Contract Practice Flashcards
What is a contract?
- Legally binding promise (written or oral) by one party to fulfil an obligation to another party in return for consideration’
What should a basic binding contract consist of?
Offer, acceptance, Consideration and Intention to create legal relations
Define express terms
terms of the agreement which are expressly agreed between parties
Define implied terms
A contractual term that has not been expressly agreed between the parties but has been implied into the contract either by common law or by statute
What is tort?
A tort is a civil wrong
Part of the civil law
A claim in tort is concerned with loss or harm
How do statutory provisions and contract provisions differ?
Statutory provisions are set out by law and must be complied with regardless
Contract provisions relate to the contract in question and therefore only apply to specific project
What is your opinion of oral contracts?
Whilst they are legally binding, the difficulty lies in having proving specific terms and conditions of the agreement. Having a written contract is always the preferred opinion
What is a breach of contract?
Breach of contract occurs when one party in a binding agreement fails to deliver according to the terms of the agreement
A breach of contract can happen in both a written and an oral contract
What is the LDEDCA 2009?
Local Democracy, Economic Development and Construction Act 2009
When did the Local Democracy, Economic Development and Construction Act 2009 come into force?
October 2011 in England and Wales
What did the LDEDCA amend?
The Housing Grants Construction and Regeneration Act 1996
Changed the way construction contracts are entered into and in particular introduced amended regime for payment and adjudication
What are the key payment provisions under the LDEDCA 2009?
Payment
1) Under HGCRA a construction contract must have an adequate mechansim for determining what payments are due and when they become payable
2) Pay when certified clauses can no longer be used to prevent paying a subcontractor on the basis that a certificate in the main contract is yet to be issued
What is a letter of intent?
Used to describe a letter from an employer to a contractor (or from a main contractor to a subcontractor) indicating the employers intention to enter into a formal written contract for works
Letter of intent typically asks contractor to begin those works before formal contract is executed
What info is typically included in letter of intent?
Detailed description of works
Contract sum
Date for possession
Date for completion
Insurance provisions required
What are the key contract provisions under the LDEDCA 2009?
Contracts
1) Repeals the requirement for construction contracts to be in writing therefore, contracts that are partly in writing or wholly oral are now covered. Allows parties to go to adjudication, even if their involvement is not formally recognised in writing
What are the key contractual payment notice provisions under the LDEDCA 2009?
Contractual Requirements
1) construction contract must specify that either the payer or the payee will issue the pay notice
2) Must be issued not later than 5 days after pay due date and paid before final date for payment identified by construction contract (usually 14 days)
3) Pay notice must specify sum the payer / payee considers to be due at the payment due date and basis for which sum was calculated
4) Pay notice must be issued even if pay notice is nil
What happens if payment notice is not issued?
Payer is required by contract to issue pay notice - failure to do so in set timeframe the payee if entitled to issue a default payment notice
What is a default payment notice?
Obliges the payer to pay the amount due and allows the payee their statutory right to suspend performance for non payment
What is a pay less notice?
A pay less notice allows the payer to amend the sum due if it is later discovered that the work or amount notified in pay notice is unsound.
When would a pay less notice be issued?
Paying parties are required to pay notified sum in either the pay notice or default pay notice by final date or serve a pay less notice
A pay less notice must specify sum paying party considers due on date the notice is served, basis of sum and be served no later than prescribed period prior to final date for payment
What can the payee do if the pay notice dates are not followed and the payer does not pay by final date for payment?
The LDEDCA 09 clarifies contractors right to suspend works in the event of non-payment
To suspend performance of obligations by reason of non payment , a default pay notice must have been issued and there must have been failure to pay.
What is the payer liable to pay the payee if works are suspended due to non payment?
The party who has not paid is liable to pay the payee (contractor) a reasonable amount by way of costs and expenses incurred by exercising the suspension of all or part of the works
What are the advantages of a Letter of Intent?
Allows work to commence before the main contract is agreed / signed
What are the disadvantages of a Letter of Intent?
May lead to complacency and disincentise both parties from signing the main contract
Contractually less robust than the main contract
Employer loses incentive in negotiations of the main contract
Who issues the Letter of Intent?
The employer
In what circumstances might a letter of intent be used?
Where the employer needs to commence works before a certain date
Where materials have long lead in times and early procurement would aid programme
Starting construction works might trigger early founding
Who signs it?
Both employer and contractor
What would you say if the client asked you to draft a Letter of Intent?
It is legally binding agreement, like a contract, therefore we would NOT draft those.
What are the different types of Letters of Intent?
Comfort Letter
- letter expressing parties intention to act in particular way at some point in future, or at time of issuing letter
Instruction to proceed with consent to spend
- letter with instructions to proceed and consent to spend sometimes referred to as an ‘if’ contract.
- this type of letter allows works to proceed up to certain value while contract is being finalised
Recognition of Contract
- also referred to as letter of acceptance and used by some forms of contract (FIDIC) to formally execute contract itself.
- Letter will be issued once contract has been substantially agreed and marks completion of negotiations between parties
What is a recognition of contract?
