Whose Construction Terms Apply – Yours or Mine?

Contract Administration

Most, if not all, players in the building industry from suppliers all the way through to head contractors have their own terms and conditions.

These have sometimes been plucked from a random online source, or carefully developed by their lawyers (guess which one we recommend?).

But even the very best terms only have any value if they apply to your contract.

And in the ebb and flow of negotiations, whose terms apply can become a little unclear.

Let’s explore how to figure out this common issue.

The Common Engagement Process

Particularly with services and sub-contractors, here is a common contracting process:

  1. A tender is sent out, or expressions of interest or quotes are sought;
  2. Supplier puts in a quote, which contains as well as the price:
    1. terms and conditions; or
    2. a statement that “our terms and conditions will apply to any contract formed following this quote”*;
  3. The purchaser puts in a purchase order in response to the quote, reflecting the commercial terms of the quote but:
    1. attaching their own terms and conditions; and
    2. a statement like the one in 2(b) above, or a term that THESE conditions apply to the contract;
  4. The supplier commences work.

So whose terms apply? Did the purchasing party really “accept” the quote by submitting a purchase order in response? Do the first terms apply because they said they would apply to future contracts, or do the later terms apply because they were the most recent before the work started?

*this kind of “incorporation by reference” method isn’t exactly ideal and so we generally don’t recommend it, but it can work in some situations.

Understanding Contract Formation

The legal mechanics required to form a contract are fairly simple. The pieces are:

  1. offer;
  2. acceptance;
  3. valuable Consideration; and
  4. (depending on who you ask) an intention to create legal relations.

The linchpin of our situation here is the concept of “acceptance”.

You see, you can’t “mostly accept” an offer, in a legal sense.

Any “acceptance” that is not on the same terms as the offer is, in fact, not an acceptance at all.

From a legal perspective, an “acceptance” which seeks to adjust the terms or specifics in any way is a counter-offer. A counter-offer does not conclude a contract negotiation – it requires its own acceptance from the original party.

Applying the Counter-Offer Principal

So if we examine our situation above, we can see fairly readily at this point what’s going to happen.

Our supplier has made an offer to which its terms and conditions would apply.

If we simply said “yep go for it” that would be an acceptance, and their terms would govern the contract.

However, we didn’t do that. Instead, we submitted a “purchase order” which sought to change the terms of the deal – from theirs to ours.

Generally speaking, having received a purchase order with the right number on it, the supplier will simply carry on with the work. So while they haven’t said “yes we agree” to indicate their acceptance, by starting the work they are usually found to have accepted the terms of that purchase order by their conduct, even if they didn’t say it out aloud.

Are there Other Options?

The problem with all this is that in most cases both parties simply go ahead as if their own terms apply, and normally that makes not a single jot of difference until you get into a disagreement about something.

So let’s say you’re a supplier and you want to lock it down and not be working in legal limbo throughout your project. If you simply proceed after an unsatisfactory purchase order, then you should expect their terms will apply, and you’re not happy with that. What should you do?

The answer is deceptively obvious: negotiate something clear.

If you’ve submitted terms and they have submitted alternative terms, then you’re going to need to agree on a final landing spot to go ahead with the deal.

Whether that’s both worthwhile and commercially viable is a question for another day.

In Short

The takeaway here is this: having good terms and conditions is not enough. You need a process and the necessary understanding of the contracting process to ensure that those terms apply to your contract for them to give you any benefit.

Need a hand with terms or getting the process right? Give us a call and we’d be happy to help.

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