Contract Practice Flashcards
1
Q
What is a contract?
A
- Legally binding promise (written or oral) by one party to fulfil an obligation to another party in return for consideration’
2
Q
What should a basic binding contract consist of?
A
Offer, acceptance, Consideration and Intention to create legal relations
3
Q
Define express terms
A
terms of the agreement which are expressly agreed between parties
4
Q
Define implied terms
A
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
5
Q
What is tort?
A
A tort is a civil wrong
Part of the civil law
A claim in tort is concerned with loss or harm
6
Q
How do statutory provisions and contract provisions differ?
A
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
7
Q
What is your opinion of oral contracts?
A
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
8
Q
What is a breach of contract?
A
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
9
Q
What is the LDEDCA 2009?
A
Local Democracy, Economic Development and Construction Act 2009
10
Q
When did the Local Democracy, Economic Development and Construction Act 2009 come into force?
A
October 2011 in England and Wales
11
Q
What did the LDEDCA amend?
A
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
12
Q
What are the key payment provisions under the LDEDCA 2009?
A
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
13
Q
What is a letter of intent?
A
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
14
Q
What info is typically included in letter of intent?
A
Detailed description of works
Contract sum
Date for possession
Date for completion
Insurance provisions required
15
Q
What are the key contract provisions under the LDEDCA 2009?
A
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
16
Q
What are the key contractual payment notice provisions under the LDEDCA 2009?
A
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
17
Q
What happens if payment notice is not issued?
A
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
18
Q
What is a default payment notice?
A
Obliges the payer to pay the amount due and allows the payee their statutory right to suspend performance for non payment
19
Q
What is a pay less notice?
A
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.
20
Q
When would a pay less notice be issued?
A
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
21
Q
What can the payee do if the pay notice dates are not followed and the payer does not pay by final date for payment?
A
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.
22
Q
What is the payer liable to pay the payee if works are suspended due to non payment?
A
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
23
Q
What are the advantages of a Letter of Intent?
A
Allows work to commence before the main contract is agreed / signed
24
Q
What are the disadvantages of a Letter of Intent?
A
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
25
Who issues the Letter of Intent?
The employer
26
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
27
Who signs it?
Both employer and contractor
28
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.
29
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
30
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
31
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
32
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
33
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.
34
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
35
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
36
Are there any Acts which govern third party rights?
Contracts (Rights of third parties) Act 1999
37
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
38
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
39
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.
40
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
41
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.
42
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
43
What is privity of contract?
??
44
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.
45
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
46
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
47
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
48
Are you aware of any case law relating to collateral warranties?
Parkwood Leisure v Laing O'Rourke
49
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
50
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)
51
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
52
Can you provide example to explain how assignment might be applied?
Can arise where a party to a contact, CW or consultants appointment wants to assign the benefit under the contract to a 3rd party, such as a purchaser or tenant.
53
What are some of the typical clauses of assignment?
- standard to allow assignment of rights twice without consent
- the assignment should be notified in writing to the other party
54
What is a bond?
Construction bonds are protection for the owner against non-payment, lack of performance, company default and warranty issues
An arrangement where a contractual duty owed by one party to another is backed by a third party
55
Can you list 5 different bonds which might be used on a project?
- Performance bond
- Retention Bond
- Off-site materials bond
- Advance payment bond
- Tender bond
56
What is a performance bond?
form of security provided by contractor to a developer or employer
consists of an undertaking by a bank or insurance company to make a payment to the employer in circumstances where the contractor has defaulted under the contract
57
When might an employer want a performance bond?
- if contractor is new or unapproved
- if concern over contractors finances
- The economy might be heading into a recession
- Employer simply wants to protect their commercial exposure
58
What is the difference between on-demand and conditional bonds?
On-demand
Money set out in the bond is immediately available on demand without needing to satisfy any preconditions whatsoever unless the demand is fraudulent
Conditional Bond
Require the employer to provide evidence that the contractor has not performed their obligations under the contractor and that they have suffered a loss consequently
59
What is a conditional performance bond?
Require the employer to provide evidence that the contractor has not performed their obligations under the contractor and that they have suffered a loss consequently
60
What is an on demand performance bond?
Money set out in the bond is immediately available on demand without needing to satisfy any preconditions whatsoever unless the demand is fraudulent
61
What is the typical value of a performance bond?
Usually 10% of contract sum
But can depend on financial stability of contractor and number of previous claims
62
What is the risk of not having a performance bond?
- Event contractor goes into insolvency and no bond in place, employer liable to pay all costs to deal with insolvency
- Costs include sourcing new contractor, and premium that will attract
- Employer will not be able to pursue contractor as company will be in process of liquidation
63
Are there alternatives to a performance bond?
If contractor part of a group of companies, employer may wish to consider Parent company Guarantee
If smaller company breaches contract, PC obligated to step in and remedy the breach
64
What is a tender bond?
