Care needs to be exercised not to create a contract orally or by the exchange of non-contract documents or letters. Care also needs to be exercised so that contracts are not formed or amended by informal means.

Unknowingly entering into a contract can occur, for example, where an acquiring entity instructs a contractor to proceed with work or delivery before a contract is signed. Subsequent attempts to negotiate contract conditions often fail because a contract already exists and both parties are bound by its conditions. This places the acquiring entity at a potential disadvantage because the contractual terms may not have been fully developed or formally recorded and it poses risks to getting the goods and services required. Such oral contracts are uncertain in terms of their operation and the precise obligations of the parties are difficult to prove in the event of a dispute.

Even if a contract is not formed because not all the formal requirements are present, the contractor may be entitled to be paid a reasonable price for the work undertaken on the basis of the acquiring entity's instructions to proceed.

The following case study highlights how the actions of an entity can result in an obligation to pay a contractor.

Care needs to be exercised not to create a contract orally or by the exchange of non-contract documents or letters.

Case Study: Entitlement to payment where there is no contractual obligation

The acquiring entity advertised for tenders to construct a building. A contractor was selected and extensive negotiations were undertaken-but no contract signed. The contractor was asked to provide and submit three detailed plans. The entity then decided not to go ahead with the project and consequently did not pay the contractor's bill for the plans. The case went to court.

The entity argued it did not need to pay the contractor, as there was no contract between them. The court found the contractor was entitled to payment because there was no basis to suggest that the work was undertaken gratuitously and the decision not to proceed was not attributed to any conduct of the contractor.

Comment: When negotiating a contract, requesting a contractor to provide services prior to the commencement of the contract should be done with caution and in exceptional circumstances. If it is necessary to do so, then an additional contract should be drafted outlining the details of the task and remuneration of the contractor.

In some circumstances, (for example, responding to a natural disaster or similar emergency) it may be necessary for a contractor to be engaged and for work to commence urgently prior to having signed a contract. In such cases it is important to document key terms in writing and have these acknowledged by both parties prior to actual work or delivery commencing. An alternative to documenting the key terms is to have the contractor commence work at their own risk. In both cases, the terms on which it was agreed to proceed should be settled and formalised as soon as possible.