An understanding of construction contracts, agreements and letters of intent

While some contractual terms are used in a wide range of construction and non-construction contracts, other contractual terms and references are quite specific to the construction contracts.

Understanding what these terms mean and the subtle differences between them, is an essential first step in safely navigating the sometimes tricky path that arises when contract law and construction meet.

Legally binding contract – what does it mean?

A legally binding contract is an agreement reached between two or more parties with ‘consideration’ being given by at least one of those parties, in circumstances where all parties have legal capacity and the intention of the parties is that the contract will be legally binding.

This is sometimes referred to as ‘…a meeting of the minds…’.

In addition to these basic requirements there may be some particular legal formalities that need to be complied with.

For example, if the contract is for the sale of land, a verbal contract will not be sufficient; the contract will need to be in writing and signed.  In the construction context, the contract must comply with the Queensland Building and Construction Commission Act 1991, particularly Schedule 1B which replaced the Domestic Building Contracts Act 2000.

Agreement vs. Legally binding contract

When parties refer to having reached an agreement, it means that one party has made an offer and the other party has accepted that offer. But a simple agreement may not amount to a legally binding or enforceable agreement.

Essential components for a legally binding contract

For there to be a legally binding contract, there needs to be more than a simple agreement. Particularly, there needs to be ‘consideration’ (usually the payment of money) by at least one of the parties to the agreement.

What is ‘consideration’?

Consideration is an act performed by one party in exchange for the performance of an act (or sometimes non-performance of an act) by the other party.
Common consideration is a payment of money in return for the provision of a service or goods.  But money is not the only form of consideration that can be used to ensure a legally binding contract has been reached.
Consideration can include some type of right, benefit or profit being gained (or given up or dealt with in a particular way) by the party receiving the consideration.
The most important part of consideration is that the party providing the consideration is giving something (be it money or some other right or commodity) or changing their position, in return for something.

Letter of intent

A letter of intent is correspondence sent by a potential Principal to a prospective Contractor, before any contract is actually entered into, to notify the Contractor that the Principal proposes to award the contract to that Contractor.

A letter of intent is not ordinarily a legally binding contract.

At best, a letter of intent simply puts into writing a Principal’s intention to do something in the future. It does not necessarily bind the Principal to either proceed to actually award the relevant contract to that particular Contractor or pay the Contractor for any work the Contractor may undertake on the basis of relying on that letter.

As a letter of intent is not generally held to be an offer that a Contractor may accept (because the terms of any agreement still need to be negotiated), any work carried out by a Contractor on the strength of a letter of intent will need to be claimed for on the basis of ‘reasonable payment’ for any work done.

Heads of Agreement

A Heads of Agreement is a document that sets out the most important terms of an agreement … but leaves many of the terms still to be agreed. While it is not impossible for a Heads of Agreement to be a legally binding contract, this is not ordinarily the case.

It is not uncommon for Heads of Agreement to include a notation that the agreement is ‘subject to contract’. If this type of terminology is incorporated into a Heads of Agreement, it indicates that the parties do not intend that document to be legally binding.

As with a letter of intent, if the parties to a Heads of Agreement wish it to be a legally binding contract, it should contain a specific term stating that it is to be immediately legally binding and the key elements of agreement (consideration, capacity and any legal formalities) will need to be present in the document.

Early works contract

An early works contract is designed to cover only the early stages or preliminary works of a project and is used for works that are carried out before the contract is finalised. 

That said, it is still a contract between the parties and care needs to be taken that it accurately reflects the obligations of the parties and the things that have been agreed.

Head contract vs. subcontract

The head contract is the contract under which a Contractor agrees to construct or complete an entire project.

Depending on the terms of the head contract, a Contractor may accept responsibility for the preliminary works performed under the early works contract.

The Contractor will then enter into various contracts with the Subcontractors that it engages to actually perform the building work.  These ‘subcontracts’ are quite separate to the head contract but may incorporate some or all of the terms of the head contract into the subcontract.  Or they may have quite separate, independent agreements.

Before entering into any negotiations, signing documents or undertaking work, it is important to have the contract documents reviewed. We have particular expertise in this area and are always happy to assist.