- Requested by employer when inviting contractors to tender for a contract
- provides security against risk the successful bidder failing to enter the contract
- should help prevent idle tendering
65
What is an off-site materials bond?
- Covers an employer against risk of paying the contractor for materials being manufactured off site
- if contractor becomes insolvent, the employer can claim on the bond for goods paid for (in event not delivered to site)
66
What is a retention bond?
- Employer could hold up to 5% of contract value for a period up to 12 months. Main contractor then must wait for funds to be returned at the end of the making good of defects period. Can affect business cashflow
- Retention bond provides employer with same level of comfort as retention, but the contractor has real benefit of retaining cash in their account
67
What are the disadvantages of a retention bond?
- Employer will ultimately have to pay the premium for taking out the bond
- may reduce contractors incentive to complete works promptly and to desired standard
68
Why might a retention bond be used?
in difficult market conditions to aid the contractors cashflow
69
What is an advanced payment bond?
required to protect and support payments to contractors by the employer in advance of works being done
some contracts require purchase of materials in advance of contract commencing. Risk to employer of advancing money to contractor
APB protects payment being advanced in exchange for a bond underpinned by a suitable guarantor to give peace of mind to parties
70
What are antiquities?
- Historical artefacts
- bones / fossils
- something of historical interest
- archaeology
71
What should the contractor do if they discover such objects?
- use best endeavours to avoid disturbing
- cease work if it would endanger object
- take necessary measures to preserve in location
- inform CA or PM of discovery and location
72
When the objects of interest are discovered, who is liable for the delay and expense incurred?
- Usually employer
- Significant delays and costs can arise - can be serious event for the employer
73
What are defects?
defect in workmanship, design, materials or systems
result is failure of building project or structure that causes damage to people or property - in turn leads to financial losses or harm.
74
What does NEC define defects as?
part of the works which is not in accordance with works
part of works designed by contractor which is not in accordance with applicable law or contractors design which PM has accepted
75
What are the two types of defects?
Patent defects
Latent Defects
76
What are patent defects?
those which can be discovered by reasonable inspection
e.g cracked walls, sagging gutters, broken windows, missing tiles
77
What are latent defects?
Defects which cannot be discovered by reasonable inspection
problems with foundations - may not be apparent for several years until settlement causes cracking
78
Why is the defect rectification period 12 months?
12 months will allow the building to go through all seasons of the year. Most defects (with exception of latent defects) will become apparent within this period
79
What is novation?
Usually under D&B contract, novation normally refers to process by which design consultants are initially contracted to the client, but are then novated to the contractor
Contractor will then go on to manage remaining design process with existing design team rather than bring their own consultants onboard
80
Are novation agreements required under traditional procured projects?
Not usually. Designers are typically retained by the employer
81
What are some of the advantages of novation?
- reduced learning curve - working with client early - design team gain strong understanding of project requirements. If not novated - new design team will potentially need to replicate and re learn parts of design
- reduced contractual risk to employer - transfer of responsibility to contractor means employer assumes minimum risk
82
What are some of the disadvantages of novation?
- Employer will generally require collateral warranties
- client may need to employ shadow team for compliance purposes
- potential for conflict of interest, in relation to services that remain to be performed
83
What is retention?
percentage of the sums certified for payment under the construction contract, (typically 3- 5% is held by the employer during the construction phase
84
What is the purpose of retention?
Used as an assurance of project completion and is intended as a safeguard against subsequent defects that the contractor may fail to remedy
85
What can the employer use retention monies for?
If contractor does not return correct the defects, then the retention held may be used to fund the payment of others to correct the works
The PM / CA will need to check the contract on the ability to do this and relevant notices that should be given to the contractor prior to appointing others to undertake the works
86
Who typically benefits from interest accruing on retention money?
Usually, the employer
87
Are there alternatives to holding retention?
Possible to procure a retention bond to cover retention that would otherwise have been deducted
88
What is professional negligence?
When a professional fails to perform their responsibilities to the required standard or breaches a duty of care
Poor conduct subsequently results in financial loss, physical damage or injury of client / customer
89
How can the employer recover a loss if the consultant or contractor is professionally negligent?
Make a claim on their professional indemnity insurance (PII)
90
What is Product Liability Insurance?
Manufacturers / suppliers of products are at risk of claims being made against them for damages if defects in those products result in damage or injury
Protects policy holder against liability resulting from defects to products
91
What is Public Liability Insurance?
PII protects liabilities for injury to third parties or their property
e.g. a member of public could make a claim if a fallen brick damaged their car, or if a supplier trips over an unsecure cable
92
What is Employers Liability Insurance?
ELI can pay the compensation amount and legal costs if an employee claims compensation for a work related illness or injury
93
What are the 3 types of liability insurance?
Product Liability Insurance
Public Liability Insurance
Employers Liability Insurance
94
What is Contractors Design Portion?
