Develop Safe Contract (Notes)
ESSENTIALS OF STANDARD FORM CONTRACT FOR THE PURPOSES OF HOME CONSTRUCTION
In most of the business dealings the writing of contracts plays a vital role. Contracts determine rights and liabilities on both sides of the parties and therefore, as a consequence, also provide certain protections. These protections may be against the complaints, misunderstandings and future disputes that may arise in the absence of a written contract. Contracts also bind the parties into a legal force, the violation of which can have serious consequences. Apart from providing certainty to both parties, the contracts also furnish evidence. In short, the contracts provide safeguards for the performance of a promise or a set of promises in the future.
Before the terms of the contract are reduced into writing, the parties set out the details of the contract. This process is called ‘Contract Negotiations’. The main objective of the contract negotiations is to focus on the losses and revenues that may arise out of the contract after its execution. Both of the parties have to agree upon the terms and provisions discussed at the time of negotiations and afterwards written in the form of contract. This provides a more flexibility before entering into a contract. However, the negotiated contracts require plenty of time. This is because of the fact that the negotiations take reasonable time before reaching towards a conclusion. The negotiated contracts are not cost effective as well. So, therefore, there is an alternative to this problem, because not everybody can afford negotiated contracts. In that case, the Standard Form Contracts play an efficient role to reduce the transaction costs.
Standard Form Contracts eliminate the need of negotiating and therefore, are more effective while entering into a business transaction. There is a wide use of Standard Form Contracts in most of the transactions that deal with services of an independent contractor. The Standard Form Contracts save the time of negotiating and are also cost effective due to numerous reasons as mentioned above. In this research, the essential clauses that need to be addressed in Standard Form Contracts for House Building services are discussed.
FORM OF CONTRACTS:
In English Law, there is no specific form for Contracts Drafting. In simple words, the form of the Contracts is immaterial. But, by their long usage, certain forms of contracts have obtained a sort of sanctity. These forms may be used after some reasonable alterations. However, when we talk about the Standard Form Contracts for construction purposes, there are many forms of contracts published by some organisations.
Even though the form of the Contract is immaterial but still there are some general requirements to be fulfilled. These requirements are of essential nature and must be included in any Standard Form Contract. As it has been mentioned above, the Standard Form Contract is different from a Negotiated Contract. The Standard Form Contract, therefore, must be comprehensive and include all the general and essential requirements explained below.
REQUIREMENTS OF STANDARD FORM CONTRACTS:
The Standard Form Contract consists of numerous requirements that are of vital importance. The main aim of the Standard Form Contract writing is to ensure the comprehensiveness by fulfilling all the requirements. Followings are the requirements for an ideal Standard Form Contract:
Parties to Contract
Signatures and Attestation
The effective date of the Contract means the date from which the contract is valid and enforceable. It can also be said that the date on which the contract is signed by the executing parties is effective date. The omission to write effective date in a contract may lead to obscurities and therefore, it is recommended to mention the effective date. There is also a statement describing a brief description of the Contract along with the effective date. In order to avoid ambiguities and risk of fabrication, the effective date must be written in words and figures may also be added additionally in the parenthesis. However, there is no restriction to write the date completely in figures and not in words.
Example: This Building Contract (hereinafter referred to as “Contract”) is made and entered on this Twenty Sixth Day of July, Two Thousand and Twenty (26th July 2020)
Parties to Contract:
After brief description and effective date, the parties’ names are mentioned. There are two types of parties to a contract i.e. Necessary Party and Proper Party. The necessary party is one in whose absence the Contract cannot be executed and the terms and conditions of the contract must be applicable on such party. Such party always have a direct interest in the subject matter of the contract. The proper party on the other hand, has an indirect interest either financial or protective in the subject-matter of the contract. Who are the necessary and proper parties to a contract depends on the circumstances of each case.
