Contract practice Flashcards
1
Q
What contract suites are you aware of in the UK construction industry, other than JCT?
A
NEC
FIDIC
2
Q
What are the main differences between the NEC and JCT contracts?
A
- NEC uses compensation events to assess time and cost together, JCT assesses these separate under Loss & expense and extension of time.
- Programme and Early warning register are key contract documents under the NEC forms.
- NEC uses Core/ Main and Secondary option clauses
- NEC uses simple, present tense language
- NEC encourages collaboration
- NEC is forecast rather than retrospective (i.e. variation costs can be agreed at FA on JCT, however we agree them prior to instructing)
- NEC does not provide for the use of Provisional Sums
3
Q
You mention that you are aware of collateral warranties, What is a Collateral Warranty and why is it used?
A
Provides security for investors. A collateral warranty is used to create direct contractual relationships between parties that would otherwise not exist. It extends the rights under a principal contract, i.e. duty of care/ Professional Indemnity etc. It extends the duty of care for the whole of the principal contract. IT IS A CONTRACT BETWEEN THE THIRD PART AND SUB-CONTRACTOR/ CONTRACTOR ETC.
4
Q
What are third party rights?
A
Allow third parties to have rights in relation to contracts without the need for additional documentation. I.e. third party can enforce the benefit of the contract
5
Q
Why would you use third party rights instead of collateral warranties?
A
Warranties often involve a lot of admin and cost.
6
Q
How do you go about deducting LAD’s?
A
a. Notify intent to charge LAD’s
b. Deduct costs from valuation and payment certificate
7
Q
What are heads of claim?
A
Prolongation / disruption / acceleration
8
Q
What are the differences between NEC and JCT?
A
QS / PM / CE’s / collaborative / legal jargon
9
Q
What is required for a Contract to be valid?
A
Offer – acceptance – consideration – intent to form contract – legality – capacity
10
Q
Do you know when FIDIC may be used and what it stands for?
A
a. Fédération Internationale des Ingénieurs – Conseils
b. Used internationally, the engineer acts as CA
11
Q
Are you aware of the updates to JCT?
A
a. 2024 updates recently published.
b. More gender-neutral language
c. Captures updates to the – Building Regulations & Building Safety Act
d. Target cost contract (TCC)
12
Q
What Acts are there relating to construction?
A
a. Building Safety Act 2022
b. Corporate Insolvency and Governance Act 2020
c. Housing Grants, Construction and Regeneration Act 1996
d. The Procurement Act 2024
e. Construction (Design and Management) Regulations 2015
f. Health and Safety at Work etc Act 1974
13
Q
What is the construction act (housing grants construction and regen)?
A
Ensure payments are made promptly throughout the supply chain, and easier dispute resolution.
14
Q
Do clients have to use the new suite of JCT contracts?
A
No, it will take time to implement and for client legal teams to assess.
15
Q
How would you deal with ordering materials upfront?
A
a. Off-site materials bond
b. Vesting
16
Q
What other bond are there?
A
Retention bond, advance payment bond
17
Q
When might you or might not use a performance bond?
A
Technically shouldn’t be needed, as the tender has proved the contractor to be capable, and it adds additional cost. However it is good when the contractor is new to the client, or where there is a potential risk.
18
Q
What contracts are you aware of and when would you use them?
A
a. I am aware of JCT D&B which would be used where the client wanted the contractor to be responsible for design maybe where the design had not yet been completed, and there was more urgency to get to site.
b. I am aware of JCT SBC and IC which are used where the client wants to retain control of the design and handle that risk and where the design is needed to be completed to RIBA 4 prior to entering the contract.
c. I am aware of JCT MW, which is a simpler contract used on smaller scale projects, or those of relatively simple work
19
Q
What are the types of contract sums you can get/ basis of cost?
A
a. Lump sum – only adjusted by variations
b. Reimbursable (Prime Sum) – don’t know what the final account will be, paid actual.
c. Re-measurable – approximate quants are remeasured fully on site
20
Q
What are some typical contract amendments?
