What happens if a mandatory standard changes after you submit a tender?
We live in an era of constantly changing mandatory standards and regulations. Failure to keep up with them can have serious consequences for your business. There may be several, including criminal prosecution and disciplinary proceedings by relevant licensing bodies, however this article deals with the contract law consequences of failing to do so.
Most standard building contracts contain a provision which requires the work performed under the contract to comply with all relevant legislative requirements, including regulations, mandated standards and council bylaws. However, even if there is no express provision in the contract to that effect, the common-law implies a term into the contract to a similar effect.
The consequence is that as a matter of contract law, all building work must comply with the relevant legislative requirements. If it does not, not only have you probably committed an offence and may be liable for disciplinary action, but you are also in breach of contract and liable for the cost of rectification work to bring the work up to standard.
This article deals with some of the scenarios which may arise where there is a change in the legislative requirement after a tender is submitted. The article does not cover all possible permutations, but by addressing some potential situations we hope the discussion will provide some guidance for situations not expressly dealt with in this article.
One scenario considers the submission of a tender, where there is a change to the law (or you become aware that you missed a change) before a response to the tender is received. If this is going to make a significant change to the price that you quoted, you need to immediately withdraw your tender and seek to submit a new tender containing the revised price.
A second scenario is becoming aware of a change in a legislative requirement after a contract has been signed. In that situation, your first port of call is to read your contract. Many standard form contracts deal specifically with the question of a right to a variation where there is a change in legislative requirements.
In the case of AS2545, the starting point is that there is no entitlement to a variation even if the change in legislative requirement occurred after tender.
In AS4903, a change in a legislative requirement which necessitates a change to the sub contract works, that comes into effect after the date of contract but which could not reasonably have been anticipated by a competent sub-contractor, is to be assessed as a variation.
So, the question under a clause like the latter may be, what is the date of the contract?
It is often assumed that a contract comes into existence when a letter of intent accepting a proposal contained in a tender is received by the tenderer. However, the effect of a letter of intent depends on the terms of the letter. Letters of intent generally have effect in one of three ways:
- They are always “subject to contract” and do not give rise to any binding agreement until a formal contract is signed.
- They are binding in relation to what are usually considered to be the preliminary or early works referred to in them, but there is no contract in relation to the rest of the works until the formal contract is signed.
- They are binding as to all the works to be carried out by the contract.
In the first situation, in the context of a clause like that in AS4903, the contractor will have no right to a variation if the change occurred between tender and the signing of the formal contract, and the formal contract does not reflect the change in the legal requirements. If the change were identified prior to the contract being signed, then there is a case for the contractor refusing to sign the contract unless the price is changed, without the contractor being liable for damages. However, other legal issues such as estoppel might come into play against the contractor. This is another reason why, if you find yourself in such a position, you should seek legal advice.
In the second case, the better view is there are two contracts – the first contract being for the early works and then superseded and incorporated into the formal contract. On this approach, it is the date of the second contract that is the relevant date. The same difficulty applies to a variation claim as discussed above, however the case for being able to refuse to sign the contract may be much weaker given the work that has been done.
In case of the third type of letter of intent, a variation will only be available under the contract after the date of the contract.
What can you do to protect yourself?
Some might think that this problem can be addressed by an exclusion in a quote or tender. This will not be effective as unless the quote or tender is incorporated into the formal contract (which hardly ever happens), it will be superseded by the provisions of the contract.
The first step is to continuously keep up to date with changes to legislation, regulations and legislated standards, including local government bylaws.
The second step is not to sign any contract without checking there have been no relevant changes. While in some cases you may not legally be able to refuse to sign the contract, you are always going to be in a stronger position, both legally and practically, if you raise the issue before signing.
If you have any questions about this article please get in touch with the author or a member of our Building & Construction team.
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.