Typically used on traditionally procured projects, design responsibility for specific elements of the building is transferred to the contractor
95
What's the difference between traditional procurement with CDP and D&B?
Traditional with CDP - design responsibility lies with the employer except for certain elements that are transferred under CDP
D&B - all responsibility for design rests with the contractor
96
How are CDP elements executed?
Performance spec is provided at tender stage which the contractor provides the design proposals in response.
These proposals are then reviewed by design team and either accepted, commented upon, or rejected
97
Can you list typical CDP elements which the employer may wish to transfer?
Steelwork Connections
Cladding
Roofing
Temporary Works
MEP elements
98
What are domestic sub contractors?
chosen by contractor to execute a package of works
Employers consultants, nor the employee themselves influence the appointment or the conditions
99
What are named sub contractors?
Employer provides list of named sub contractors which are pre approved
Contractor selects one from the list through the tendering process
once appointed, they then become a domestic sub contactor
100
What are the advantages of naming subcontractors?
Provides the employer with more control to the selection of a subcontractor
101
What are nominated sub contractors?
selected by the employer to carry out an element of the works
Nominated subcontractors are usually imposed upon the contractor
102
What are the disadvantages of nominated subcontractors?
- subbie being imposed on contractor (contractor allowed to object under certain conditions i.e. safety reasons)
- contractor and subbie may have conflicting procedures, ethics, attitudes etc.
103
What are the advantages of nominated subcontractors?
On the basis the employer has nominated them in the first place, their work should be of high quality and acceptable to the employer
104
What is insolvency?
Insolvency is concerned with inability to pay debts
105
What can be done at tender stage to identify potential contractor insolvency?
- Check financial accounts for stability
- Check for front loading of tender submission
- Bank references
- Use credit checking agencies
- Previous references (from consultants, employers)
- Request a bond or PCG - will not prevent insolvency but will give employer comfort in event of default
106
What is a letter of intent?
Expression of the intention to enter into a contract
107
Why would you use a letter of intent?
To start work in advance of formalising the contract
108
Contents of contract?
Agreement
Recitals
Articles
Contract Particulars
Attestation
Conditions
109
What are contract particulars?
Schedule of variables for the agreement and conditions of the contract
(retention, possession, completion, LDs, Payment dates etc.)
110
What are the articles within the contract?
core statements of what parties have agreed - whos the QS, PD, Contractor etc.
What the contract sum is
111
What are the recitals within the contract?
Introduction to project - name, address, nature of works etc.
112
What is attestation within the contract?
execution of the contract
Under hand or Under Seal
113
What are the conditions within the contract?
SECTION 1 DEFINITIONS
SECTION 2 CARRYING OUT WORKS
SECTION 3 CONTROL OF WORKS
SECTION 4 PAYMENT
SECTION 5 VARIATIONS
114
What is meant by Contra proferentum?
Legal term associated with bespoke contracts. Where a clause is ambiguous, courts will read it against the party which drafted it
115
Contracts produced under JCT
MINOR WORKS
INTERMIDIATE WORKS
DESIGN AND BUILD
STANDARD BUILDING CONTRACT
MAJOR PROJECTS
PRIME COST BUILDING CONTRACT
CONSTRUCTION MANAGEMENT
MANAGEMENT BUILDING CONTRACT
116
Differences between JCT and NEC?
JCT - variations and loss and expense
NEC - Called compensation events
117
What is included within contract documents?
Typically.
Form of contract
Drawings
Specification
ER's / CPs if applicable
CSA
118
How do you recommend which contract to use?
Project size
Complexity
programme length
Procurement selection
119
Are letters of intent legally binding?
Yes
120
Why would you use a letter of intent
Where works need to begin before a certain date and allows negotiation of contract to continue whilst works gets under way
121
What is included within a letter of intent?
Intended contract to be entered into
intended contract sum
scope of works
limit of spend under letter
key procedures for payment, disputes etc.
122
How is a contract executed?
Under hand or Under Seal (as a deed)
123
Differences between under hand vs under seal (deed)
Under Hand is for simple contracts only
Under hand - limitation period is 6 years
Under Seal - limitation period is 12 years
Under seal does not require consideration
the facts cannot be disputed in a deed
124
What is consideration?
both parties to contract must receive something of value e.g. payment for a building
125
Whats a standard from of contract?
Set of formal predetermined arrangements that form basis of agreement between parties
126
What are the advantages of using standard form of contract?
Written by legal experts - consistency and unambiguous
Rights and obligations are clearly set out
Standardisation leads to familiarity and consistency
More efficient - quicker to agree than with bespoke
127
Disadvantages of standard form of contract?
risk apportionment rarely questioned
Regularly amended anyway - reduces consistency
may not be appropriate for Client
128
Can you amend a standard form?
Yes, if both parties agree to amendments
129
Who can issue instructions?
Dependent on contract
SBC - CA
D&B - EA