A
a. The contract can be amended in many ways, one is amending the payment terms in the JCT D&B contract for example from the standard 14 days payment to 21 days for example. This is often to give the client more time to organise payment, as 14 days may not be enough time to deal with internal paperwork.
b. Another example is amending the defects rectification period from the standard 6 months in the JCT D&B to 12 months, this gives more time for any defective workmanship to show, across all seasons and weather, as the 6 months doesn’t do this.
c. Retention, from 3% to 5%
21
Q
What is the limitation period for a contract signed as a deed?
A
12 years
22
Q
What is the limitation period for a contract signed under hand?
A
6 years
23
Q
What does it mean if the LAD’s section in the contract is written as ‘nil’
A
there are no LAD’s to apply
24
Q
What if the LAD’s section is left blank with no rate?
A
This technically means they are unlimited and the client can apply any amount, this would likely lead to disputes
25
What is an example of novation and assignment?
Assignment of rights under collateral warranty to a different tenant
Novation of design team under D&B contract
26
What are the sections of the JCT?
a. Agreement (Companies)
b. Recitals (Summary)
c. Articles (Contract Sum, QS, CA, Architect, PD, adjudication)
d. Contract Particulars
e. Attestation (Signing)
f. Conditions (9 Clauses)
27
What is subrogation?
This is when an insurance company steps into the shoes of the insurer and pursues a claim against a third party.
28
Other than works insurance (the options), what other insurances are required?
a. Contractors public liability – injury to persons or property
b. Liability of Employer
c. Works insurance (Option A B C)
29
What is opening up of works/testing/work not in accordance?
CA/EA/Architect can open up works if not in accordance, allowing instruction to repair defective work
30
When would you use JCT Intermediate Contract?
Projects that don’t exceed 1 year, simple in content, and where works are already designed.
31
When would you use JCT SBC?
Works are already designed, if it is a lump sum form.
32
On the Keele IC7 Fitout you drafted the JCT D&B 2016, why was this the Contract that was chosen?
I advised my client to go down a D&B route, as this is what they were familiar with, and it suited the project and programme needs best, and the key project requirements were already achieved in the current design.
33
If the Client asked for advice on which Clauses to amend within a Contract, which Clauses would you advise on?
I have previously advised clients that typical amendments are the retention % (from 3-5 in JCT). The rectification period from 6 – 12 months in JCT D&B/SBC. And the payment dates changed from 14 – 21 days or other to allow the client additional time to make payments
34
Your client is having an airport refurb carried out, how do you advise on whether sectional possession or partial possession should be selected?
Either can be selected, as they both achieve the same thing, however sectional completion is pre agreed and put in the contract. If the sections are not yet fully known or decided then partial possession can be used and agreed post contract, however sectional completion is more contractual and all parties are aware of it and so can plan around the sections, therefore it depends on the works.
35
What is your understanding of Employer’s Requirements and why are they important?
It is what the client wants for the project, this dictates client satisfaction
36
What are the insurance options in JCT, and when have you advised on them?
a. Insurance A – New Builds – Contractor
b. Insurance B – New Builds – Employer
c. Insurance C – Existing Builds – Employer
d. Advised on NCDH to use option A as the client wanted the contractor to hold the policy due to lack of experience. Also the contractor had rolling offers with insurance providers so was able to provide a better price on the policy.
37
What’s the difference between partial possession and Practical Completion?
Partial possession is not pre agreed in the contract. Partial possession is just a section of the works whereas Practical Completion is the whole of the works.
38
When might you use Partial possession?
When during construction a section becomes completed and the client wants to take possession of this part, it may be to move client directs in such as equipment, or start installation of client direct items, such as comms lines of technical equipment, or to start generating profit/revenue from that area.
39
A client asks you to come up with a figure for LAD’s, how would you calculate it?
I wouldn’t calculate or advise the client on the cost of LAD’s, however I can offer advice and considerations to the client on what needs to be considered when calculating them, such as loss of operating profit, consequential losses, administration, and all costs which the client would incur if a delay occurred.
40
40. On UoL Worksmart, why did you give this advice? (to use both a PCG and Performance Bond) Were both needed together?
a. A parent company guarantee comes at no cost and protects the client In the event of liquidation of the general contractor. The performance bond however protects against the performance of the contractor in relation to the works being satisfactory and complete.
b. The PCG is also free
c. The PCG may not work if the parent company was going into administration.
d. It was a new contractor to the client so posed a large risk
41
What are the disadvantages of a PCG?
a. If parent company goes under, there is nothing to call upon
b. Can be difficult to manage and pursue administration and negotiation wise, as they have their interests in mind.