In a House Building Standard Form Contract, the parties may be of two kinds i.e. the homeowner and the builder. For the purposes of the Contract, the homeowner may be called Customer, Authority or Client etc. On the other hand, the builder works as an Independent Contractor and may be called ‘Contractor’. The Independent Contractor cannot be considered as an employee of the Client.
The full description of the parties must be given to avoid difficulty of identification. The description may include the full name, address along with the postal code etc. The main purpose to write the description of the parties, as mentioned above, is to prevent identification.
Example: This Building Contract (hereinafter referred to as “Contract”) is entered into and made effective on this day of 2020,
BY AND BETWEEN: Name of the Homeowner, resides at: [Address] (hereinafter referred to as the “Client”)
AND Name of the Builder, resides at: [Address] (hereinafter referred to as the “Contractor”
In case one of the parties is a juridical person:
Juridical persons in simple words are not living individuals, but they are considered to be individuals in the eyes of law, that is to say that they can be sued in a court for example: a company is a juridical person. One of the parties to a contract may also be a juridical person and it’s not compulsory for the party to be a living individual only. So if a company, association or corporation is one of the parties, it’s headquarter must be mentioned with it.
Recitals play the same role as a preamble. Recitals describe the background or the intention of the Contract and usually start with the word ‘whereas’. Whenever the Court wants to consider the intention or background of the Contract, the recitals are referred. The recitals are also helpful when there is a conflict between the two provisions of the contract. If two provisions in the contract are contradictory to each other, the one in accordance with the recitals will remain in force.
Recitals are of two kinds: Narrative Recitals and Introductory Recitals. Narrative recitals usually relate to the relation of the parties to the subject matter of the case. Following is an example of narrative recitals:
WHEREAS, in order to get the home construction services, it is expedient that the contractor shall be providing the services as an independent contractor.
Introductory Recitals on the other hand, relate to the motive for the preparation of the contract
and its execution. In simple words, the introductory recitals provide the main objective of the Contract. Following is an example of introductory recitals:
WHEREAS, Client desires to engage the services of the Contractor to provide the services hereinafter described
The recitals either narrative or introductory are of primary importance to know about the object, motive, intention and parties’ relation to the contract. The recitals must be written with reasonable care and appropriate cautions. This is because of the fact that recitals control the operative part of the contract and omission to write them may lead the parties towards ambiguities.
Recitals usually start with the word ‘whereas’. However, when there are several recitals they can be written as following:
This part starts with a witnessing clause and it refers to the introductory recitals. It also states the consideration of the contract and mention the acknowledgement of the receipt of such consideration. This part normally starts with the words ‘Now therefore’.
Example: NOW THEREFORE, in consideration of the facts as hereinbefore recited, and the mutual covenants, terms, conditions, restrictions and promises contained hereinafter and other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, this deed witnesses as follows:
In English Law, an Agreement is not binding upon the parties as a Contract unless, it is supported by the consideration. Consideration in simple words can be defined as something of
value for which a promise is made between the parties. For example, in a Building Contract, the payment for the services of the Contractor by the Homeowner is a consideration. The consideration is one of the most essential parts of Contract Writing and cannot be overlooked. Without consideration a Contract cannot be enforced. So the consideration must be mentioned in the testatum part as mentioned above.
The receipt of acknowledgment of the consideration must also be mentioned in the way as mentioned above in the testatum part.
Example: NOW THEREFORE, for good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows:
The last part of the contract is testimonium which puts forward the fact of parties having signed the Contract. This is not an essential requirement to be inserted but as a matter of practice, it can be seen at the end of every contract. The form that is usually used for it, is as follows:
IN WITNESS WHEREOF, the Parties have duly affixed their signatures under hand and seal on this day of , 2020.
Signatures and Attestations:
The signatures of the parties along with the attesting witnesses are reduced afterwards. If one of the parties is incompetent to sign the contract, his natural or appointed guardian will be eligible to sign the Contract on his behalf. Such an incompetency may be because the party is underage or insane etc. If one of the parties to Contract is Juridical Person e.g. Company, Firm, Association, Corporation etc. Such party may sign the contract through its representatives. The signatures of both parties along with attesting witnesses are compulsory.
