A BILL FOR SUCCESS?
New law to demystify contract formation and remedies for breach
Earlier this year, the High Court of England and Wales was asked to consider whether a legally binding and enforceable contract for construction operations worth a six-figure sum could be concluded through an exchange of WhatsApp messages. Tens of thousands of pounds in legal costs were incurred by the parties in debating this question. It was argued that an exchange of some WhatsApp messages was simply too informal. However, the court held that a legally binding and enforceable contract had been concluded. News of the decision undoubtedly provoked surprise and concern within the construction industry. However, there was nothing radical or controversial in the court’s reasoning.
Well-established legal rules were applied to resolve the dispute. Therein arguably lies the problem; that the straightforward question of whether a binding bargain could be concluded through the simple exchange of a few WhatsApp messages (arguably one of the predominant forms of communication in the modern world) could ultimately cause such evidence that, as Charles Dickens said, “the law is an ass.” Dickens would perhaps be heartened to hear that – at Christmas time, no less – the Scottish Parliament will vote on whether to progress forwards with the contract (Formation and Remedies) (Scotland) bill. This draft legislation aims to summarise in concise, simple language some of the basic rules that govern how contracts are formed in Scotland.
It is hoped that making the law clearer and more accessible will mean that smaller businesses will enjoy greater certainty about their rights and obligations when transacting and will not need to go the expense of hiring a solicitor in the first instance when doubts or dispute arise. This article looks at some of the key parts of the new bill, which should help to dispel some common myths around contract formation and also considers what the bill will mean for the construction industry in Scotland.
The majority of the rules and principles that currently exist in this area of the law have been created by the courts and are known as the common law rules. Over time, these rules have gradually evolved. However, like a slowly growing rainforest, the rules have arguably become more and more tangled and cluttered over the centuries as they continually grow in the light of fast-moving modern developments in commerce and technology. It has become challenging to see the metaphorical wood for the trees, and without the many years of knowledge and experience that a solicitor possesses in terms of navigating this common law thicket, it can be frustrating to disentangle seemingly simple questions, such as: “is there a legally binding contract here?”
In March 2018, the Scottish Law Commission – whose role is to make recommendations to the Scottish Government on law reform – recommended that some of the basic rules within the common law be written down in straightforward language in an accessible format. This recommendation forms the basis upon which the bill has been drafted. The bill provides that it is entirely up to the parties to a contract to decide whether they will follow these basic rules or whether they would prefer to create their own bespoke rules. For example, one of the basic rules of contract formation in Scotland is that a contract does not need to be expressed in writing in order for it to be legally binding and enforceable.
One of the basic rules of contract formation in Scotland is that a contract does not need to be expressed in writing in order for it to be legally binding and enforceable.
However, the parties to a contract are free to depart from this default rule by agreeing that their contract will only be legally binding and enforceable once it is written down and signed. In my view, the bill will be of particular benefit to sole traders and small construction outfits that regularly undertake smaller construction projects on behalf of private individuals by creating a generalised framework of rules that can be easily understood and applied. Larger construction outfits that undertake commercial projects are more likely to want the benefit of a comprehensive set of bespoke rules and the bill helpfully ensures that this will remain possible.
I will focus on a few general rules that the bill lays down which, in my view, will greatly help to dispel some common myths and mysteries within the construction industry that often lead to friction with clients. I will use examples that are most relevant to the bill’s intended audience, namely sole traders and smaller construction outfits.
When it comes to the question of whether a legally binding and enforceable contract has been agreed, many people believe that this only happens when formal papers are typed up and the parties sign on the proverbial dotted line. The bill clarifies that, generally speaking, only two ingredients are necessary for a contract to be legally binding and enforceable. Firstly, the parties must intend that their agreement will be legally binding and enforceable.
We have all experienced situations where an email has gotten stuck in our outbox or stuck in a firewall.
Secondly, the parties must at least agree on the essential matters of their agreement such that the agreement is workable and capable of being enforced. The bill goes on to explain that in determining whether a legally binding and enforceable contract has been concluded, the statements and the behaviour of the parties may be considered.
