Official Report 527KB pdf
Under agenda item 5, we will take evidence on the Contract (Formation and Remedies) (Scotland) Bill.? I welcome to the meeting our panel today: Andrew Agapiou, chair of the contracts committee, Royal Incorporation of Architects in Scotland; Colin Borland, Scotland director, Federation of Small Businesses; and David Woods, partner, litigation, regulatory and tax team, Pinsent Masons.
I should say that you do not need to worry about turning on your microphones, because they are controlled by broadcasting colleagues. If you would like to respond to a question, please raise your hand or indicate as much to the clerks. There is no need to answer every question—simply indicate if you do not wish to respond—but please feel free to follow up any questions in writing after the meeting, should you wish to do so. Finally, before we move to questions from the committee, members might wish to know that Roz McCall is joining us online.
I will ask the first question. Can you give the committee some examples of how contracts are formed in the sectors that you represent, for example, in relation to construction or where small businesses are involved?
I am happy to take that question. Contracts in the construction industry could include consultant appointments, building contracts, building subcontracts or warranties, and sometimes those things run in parallel in projects. Increasingly, many such agreements are formed through emails, on online portals and building information modelling platforms, or in staged negotiations, so there is a variety of methods by which contracts are formed through offer and acceptance.
If the bill is about modernising the process of forming contracts, with a move away from the tried-and-tested, old-fashioned postal routes, we welcome that as a positive development in moving forward with contracts for the construction industry.
So, you see it as a positive.
Yes.
That is great.
Colin Borland, would you like to come in on behalf of small businesses?
There is a massive range of contracts, from the very formal, standard form contracts that are signed and presented to you by very large suppliers or customers, and which you do not have any opportunity to influence, to very informal contracts, such as spoken ones or WhatsApp messages, and everything in between.
You can have what used to be called a gentleman’s agreement, which was always defined to me as an arrangement between two people, neither of whom is a gentleman, and both of whom are hoping that it is not an agreement. In the middle, however, email exchanges and so on are usually most common, although we encourage our members to use standard form contracts, which they can download from our legal hub.
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So, you, too, see the bill, as it has been presented, as a positive.
Yes. The bill has been put together in a broadly sensible way, and fair play to the Scottish Law Commission in managing to distil quite a big body of law down to 26 sections.
It is quite sensible for the bill to provide clear backstops where those have not been agreed in other terms by the parties. That makes perfect sense. As a general principle, anything that is done to codify, simplify or clarify the law and to make it easier for us as laypeople to understand it has to be a good thing.
David Woods, can you comment from a litigation and tax angle?
As my title suggests, I come at contracts from the dispute end. I do not negotiate or draft contracts, but I argue over them for our clients.
The contracts that we tend to advise on and which our clients tend to have entered into tend to be heavily negotiated. That is not always the case, but, whether they be for construction, information technology or procurement, they are largely quite sophisticated contracts, and the issues that can spring from them are, from a dispute perspective, very broad.
Indeed, there can be disputes over whether there is actually a contract. In such cases, we will look to case law to try to establish what the precedents are and what the guidance is on the points of dispute. However, although that question whether contracts have been entered into does arise, it does so infrequently—the issues that tend to come up are more around performance or whether contract terms have been met.
As for what the bill does on offer and acceptance and the formation of contracts, it seems, from my reading, and as has been said, to codify what I understand to be the present position.
You have answered a bit of my next question, so I will just ask a follow-up. Is the bill sufficiently future-proofed so that it can deal with any new ways of forming contracts that be might developed? David, I see you nodding.
I think that it is. Technology in particular has developed, and ways of contracting and communicating have evolved, so it is interesting to query whether the law is keeping pace with those developments. We cannot necessarily predict every future development in technology or otherwise, but the guiding principles set out in the bill appear to me to be fit for purpose, barring any unforeseen ways in which things might develop in the future. That is always a risk, though, with whatever changes may come.
I will jump in and answer yes to your question, too. As I have mentioned, I think that there is general support for modernisation. Given that the construction and architecture industries work in a digitally mediated contractual environment, any steps that assist that process will be welcomed. I am therefore quite supportive of the proposed measures.
So, as we go further into the digital age, having the bill makes more sense.