ESSENTIAL CLAUSES FOR STANDARD FORM CONTRACT:
Categorically, the Contract between the Builder and the Homeowner falls within the scope of Services Contract. In a Services Contract for House Building, the Builder is considered to be an
independent contractor to provide services to the Homeowner. Such contract defines the rights and liabilities of both parties and also explain the scope of work, remunerations, term of the contract, allowances, commissions, powers of the Contractor/ Builder and restrictive covenants etc. The Standard Form Contract for the House Construction Services must be based upon the infrastructure of a Services Contract. Therefore, the clauses that are of primary importance for a Services Contract must be included in the Standard Form Contract.
Beside the general requirements of the Standard Form Contract, there are some essential clauses that need to be included in an ideal Standard Form Contract for building purposes. These clauses must be comprehensive so that the parties using the Standard Form Contract may avoid the costs of negotiations. Followings are the essential clauses for an ideal Standard Form Contract:
Scope of the Work/ Services Provided
Term of Contract
Rights and Duties of Contractor
Ownership of Intellectual Property
Return of Property
Non-Disclosure of Confidential Information
Right of Substitution
Conflict of Interest
Modification of the Contract
Scope of the Work/ Services Provided:
The nature and description of the work associated to the Builder/ Independent Contractor is defined in this clause. There are many recognised ways to enumerate the services. While writing Standard Form Contract any of those ways can be chosen, but the clause must be clear and without any ambiguities. The services should be more general and less specific. Services when described generally expand the scope of the work. While on the other hand if the services are mentioned specifically, the scope of the work will be limited. For example, if in a Contract it is written that the Contractor shall perform the services of House Construction and in another Contract it is mentioned that the Contractor shall perform the House Map Designing Services, the Services in the latter example are more specific and hence, limit the scope of the work. The Standard Form Contracts must be comprehensive and therefore, should include services that are general. For various forms of describing the Scope of Work, see the examples below:
Example 1: During the Term of this Contract, the Contractor shall provide the following services (hereinafter referred to as “Services”):
Example 2: During the Term of this Contract, the Contractor shall provide the services (hereinafter referred to as “Services”) as described in “EXHIBIT-A” of the Contract.
Example 3: The Contractor hereby agrees to provide the services of House Construction (hereinafter referred to as “Services”)
After describing the services, for the future use of the Standard Form Contract, a sub-clause of additional services must be added to protect the interests of Homeowners. These services are not expressly defined in the Contract, but by signing the Contract, the Builder impliedly agrees to provide such services. This sub-clause must be added to avoid future conflicts between the parties. This sub-clause can be added as follows:
Example 4: During the Term of this Contract, the Contractor shall also provide any other services asked by the Client and Agreed by the Contractor from time to time.
In short, the scope of work is one of the most essential clauses of any Standard Form Contract. It must be general and not specific.
After describing the scope of work comes the payment clause. This clause is significant because the Consideration in any contract is the most important element. This may be a fixed monthly, hourly or yearly fee or commission. This can also be given after the Completion of the Services. The circumstances for each party are different. Any of the method can be chosen and mentioned in the Contract. Generally, the hourly payment is recommended, but again this is not compulsory.
Along with the payment, the reimbursable expenses are also mentioned. These are important to mention because these expenses are necessary in order to provide the Services to the Homeowner. To protect the interests of Homeowners, there should be a sub-clause defining that all the reimbursable expenses shall be pre-approved by the Homeowner.
In case, the Contract is terminated by either party, the Builder is entitled to the proportional payment for the services he performed so far. This sub-clause is also added to avoid conflicts and ambiguities.
In short the payment clause includes:
Information as to Payment
Payment of Reimbursable Expenses
The Record of Payment and its Possession
Payment in Case The Contract is Terminated Before Due Date
Followings are the ways in which this clause may be written for a Standard Form Contract:
Example 1: The Client shall pay for services and reimbursable expenses in a total amount of £ upon completion of the services to the satisfaction of the Client.