42
42. On UoW Anatomy and Clinical skills works, what was the outcome of the advice (LAD’s)?
a. I advised the client to consider how the different sections being complete were dependent on one another, and a delay in completion of one, would effect the others. The client liaised with the legal team, and the result was some wording in the contract to set out the increase in the rate of applied damages should the delay be impacted by other sections.
43
If its part of a wider development, what impact will this have?
The LAD’s had to be calculated based on loss of profit from the construction of buildings on the scheme, as the road fed the units, and the tenants were due to move in very soon, so a delay on this road would cause the client to incur damages to the end user not being bale to move in.
44
What are the factors that influence contract selection?
Procurement route. Type of works. Sector. Size, value & complexity of project. Employer familiarity. Risk allocation. Design responsibility. Financial basis & payment.
45
Can you give me an example of some of the items you included in your preliminaries for the Adrian project?
46
Why is it important to have a clear set of preliminaries in a contract?
Minimise claims etc.
47
You say that you advised on the valuation timescales on the Innovation Centre project, can you talk me through the timeline and which documents were issued?
If a 2016 D&B contract was used then the works would be valued up to the Interim Valuation Date which is 7 days before the due date. If it is issued after 7 days before then the Due date moved back by the same amount of time.
The works are valued up to the due date and the contractor then submits their interim application. We then value the works and issue a payment notice with the agreed amount within 5 days of the due date. A pay less notice can be issued within 5 days of the final date for payment, which was 14/28 days? from the due date on our project.
48
How did you validate that the contractor had a genuine claim for an extension of time on the University of Warwick project?
Verification that a relevant event had occurred
49
What are the relevant events under the contract? Give me 3 examples
There are 14 Relevant Events under the 2016 D&B Contract (cl. 2.26):
Changes. Employer’s Instructions. Delay of giving of possession of the site. Antiquities. Suspension by the contractor for non-payment. Impediment, default, or prevention by the Employer/ Employer’s Persons. Statutory Undertakers work. Exceptionally adverse weather. Specified Perils. Civil commotion/ threat or use of terrorism. Strike or lockout. UK Government/Public Authority affecting the works/ Delay to approval by a statutory body. Force Majeure
50
Is the discovery of asbestos a relevant event under the 2016 contract?
No- now included as a relevant event in JCT 2024
Clause 3.15 of DB2024 has been extended to include for the discovery of asbestos, contaminated material and unexploded ordnance devices.
51
What if the client tells you the LADs are to be £100,000 per week?
* I would check that the LAD figure is based on a genuine pre-estimate of financial loss and explain that in the event LAD’s are to be applied, they would need to substantiate this figure.
* I would also explain that if the figure inserted into the contract is shown to be punitive and not based on genuine financial loss it is not likely to be enforceable.
* In this scenario the employer will have to pursue the Main Contractor for any actual direct loss that can be substantiated through a formal dispute resolution procedure.
52
What are extensions of time?
Extensions of time adjust the completion date and relieves the contractor’s liability to pay liquidated damages for the period of the extension.
53
What are liquidated damages?
A genuine pre-estimate of the likely loss incurred by the employer should the completion date not be met.
54
What must be in place before LDs can be deducted?
* A non-completion certificate.
* A withholding notice.
55
What is the stance with LDs being deducted if the employer actually suffered no loss or damage?
* It doesn’t matter.
* The damages can still be deducted at the value stated in the contract
56
What are the benefits of being able to grant an extension of time?
* It relieves the contractor’s liability for liquidated damages for a delay that they did not cause.
* It enables another completion date to be set, which maintains the employer’s ability to deduct
liquidated damages if another delay occurs.
57
What happens when ‘time is at large’?
* There is no set completion date.
* The contractor only has the obligation to complete the works in a ‘reasonable time’.
* Liquidated damages cannot be claimed as there is no date to take them from.
* The employer would have to try and prove that the contractor had not completed in a reasonable time.
58
What are Relevant Events in a JCT form of Contract?
They are events that entitle the contractor to an extension of time.
59
What are the relevant events?