Yes. In the future, if there were developments in retentions and updates to payment legislation, for example, there could be further linkages with, say, trusted project bank accounts. The developments in digitisation at this stage might be a prelude to the future contractual formation exercise.
Colin Borland, does this sort of future proofing make your members, especially smaller businesses, feel more comfortable?
I think so. Sensibly, the bill tries to stick to general principles and backstops. When we read the bill and its accompanying documents, we could see nothing that suggested that something was time limited or had a finite shelf life. From that point of view, I do not think that we have any concerns.
Thank you.
I have a wee follow-up question for RIAS, but anyone can answer it. Will you expand on the comment in your written evidence that the bill should be aligned with modern international instruments that many commercial parties already recognise?
I think that there is general recognition that construction is not limited to one particular jurisdiction; project supply chains, in particular, can span more than one. It is therefore important to understand which jurisdiction and which legislation apply to the contract, and how different parties from different jurisdictions can work together with a common understanding of how negotiations and contracts are formed. It is important to have that understanding, and perhaps the construction policy notes need to be updated in that direction.
As for the bill, I would just highlight that, across the board, there will need to be updates against many of the policy notes in order to reflect the changes.
That was very helpful. Thank you very much indeed.
Good morning, and thank you all for coming this morning. I will move us on slightly, and I will start with you, Colin Borland. What are your views on parties being able to contract out of the provisions of the bill? You mentioned that point in your written submission.
As a general principle, the freedom to contract as you see fit is a good one. In our written evidence, we made the point that we must be realistic and acknowledge that the idea that it is two people with equal bargaining power who arrive at terms can be something of a fiction. You can have instances in which one party is far more powerful and influential than the other, and then the choice is to take it or leave it.
I accept that this point is outwith the scope of the bill, and that it is a bigger issue that we are trying to tackle here, but we think that there is a case in such circumstances for treating smaller businesses more like individual consumers and giving them the rights that consumers have. The Consumer Rights Act 2015 does not apply to business-to-business contracts, so we have to go back to pieces of legislation from the 1970s and the related case law.
Again, I am not a legal expert, but, as a layman, I can see a compelling case to update and modernise the law to cover those specific instances.
Thank you. As you point out, that is probably outwith the scope of the bill, but your comments have been noted and others can consider them.
David Woods, you are the legal expert. Are you happy that parties can contract out of the provisions of the bill?
Yes. That is quite important. I anticipate that that might happen quite a lot—not because there are problems with the legislation but because it is not a universal and full codification of contracting law under Scots law. As the bill deals only with certain parts of contracts, it might be that parties look at it and, rather than try to work out which bits of their contract are governed by the legislation and which bits are not, they instead remove the legislation wholesale from the contracts that they enter into. It might well be that what they end up negotiating and agreeing to in their contract is the same, but contracting out of the provisions would avoid them having to sense check it and decide whether they are happy with what is contained in the legislation as well as with what they are negotiating between themselves. Therefore, instead of following the legislation, if passed, they would just contract and agree all the terms between themselves. I do not anticipate that that would happen in every case, but I could see that parties would say, “We recognise that it exists, but we’ll park it and we’ll contract on terms that we’ve negotiated ourselves.”
Andrew Agapiou, do you have anything to add?
What I picked up is that issues such as interpretation, penalty clauses and the battle of the forms have deliberately been left out of the bill. That is positive, because we have a settled body of case law that we can rely on. In addition, when it comes to the architecture and construction professions, we use standard forms, such as the Joint Contracts Tribunal and the Scottish Building Contracts Committee forms.
Therefore, from the point of view of the architecture and construction industry, the proposed approach is a positive development. I think that it is the correct way to go.
As David Woods mentioned, the bill is limited to reforming certain aspects of the law of contract and providing certain remedies for breach of contract. Do you think that the bill should be broader, or does it do enough?
When it comes to the area of contract law and, in particular, the issues that could develop that are in dispute or that need clarification by way of legislation in advance, there are potentially hundreds of issues. We have touched on the interpretation of contracts, the battle of the forms and penalty clauses. Those are three good areas to think about. It would be a challenge to set down comprehensively in legislation everything that could possibly arise in relation to a contract or issues that are connected to a contract.