Example 2: The Client shall pay for services performed in accordance with this Contract at an hourly rate of £ and reimbursable expenses in the amount of £ . The Contractor shall
Example 3: The Client shall pay for services performed in accordance with this Contract in a total amount of £ every year unless the Services are completed to the satisfaction of the Client.
Example 4: The Client shall pay for services and reimbursable expenses in a manner provided in “EXHIBIT- B” of the Contract.
Term of the Contract:
Tenure, Period or Term of a Contract means the time during which the Services will be performed. The Term of a Contract may be definite or indefinite. If the Term of a Contract is not fixed as for example, “so long as the Services are performed to the complete satisfaction of the Client” the contract may be terminated by a notice from one of the parties. The period of notice should be settled by the clear provisions of the Contract. However, in Standard Form Contracts, both definite and indefinite Terms can be written.
Example 1: The term of the Contract (herein after referred to as “Term”) shall begin on the date of this Contract and remain in full force and effect until the completion of the Services, subject to earlier termination as hereinafter provided in the Contract;
Where either Party wishes to terminate the Contract prior to the completion of the Services, the Party wishing to do the same shall be required to provide days’ written notice to the other party
Example 2: The term of the Contract shall begin on the date of this Contract and remain in full force and effect until day of
The first example is about indefinite Term. The indefinite term is recommended to write in a Standard Form Contract. However, the definite Term is also not open to criticism. Both examples are well practiced in Contract writing and therefore can be used in Standard Form Contracts according to the circumstances.
Rights and Duties of Contractor:
The first and the foremost right that a builder has against the homeowner is that he works as an
independent contractor and not an employee. There is a difference between an independent contractor and an employee. An employee works under an authority and gets payment monthly. While on the other hand, an independent contractor works in an independent capacity and gets paid to the extent of Services he provide.
The builder should also be given the full control and autonomy for the performance of his work. This right ensures the full commitment by the builder and consequently a better outcome for the homeowner.
In case, the builder hires any sub-contractors, employees etc. he is responsible for their payment and not the Homeowner. In simple words, the homeowner can be protected from additional financial burden by inserting this sub-clause.
The builder as mentioned above, works as an independent contractor which means that he cannot enter into any agreement on behalf of the homeowner. This protects the homeowner from any further liabilities of third parties.
The rights and duties of contractor is an integral clause combining various above-mentioned sub-clauses. It puts restrictions on the part of builder while performing the services and also ensure the status of builder as an independent contractor.
Ownership of Intellectual Property:
The intellectual property of every kind stays the property of the homeowner and the builder cannot claim to be an owner of such property. The intellectual property may include home design, structure, plans etc. This clause defines that any intellectual property created by the contractor in connection with the services is not his property.
The consequences for not including this clause can be very serious because the builder in future may file a case to claim such intellectual property. Therefore, it is obligatory to define this clause.
Return of Property:
Any property which belongs to the homeowner will be returned to him after the completion of services. This clause is inserted to avoid all the misunderstandings related to the property of the
Homeowner. It also protects the Homeowner from costs of litigation that he may face in the future if the builder refuses to return the property.
Non-Disclosure of Confidential Information:
In every business transaction there is some sort of confidential information disclosed by one party to the other. Sometimes, it is mutual and both of the parties disclose confidential information to each other. There are two ways to protect such information. The first one is to include a Non-Disclosure clause in Standard Form Contract and secondly, there can be a separate Non-Disclosure Agreement signed by the parties.
The Non-Disclosure clause protects the Homeowner from the disclosure of secret information to the third party. The omission to write this clause will have direct effect upon the rights of Homeowner. There are also some exceptions to this clause that may also be inserted as sub-clauses.
This clause include:
The definition of Confidential Information
How such information will be used
What are the exceptions or exclusions
Under what circumstances such information may be disclosed.
