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Beware the handshake deal

By Richard Neave, Partner

First published in The Press 1 March 2010

We Kiwis tend to be a casual bunch and sometimes think a handshake will suffice to seal a deal. Implicit in the handshake is that any financial commitments will be honoured. The sad truth is that you could well be left out in the cold if matters turn sour.

Many contractors and subcontractors accept jobs to supply goods and services to customers without any written agreement on the terms of the supply including payment and when it is due.  This can lead to misunderstandings and disputes which can cause problems for the contractor and be costly and time consuming to resolve. 

The following fictitious example is an all too typical scenario.

John is an experienced plumber working in Christchurch.   A good customer has given John’s name to a developer who wants some plumbing work done on three properties being developed. John meets with the developer to look over the properties and agrees to do the work. They shake hands on the price. 

To complete the work, John purchases a significant amount of plumbing supplies from his regular merchant and quickly completes the work. In line with his normal practice, he sends his invoice for the goods and services completed.  The invoice states that payment is due seven days from the date of invoice.  When payment is not received within that period, John contacts the developer who says that he has issues over the quality of the work, the cost increases over the price agreed and that, in any case, he usually pays invoices accepted on the 20^th of the month following the date of receipt and not seven days from the date of invoice.

Although a contract for the provision of goods and services can be verbal and enforceable, if not in writing, there can be disputes as to the the terms of the contract agreed.  The law will imply some terms in contracts of this nature, although it can be both costly and time consuming to establish what terms apply to such a contract, let alone enforcing final payment.

It is always far preferable for any contractor supplying goods and services, however limited, to enter into a written contract with the customer paying for goods and services. The contract should confirm the terms agreed, particularly in relation to the price and cover any variation of the price and terms of payment. 

The regular practice of submitting terms and conditions on the reverse side of an invoice may not be sufficient to form the terms of a contract if these terms are not disclosed and agreed at the time when the job is accepted.  The terms of supply of goods and services should always be given to the customer with the initial estimate or quotation and accepted by the customer in writing to ensure that there is no dispute over this.  This protects the contractor in respect of misunderstandings, disputes, variations, terms of payment and other important matters relating to the supply of goods and services.

John did get paid by the developer but only after several months of expensive legal arguments and for less than his invoiced amount.  Had John realised this at the time of accepting the work, he would have not accepted the job as he ended up working for much less than his usual rate as a result of the disputes, delays and costs.  If the developer had gone under during this period, John would have worked for nothing and still had to pay his merchant for the plumbing supplies.  Clearly this can be a serious risk to any contractor’s business.

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

• Richard Neave is a commercial law specialist partner at Duncan Cotterill Lawyers.   R. neave@DuncanCotterill.com