This is a type of letter of intent
Comfort Letter
- letter expressing parties intention to act in particular way at some point in future, or at time of issuing letter
What is an instruction to proceed with consent to spend?
This is a type of letter of intent
Instruction to proceed with consent to spend
- letter with instructions to proceed and consent to spend sometimes referred to as an ‘if’ contract.
- this type of letter allows works to proceed up to certain value while contract is being finalised
What is a comfort letter?
This is a type of letter of intent
Recognition of Contract
- also referred to as letter of acceptance and used by some forms of contract (FIDIC) to formally execute contract itself.
- Letter will be issued once contract has been substantially agreed and marks completion of negotiations between parties
Are you aware of any case law related to letters of intent?
Ampleforth Abbey Trust vs Turner & Townsend
Defendant project managers retained by trust to build new accommodation at a school.
Defendant retainer included obligations, ‘ facilitating, assisting and being involved in the procurement of the building contractor and contract’.
Contractor never signed contract and whole of works procured under LoI’s
Affect was trust was unable to claim liquidated damages under contract for late completion of works
HHJ Keyser QC held that the defendant had been negligent in failing to take steps reasonably required of competent PM for purpose of finalising the contract between contractor and trust.
What is a PCG?
Parent Company Guarantee
Form of security that may be required by clients to protect them in the event of default on a contract by a contractor that is controlled by a Parent Company
Default might be caused by insolvency of the contractor
In what circumstance may a PCG be required?
Useful where a small contractor is part of a large, financial stable group of companies.
Guarantee is given by the parent company to the client and in the event the contractor defaults on their obligations, the parent company is required to remedy the breach, meeting all contractor obligations under the contract
Are there any Acts which govern third party rights?
Contracts (Rights of third parties) Act 1999
What is the overarching purpose of the contract act 1999?
allows third parties to enforce terms of contracts that they are not a party to, but which benefit them in some way or which the contract allows them to enforce
It also gives parties access to various remedies if those contract terms are breached
What are the advantages of third party rights?
1) Time and Cost
No separate document (i.e. collateral warranty) is being entered into, using the Act cuts down on time and cost associated with warranties being drawn up, signed and circulated.
2) Certainty
Once rights to be conferred on 3rd parties are negotiated and agreed by all parties, there is limited room to revisit the wording when protection is required as is often the case when new collateral warranties are circulated
3) Subcontractors
3rd party rights process can be extended into subcontracts, so that an employer can confer 3rd party rights in relation to work done by sub contractors unilaterally. Avoids need to chase large numbers of individual warranties
What are the disadvantages of 3rd party rights?
1) Lack of flexibility
- once schedule of 3rd party rights being conferred has been agreed, limited room for negotiation. Advantage as keeps costs down but inflexible - could cause problem if specific provision is required by specific party - such as incoming tenant / purchaser
2) Need for careful drafting
- Recent cases shown importance of drafting provisions relating to enforcement of 3rd party rights very clearly to ensure that all necessary rights are conferred on 3rd party.
Why might 3rd party rights be used instead of collateral warranties?
if a lot of collateral warranties are required, can involve a lot of admin and cost.
3rd party rights are easier to get in place because there is no separate document required
What is a collateral warranty?
Formal contractual agreement which runs alongside another contractual agreement.
Purpose to create contractual relationship between two parties where one would not otherwise exist.
Can you provide a working example of how a collateral warranty could be used?
Employer places a contract with contractor, contractor places several sub contracts with suppliers to do the works.
Employer has direct contractual relationship with contractor but not suppliers - known as ‘privity of contract’
in this circumstance, employer may wish to have direct contractual link to suppliers so that it can enforce obligations that subcontract owes directly or to create other obligations and rights between them
What is privity of contract?
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Who might want a collateral warranty?
- Any third party with a financial interest in the project but is not party to main contract (purchasers)
- employer may want a collateral warranty with key subcontractors / suppliers, if the contractor were to go into liquidation, otherwise they would have no contractual link with them for redress in case of defective work.
What is the difference between a bond and a collateral warranty?
Bond - financial commitment backed up by 3rd party
CW - passes on contractual obligations
Bond - contained within the contract
CW - Side agreement to the contract
Are there any alternatives to collateral warranties?
alternative method to confer such rights provided by the Contracts (Rights of 3rd parties) Act 1999
Allows 3rd parties to obtain benefits from contracts, which are entered into by others
What are the three ways that benefits can be transferred under a building contract?
1) Collateral Warranties
2) Contracts (Right of 3rd parties) Act 1999
3) Assignment
Are you aware of any case law relating to collateral warranties?
Parkwood Leisure v Laing O’Rourke
What happened in the case of Parkwood Leisure v Laing O’Rourke?
In light of particular wording used in the collateral warranty, there was no doubt that it should be treated as a construction contract under section 104 of the HGCRA 1996
There is high probability that collateral warranties will be needed under a D&B contract, can you explain why?
Design team typically sits below contractor under D&B , therefore, the employer will need to retain a contractual link with the design team (using CW)
What is assignment?
Assignment is the process whereby the benefit of contract is transferred from one party to another, but burden of contract remains with the original party to the contract