Right of Substitution:
This clause allows the builder to engage third parties as subcontractors, employees etc. Such inclusion should be subject to the prior consent of the Homeowner. In simple words, the builder will not be able to hire third parties without the consent of the Homeowner.
The concept of the prior consent by the Homeowner protects his interests as there may be a third party that will be detrimental towards his work. The condition precedent of the consent clause protects the interests of the Homeowner by providing him with the cognisance of the facts.
It is also mentioned in this clause that the builder/ contractor will be completely responsible for
the payments, indemnifications, insurances etc. of those third parties. This is for the reason that the Homeowner does not suffer from an unimaginable burden of third parties
For a better outcome, the builder while providing services is given the full autonomy to the work. Such autonomy is subject to the other provisions of the contract. For example, the builder does not have autonomy while engaging third parties, if it is mentioned in the Substitution Clause, the consent of the Homeowner is required. So, this clause along with the exceptions is inserted for a better outcome of the services.
Conflict of Interest:
This is clause is very important to protect the interests of homeowners. This exclaims that the services rendered under the contract must not be in violation of state legislation. If there is a conflict the builder has to notify the homeowner. The homeowner will decide the termination of the Contract. The reason behind it that the contract is between two parties and it must not be in violation of the law of the land. The insertion of this clause protects Homeowner against the illegal activities that may be done in his absence.
This clause explains the indemnification for the harm or loss caused by one party to another by his act or omission. This clause is broadened by including the affiliates and representatives of each party to the indemnification. The indemnification may be claimed in any of the following forms:
Reasonable Legal Fee
Costs of any other kind
The above-mentioned expenses will be payable by the party by whose act or omission the harm is caused to the other party. This clause determines the conditions for the indemnifying party to pay for the costs. So, the clause is important to protect the Homeowner from paying a huge amount of expenses and it puts limitations on such amount.
Modification of the Contract:
One of the Salient Features of the Standard Form Contract is that they can be modified according to the changing circumstances. Before amending the Contract it is always better to define the procedure for such modification or amendment. This helps the parties to be more convenient. To provide for the procedure to amend the Contract, modification clause is inserted. This clause provides a procedure to amend the contract. For the amendment purpose, the parties may choose any procedure. But the recommended way is to have such amendment written and signed by the parties so that it becomes an ultimate evidence for the sake of amendment. If the modification clause is not inserted, the parties will have to write a new contract when the amendment is needed. Therefore, it is very important to have a modification clause in a contract.
Governing law clause must be more general rather than specific. The specific mention of a provision of the law restricts the scope of the Contract because laws are updated every now and then. Therefore, it is recommended to include this clause more generally as following:
Example: This Contract has been governed by the prevalent laws of the United Kingdom.
Unlike the above-discussed example, if governing law clause includes a specific section of an Act, it will ultimately restricts the scope of the Contract.
This clause explains the consequences after a clause of a Contract has been held invalid or unenforceable by a Court of Competent Jurisdiction. If a clause is held invalid or unenforceable, such clause is replaced by another valid or enforceable clause whatever the case may be, by the insertion of this clause. It protects the Contract from being declared invalid. The proper use of
this clause ensures safety to Contract against complete termination.
Waiver means when a party to contract waives his right or claim. The waiver is different to breach of Contract. Breach of Contract means when a party to contract violates any term or provision of the contract. The waiver is on the other hand is different as defined above.
Waiver clause defines that a waiver is always made expressly in writing. Furthermore, it also explains that the waiver will not be considered as a breach of contract. So, this clause explains the procedure when a party desire for the waiver.
The Standard Form Contracts are widely used in Construction Services. The main aim of such contracts is to avoid the costs of negotiations and utilise the time. Before using Standard Form Contracts, there are some essential and most important clauses that need to be observed. Therefore such contracts must be comprehensive and covering every single aspect of the future transactions between the Homeowners and Builders. The emphasis is on the anticipation of such transactions. A good Standard Form Contract always anticipates the expected future transactions between the parties. This research has laid down all the essential requirements in this regard.