It follows that a legally binding and enforceable contract can be created verbally, by email exchange, by instant messaging or by ticking a box on a webpage to name but a few modern methods. There simply needs to be an intention to contract and there is no prescription as to how that intention must manifest itself.
Another common misconception is that if the parties are still negotiating about certain matters, then there cannot be a legally binding and enforceable contract unless and until all negotiations have concluded and all outstanding matters have been agreed.
The bill clarifies that this is not the case. If the parties have agreed on some matters, but have not agreed on everything and are still negotiating certain other matters, then there will nonetheless be a legally binding and enforceable contract so long as the parties agreement. All the essential terms were agreed; the parties, the price, the services to be provided and a mechanism for identifying the start date. There are enough essential ingredients there for the agreement to be carried out and enforced. However, the parties are free to depart from this general rule if they wish.
For example, the parties may agree that there is no legally binding and enforceable contract until there is express agreement on a definitive start date.
We have all experienced situations where an email has gotten stuck in our outbox or stuck in a firewall. Or situations where we have pressed ‘send’ on an instant message and the message has in fact not yet been sent owing to a lack of internet connectivity or some other technical factor. Things were simpler several hundred years ago, when the law came up with a brilliant idea in response to the technical marvel of being able to send a piece of paper from one town to another. The postal acceptance rule has provided for a very long time that an offer is deemed to have been accepted when the acceptance of said offer is dropped into a pillar box.
Thus, a client was deemed to have accepted a builder’s quotation on the date on which the client posted the letter of acceptance back to the builder. If the letter of acceptance was postmarked Monday and arrived by second class post with the builder on Thursday, then this would trump a revocation of the offer by the builder that was postmarked Tuesday and arrived by first class post with the client on Wednesday.
Of course, this ingenuity doesn’t really work in an age of instantaneous communication, and the courts have had to tweak the postal acceptance rule over the decades so that it fit telegrams; then telexes; then faxes; then emails; and, today, the likes of WhatsApp messages.
The bill consigns the postal acceptance rule to history, and in its place provides a simple rule that is fit for modern purpose. The notification of (amongst other things) an offer, an acceptance, a counteroffer or a revocation of an offer will take effect when it is reasonable to expect that the recipient can gain access to the notification without undue delay. The bill helpfully provides some common examples of this; delivery to the recipient; delivery to the recipient’s place of business (which may be their home); and, in the case of electronic communication, when the communication becomes available to be accessed by the recipient.
So, generally speaking, an email accepting a quotation from a builder will be deemed to be effective when it lands in the builder’s inbox. A text message which purports to withdraw that quotation will be effective when it lands in the customer’s inbox. If the builder sends a text message which withdraws a quotation and it lands in the customer’s inbox, but the customer misses the notification and later send an email accepting the quotation, then the acceptance will not be effective as the communication of the revocation landed first.
While this is by no means a radical bill, it is to be welcomed. It will be of particular benefit to sole traders and smaller construction businesses. The bill will provide greater clarity and certainty that (i) informality is not a barrier to enjoying the rights and remedies that are available when one is a party to a legally binding and enforceable agreement; and (ii) nor is the fact that the agreement has some gaps and is therefore not all-encompassing. It will also provide a default framework of clear rules that can be easily accessed and applied without the need to incur the significant legal costs that larger construction businesses can more easily shoulder.
The objective of the bill is to provide a generalised summary of the basic rules when it comes to contract formation and remedies for breach of contract.
It should also foster an approach to dispute resolution that avoids lawyering up in the first instance and which instead encourages parties to communicate with one another, referring to the default rules in the bill and negotiating a resolution based on same.
Of course, in larger and/or more complex construction projects, there really is no substitute for a bespoke contract. It is a positive that the bill provides for the freedom of the parties to depart from the default framework of general rules should they wish to do so. Lastly, it should be borne in mind that the objective of the bill is to provide a generalised summary of the basic rules when it comes to contract formation and remedies for breach of contract.
While the bill will be helpful in respect of common bread-and-butter construction contracts where questions and doubts about whether a contract exists, or what remedies are available for breach, are reasonably straightforward, the end of the bill reminds the reader that the bill is without prejudice to many other legal rules that may be relevant and applicable.