needs to be included on the tax invoice and it would be appropriate for these details to be included on the contract and in particular that both parties consider including their ABN where necessary.
This should be clearly set out and should clearly state whether there is any GST payable and each calculation.
Variations are probably less likely to occur in contracts between owner/builders and their contractors or suppliers than in contracts between owners and builders. Nevertheless if it is contemplated that the scope of work or the amount of the work might change, it is useful to include a clause that explains the procedure to be followed. Again, for certainty, this usually involves the variation being recorded in writing and signed by the parties to make sure no extra work is carried until the price and scope of the variation is agreed to. If a rate is to be supplied for extra work per hour or per item then this could also be stipulated.
One of the bugbears of being an owner/builder is the problem of scheduling works and the inevitable delays. Quite often it is difficult not only to arrange for trades to complete the works within their allotted time. This is probably one of the most difficult items to negotiate. Frequently one trade will say it is dependent, in carrying out its work or commencing work, upon another trade. Frequently trades or suppliers will not be able to give a definite start date, nor particularly will they commit this to writing. In this area there is no doubt that the successful owner/builder is one who can carry out the required research, administrative and organisational tasks, so the administration of the project is fully prepared and less likely to encounter major problems. A clause tying in a completion date with a right to terminate the contract if the work is not completed is desirable. Another useful clause is to stipulate an agreed amount to be paid to you for each day the contractor goes over time; e.g. this may be based on an estimate of your last rent – actual rent and finance costs.
Owner builders will be aware that each trade is unlikely to insure their supplier or services, or the site for that matter, unless required to by law. Each owner/builder should therefore make sure they have a policy of insurance to cover any materials and workmanship and goods coming on site, against theft as well as other risks such as public liability, fire etc.
Ending the contract
It is useful to include a clause that allows the owner/builder to terminate the contract upon giving a required notice, either if the contractor or supplier is in default or for some other reason, e.g. a supplier or contractor going into liquidation or failing to supply or carry out goods or services within a required date.
Incorporating other documents – a frequent problem for owner/builders is ensuring that each trade is obliged to follow any permit or other documents. One way in which to make this more certain and enforceable is to include on the contract a specific reference to any plan, specifications or other documents such as engineering computations and drawings, soil reports and other matters which need to be referred to by the contractor or supplier.
Building, extending or renovating your home is an enormous task. The emphasis for the owner builder is on administration, organisation and preparation as well as communication. Part of the communication process with contractors and suppliers is to obtain and enter into clear contracts for each portion of the work so if any reason any one part of the work does go wrong, the rights and obligations of each person are clearly set out.
Hopefully the contract can either be terminated or discussed meaningfully so the problem can be resolved and does not jeopardise the entire project. Adequate written contracts will then assist the owner/builder in the building process and also help prevent disputes.
Pre-written contracts for major and minor works are available from BuildSafe and Australian Owner Builders along with specification packs. Owner builders should record their contracts in writing to ensure that if they need to enforce their rights …those rights are clear…