I propose that a preferred route would be to deal with discrete points, and to deal with those well, instead of undertaking the challenging task of seeking to produce draft legislation that would deal with every possible contractual issue. There are hundreds of years of case law that deals with such issues. Every month, a point will be dealt with in a new decision by, in particular, the Court of Session or a sheriff court. It is not necessarily the case that the law is advanced every day, every month or even every year, but new precedent is set. Every dispute relates to the facts between the parties and the situation that they find themselves in and, through the common law, the application of established precedent to their situation is how the law is built up.
A more achievable task would be to set out discrete points, as the draft legislation does. It might well be that further legislation in future could deal with other points, but, as I have said, there are lengthy and voluminous textbooks on contract law, as well as lots of case law on the subject, so it would be a challenge to go too far, or even to go further.
Colin or Andrew, do you have anything to add to that?
What David Woods has said is absolutely right. I am conscious of the matter at hand. In that respect, the bill does the job that it has been tasked with, notwithstanding the fact that, as I understand it, the Government has indicated that it will lodge stage 2 amendments to deal with some of the remedies, because case law has moved on. Subject to that proviso, we are pretty content with the current scope of the bill.
I have nothing further to add.
Do you have any specific comments on part 1 of the bill? I am sorry to start with you again, David, but do you have a particular view on the proposal to abolish the postal acceptance rule? Every first-year law student learns that rule. In the 21st century, would that be a good thing to get rid of?
Yes—that is probably my short and my long answer.
The postal acceptance rule is a strange thing. It certainly made sense decades ago, but it is now pretty much standard for it to be taken out of contracts. Our position is that it is not fit for purpose in the modern age. If the bill does nothing else, it should abolish the postal acceptance rule.
Is there anything else that you would like to comment on in part 1 of the bill?
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Not particularly. My reading of part 1 is that it essentially sets out the law in writing. There is no real significant reform, but it sets down offer and acceptance; revocation of an offer; change of terms; and change of circumstance, which is difficult to predict. In years to come, I might have disputes in court on behalf of clients when I could be trying to apply or interpret the legislation but, sitting here today, it seems fine to me.
Two issues stand out for me in the bill. The first is staged formation of contracts and the second is the “subject to contract” wording. Many appointments in the architecture and construction sector are made on the basis of pre-construction service agreements, which evolve in stages. They might include wording such as “proceed on the attached terms”, followed by detailed schedules. There would need to be some guidance on how that would operate in an architecture or construction environment going forward.
In many instances, particularly public sector funded projects, contracts include the wording “subject to contract” or “subject to grant funding.” There, the danger—I use the word loosely—is that the bill should not accidentally convert those into binding agreements. A worked example of how the provisions could operate in the construction field could be required.
I have nothing specific to add, except to say that the postal acceptance rule belongs to another age and is overdue for repeal.
Andrew Agapiou has already mentioned the formation of contracts electronically. What are the witnesses’ views on how the bill deals with contracts that are formed electronically?
What has been proposed is welcome. Moving away from the postal rule into the digital age is a positive development. I think that the bill deals that very well.
Colin Borland, do you have anything further?
No. I think that an offer is an offer and that a qualified acceptance is a qualified acceptance; I do not think that the medium by which it travels makes much difference. However, that links to the earlier point about the extent to which the bill is future proofed. By sticking to those principles, the bill gives itself the best chance of being that.
David Woods, do you have anything further to add, or are you broadly happy?
I am in broad agreement. The exchange of emails for the formation of a contract is absolutely fine. From a contract dispute perspective, I can foresee that there would be issues around whether an email had been received, but that is no different from the position as it stands. Evidence would be led as to whether a person could have opened an email or whether they had access to it, which is fine.
From reading more widely, beyond the bill, I know that thought was given to whether a read receipt would be needed. However, that gets into an unnecessary level of detail. Coming at it from a principles perspective works. The danger is in trying to micromanage and specify more deeply what would be required. In summary, the bill is okay on that point.
Picking up on that, I am aware that views have been expressed to the committee that it is not clear how the rules on electronic notification will apply when, for example, there is an out-of-office message, or if messaging services are not working. Have you given any thought to that, David?
Yes, that could arise in some cases. It would be a situation or scenario in which one party would be denying that they have entered into a contract. Evidence would need to be led to show that they had not received an email or that their out-of-office notification was on, which would be put forward in trying to establish the position that there was no contract.
However, if we are trying to address that in the bill, we would need to get into a level of detail in which we would say that the sending of an out-of-office email either does something or does not do something to the contract formation. I suggest that we keep it at the principles level, without trying to think of every possible scenario, because going down that path would lead to some scenarios being missed out.
Taking that as it stands and applying it to whatever situation the parties find themselves in would work. If I was arguing for a client who said that they did not receive an email, I would need to produce evidence to show that. The bill suggests that, if that information was not available, the offer of acceptance would not have been formed.
There might be reasons to consider putting in some explanations, but I suggest not going into every possible scenario, because things will be missed.
Colin Borland, is there a need for more in the bill?
No, there is not. It is quite clear that we are talking about the process of offer and acceptance. In cases involving an exchange of emails, yes, things can go wrong and people can deny things, but the vast majority of cases will be fairly clear.
Say I drop you a line to ask whether you can supply something and you say that you can do so at a certain price. I might then ask you do it for a bit less. Your response to that might be to say, “Fine. Done. Deal.” There is back and forth, and that exchange of emails effectively forms the basis of the contract. That is common business practice.
What about a situation in which there is not an exchange of emails and, as was mentioned, an out-of-office message is received? Would it be helpful if there was further detail in the bill on that, or would there need to be evidence-led facts to support having such detail?
I am not sure about that. I would need to see the extent to which that scenario is causing real problems for people doing business. We certainly do not have the evidence to demonstrate that that is the case at the moment.
I echo the points made by David Woods and Colin Borland. As I touched on before, it might be important to have a set of principles or guidance. We should not be going into too much detail—there could be various situations in various sectors and that would be too much to put into the bill.
Does the panel have any comments on the rules and remedies for breach of contract in part 2 of the bill?
Having read the wording of part 2, I think the proposals are quite modest, which is welcome. There is always a danger when we get into the complete codification of matters, so modesty is quite important as it means that we are not trying to codify everything.
I see three benefits of the proposals. The first two are that there will be clearer rules on withholding and suspension and that there will be more clarity on keeping a contract alive after breach. Those are important, because we saw what happened after the Carillion issue. They are important in the construction environment, because breaches of contract happen there. The third benefit is that there will be a reduced need for litigation and adjudication on minor cash flow disputes.
It is important—and maybe this needs to be referenced a little bit more in the bill—that the bill aligns with current legislation, such as the payment regimes under the SBCC and JCT contracts and the Housing Grants, Construction and Regeneration Act 1996 and all the updates that have come from that. A little bit of work needs to be done in that area.
Nothing specific came up for us in part 2, but I reiterate the general principle that working to codify, simplify and make it easier to interpret the law in that area has to be a good thing for small business owners who find themselves in the position where they have to interpret it.
Do you have anything further to add, David?
The return of benefits after rescission or termination of contract for material breach is an interesting point from a disputes perspective. The bill certainly covers off, or could cover off, situations in which something that was to be delivered has not been delivered or has been delivered but not paid for—in other words, relatively straightforward situations.
However, let us consider something more complex, such as the implementation of a sophisticated information technology contract involving software deployment, with services coupling that, too. That might require physical services to implement it, as well as software services, such as coding. In such a situation, considering how to return the benefit or what had been delivered would be more complicated. In practice, I do not think that that would work.
Under the bill, if you cannot give back a thing, you give back its value. In essence, I would already approach that by saying that I am acting for a client and suing somebody for damages because they have not paid for a thing that has been done for them, or they have benefited from it without paying for it. Those principles are already established in law.
The bill as drafted has to be quite complicated because the points that are being covered are not straightforward. The bill is fine in tackling a discrete point. It does that well and it does not try to overcomplicate matters by branching out and trying to foresee every situation that could arise between parties in a contract where there is a dispute and then legislating to deal with how those should be governed.
Last week’s witnesses seemed, in general, to consider that guidance would not be needed. Some of the evidence that the witnesses have given today suggests that they might have a slightly different view.
What is your view on the need for guidance on how the legislation will work in practice? I come to Andrew Agapiou first.
It is important that the legislation does not unintentionally narrow the right to suspend for non-payment where standard contracts already cover that. As such, there is a need to have guidance or maybe some sort of compatibility note referencing the existing legislation and how that is covered in construction contracts, particularly in the standard forms.
I am not sure that that is something that we have a view on.
You do not have a view on that. David, do you think that guidance would be helpful or is it not needed?
I do not think that significant guidance would be necessary, certainly not for large parts of the bill, and in particular its front end—the offer and acceptance piece—as that is quite straightforward. Perhaps some guidance would be helpful for later parts of the bill.
It might also be helpful to clarify what the legislation does not do. In other words, it might be useful to set out that it covers certain areas but not others. If people were to read the legislation, they would work that out for themselves.
I do not think that significant guidance is necessary, but it might be of assistance for some parts of the bill.
We are going online to our colleague Roz McCall.
Good morning, everybody—my apologies for not being at the meeting in person today. The evidence has been very interesting so far.
What are your views on whether the new rules on contract law should apply only to contracts that are entered into after the bill comes into force? Is setting that out in the commencement regulations sufficient?
I will just move down the line, starting with Andrew Agapiou.
Will you clarify that question for me, Roz? Are you talking about the transitional provisions that might be required before and after the bill?
Absolutely.
That is a critical issue for the construction sector in particular. Many contracts, whether building contracts or consultancy contracts, that are entered into by architects or other consultants can run for multiple years—particularly long framework-based contracts.
The legislation must make it absolutely clear that the law that is in force when a contract is made will continue to apply, to ensure that projects are not forced midstream into new rules. That is an important issue that I think needs to be clarified.
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That is really interesting. Could there be a big problem with continuation?
Yes. I deal with lots of large projects in a practical and professional capacity, so I know that some contracts can run for five or six years. Depending on when they start, the legislation might switch the game, so it will be important to have clarification of that. There needs to be some unambiguous transitional wording to cover such situations.
Okay. That is very interesting.
Colin, what is your federation’s perspective on this?
Andrew Agapiou hit the nail on the head when he used the word “unambiguous”. I do not think that we have particularly firm views on the matter one way or the other, but whatever you decide to do, it needs to be very clearly communicated in the sort of simple, refreshing language used in the bill to ensure that people who enter into contracts know exactly what rules will govern them. Obviously, there is also the general point about the need to be careful about making retrospective changes after people have already agreed a set of terms and obligations.
Thank you for that. Do you have anything to add, David?
It is important that the legislation applies only to contracts that are entered into after the bill has been passed. If it has retrospective effect, a scenario might develop with regard to party autonomy, which is a principle in the bill, in which parties who enter into contracts after the bill is passed might be able to contract out while parties who had entered into contracts prior to that will find themselves bound by it. That, I think, would be a bizarre outcome.
For the sake of clarity, I will just say that party autonomy appears to be important—it is a principle set out in the bill—but if it is imposed retrospectively on parties that have already entered into contracts, not knowing that this legislation would come, they would find such an outcome difficult.
Thank you.
What is your view on the Scottish Government’s proposal to amend the law of retention at stage 2? I will start with you this time, David, and then move back down the line.
On the law of retention, I make it clear that my bias is towards not legislating strongly in the area of contract law. We will need to see what is being proposed in order to form a firmer view on it, but I do have some hesitation here. As I have mentioned, if the legislation is not going to comprehensively codify the law of contract in Scotland, I am certainly not in favour of a kind of piecemeal approach being taken to tackling different bits of it in Scots law and its being removed from the common law and put into legislation, just for the sake of it.
I am sure that this is always the case, but if there is an issue to address or a point that needs to be clarified in legislation, legislation should step in and deal with it. Otherwise, I would hesitate to overlegislate in the area of contract law.
That is very interesting. So, you are saying, “If it ain’t broke, don’t try to fix it.”
Colin, do you have anything to add from your federation’s perspective?
The only thing that I would say is that, as I understand it, the reason for this amendment of the law is that, between the Scottish Law Commission report in 2018 and subsequent case law, the waters have been muddied a little bit, so it has been determined that there is a need to clarify the situation. That makes sense, and it is in keeping with the bill’s general principles. If the intention is, basically, to restate, clear up and clarify the law and to make it easier for us to understand, that seems sensible.
Thank you. Andrew, do you have anything to add?
Perhaps I can give you a bit of context. Retention is widely used in construction to secure the completion of projects; to deal with or manage snagging and defects; and to ensure that there is handover information. However, what we have seen historically in the industry is poor practices undermining payment flow.
In general, there are some caveats. Supporting reform is good, but only where it clarifies when retention or suspension is proportionate, where it does not undermine the retention mechanisms that are in the current standard form contracts and the JCT and SBCC forms, and where it aligns with policy directions on fair payment in Scotland. On that last point, there is a UK-wide consultation on payments within the construction industry, which the Royal Incorporation of Architects in Scotland has responded to.
It is important to emphasise that poorly drafted provisions can either make retention meaningless or allow for continued abuse. Some proportionate construction-tested drafting might be essential in that regard.
I will come back to that point, if I can. Maybe other witnesses would like to answer my next question. Should there be a right to contract out of the new rules on the law of retention? Would that solve the problem?
I go back to the need to align with what the construction industry already has in place—with the standard form contracts that are widely used in the industry. There could not be a departure from that.
Okay. Will you expand on the comments that you made in your written evidence that there needs to be separate consideration of the problems with retention clauses in construction contracts? You said that the UK Government is currently looking at the payment process. Are your concerns purely about the payment issue?
There is certainly an explicit case for reforming the law of retention. There are insolvency issues, non-payment issues relating to delays, and opaque supply chains are operating. Cash retention is having a disproportionate impact on small and medium-sized enterprises, which are largely the companies that operate in the industry. There is also a weak regulatory framework to cope with that.
We can look at international practice in this area, because New South Wales and the Republic of Ireland have gone much further. The Scottish Parliament might also consider this area in the future.
The danger of considering and proposing new reforms at this point is that it might create administrative burdens on the industry. There needs to be extensive consultation with industry if any changes are to be made in this area.
So, you are saying that, in that regard, amending the bill at this point would be the wrong way to go.
It is not the right time to do that.
Okay, thank you. Colin Borland and David Woods, do either of you want to comment on the possibility of the right to contract out of the new rules on the law of retention? Would that make sense?
On the point about party autonomy, as the bill indicates, parties should be able to contract out of the new rules if they wish to do so.
My only note of caution is on the point that we started off with about the relative bargaining positions of the two parties. We need to be careful that people are not using the rules to say, “Because one tiny part of this contract has not been delivered, the whole thing is void and you are not getting a penny from me.” That is unethical and probably illegal, but it is something that goes on.
There needs to be a way to ensure that, when there is a gulf in the bargaining position between two parties, you are not strengthening the hand of the more powerful party by allowing them to remove themselves. We do not have the same level of rights as individual consumers. If such a right would help with that—again, we do not know what that would look like—I would worry about making it easier for large corporations to sidestep their obligations.
Thank you very much indeed, gentlemen. That was very interesting.
Finally, do the witnesses have any other comments on the drafting of the bill or want to make any points that we have not raised today but that they mentioned in response to the committee’s call for views?
I made a few points that I would like to bring to the committee’s attention. The value in the bill lies in what it supports. It supports the standard forms—the SBCC and JCT forms—but does not interfere with them. That is an important issue.
I also noted the need for worked examples, which I highlighted earlier. Those might relate to dealing with letters of intent, tenders, emails and digital workflows. Maybe a little bit of work could be done there, to ensure that postal acceptance aligns with modern practice. We talked about digitisation earlier.
Also, it is good that the bill does not open or reopen any debates on issues that are settled under current Scottish case law.
Those are the points that I wanted to make the committee aware of.
I have no comments on the drafting. As I mentioned, from my perspective, it is important that the bill takes a relatively light touch. It picks up on discrete points and seeks to clarify. As I read it, it is not a reforming piece of legislation, at least in large part, but it provides clarity, which is good. As I said, I stress the importance of continuing to allow parties to contract out and not have the bill, or any other similar legislation, apply retrospectively. That could create quite a chaotic situation between parties. I suppose that that might be good for me from a disputes perspective, but it would not be good for parties in general.
Colin, do you want to come in?
No. I have nothing to add.
That rounding-up brings us to a good place. I think that the whole understanding is that the bill is heading in quite a positive direction, and it is great to have your contributions on that. There are no further questions, so I think that we have covered everything. Thank you very much for coming—you will be welcome back next time.
I now move the committee into private session.
10:28 Meeting continued in private until 10:55.