There are 13 relevant events set out in JCT forms including:
o Variations.
o Instructions.
o Execution of an approx. quantity that is not a reasonably accurate forecast.
o Deferment of possession of the site.
o Suspension by the contractor for non-payment.
o The carrying out of work by statutory authorities.
o Impediment, prevention or default by the employer.
o Loss or damages occasioned by the Specified Perils.
o Exceptionally adverse weather conditions.
o Strike or lock out.
o Civil commotion or terrorism.
o The exercise of any statutory power after the base date by the UK gov.
o Force majeure.
60
What are the main elements you would include within an interim valuation?
* Preliminaries.
* Measured work
* Variations.
* Materials on site.
* Materials off site.
* Loss and expense.
* Retention.
61
What needs to be in place for you to include payments for materials on
site?
* The materials should be for the works.
* They should be adequately protected.
* Delivered to programme.
* In a reasonable quantity.
62
What needs to be in place for you to include payments for materials off site?
* Proof that ownership will transfer to the employer upon payment (vesting certificate).
* Insurance until materials arrive at site.
* Materials are clearly labelled as for the site and set apart from other materials.
* A materials off site bond has been provided if required
63
What is a retention of title clause?
* Where the sub-contractor or supplier retains ownership of materials until they are paid for them by the contractor.
* This highlights the importance of vesting certificates as the employer may subsequently pay for materials that are not owned by the contractor.
* This legal principle can lead to disputes in the event of insolvency.
64
How do you evaluate interim valuations?
* Go to site and inspect the works to form a view on the percentage of works undertaken.
* Check for materials on site and materials off site.
* Value time related and fixed preliminaries items undertaken.
* Value any agreed variations and claims.
* The valuation amount is presented as the gross valuation, less previous payment made and retention.
* Finally I would send my recommendation to the Architect or Contract Administrator for them to
prepare the payment certificate.
65
How do stage payments work?
* The stages and their values are set out in the contract particulars.
* The stages are usually related to the completion of significant design items for example completion of the substructure or achieving a water tight structure
66
What is the interim certificate conclusive of?
* Interim certificates are not conclusive.
* They carry no contractual significance to state that the quality of materials or workmanship is
satisfactory.
* It is only the final certificate that is conclusive
67
What is retention?
It is a percentage of each interim certificate deducted and retained by the employer from each interim payment to the contractor
68
What is the purpose of retention?
* It provides an incentive for the contractor to rectify any defects within the contract defects liability period.
* It provides some financial security to the employer in the event of a contractor default.
69
When is the retention released to the contractor?
* Half of the retention is released in the interim certificate after Practical Completion.
* The remaining retention is released in the final certificate after the certificate of making good defects is
issued.
70
What is a typical retention percentage under JCT contracts?
Usually retention is between 3% or 5% depending on the form in use
71
What is a retention bond?
* This is a bond provided by the contractor in lieu of taking retention from interim payments.
* It should be equal to the same value as the retention deducted.
* The requirement for the bond should be stated in the contract particulars.
* A standard form is provided in the JCT contract schedules.
72
What happens if the contractor does not maintain the retention bond?
* The employer can deduct retention from interim payments.
* If the bond is subsequently taken out, the retention deducted must be repaid to the contractor
73
Why might a retention bond be used?
It may be used in difficult market conditions to aid the contractor’s cashflow
74
What are the disadvantages of a retention bond?
* The employer would have to pay the premium for taking out the bond.
* It may reduce the contractor’s incentive to complete making good defects promptly.
* It reduces the employer’s cashflow.
* The employer would not get the interest accruing on the amount of the retention bond.
75
What is acceleration?
Acceleration is the completion of works in a shorter time frame than that anticipated at tender or the act of programme recovery by the contractor if they are in delay.
76
What options may be considered to achieve acceleration?
* Re-sequencing the works or making sequential activities parallel.
* Increasing the working time by using working longer hours.
* Increasing the resources employed by using larger gangs.
* Changing the working methods for example using a dehumidifier to dry out the works faster.
* Increasing incentives for example offering bonus payments.
77
Which are the most and least efficient?
* Re-sequencing the works can be the most cost effective and efficient.
* The least efficient is usually increasing the working time and increasing the resources employed which
usually results in lower productivity.
78
What is a fixed price contract?
Where adjustments of the contract sum are limited to changes in statutory contributions, taxes and
levies.
79
What is a fluctuating price contract?
Where the contract sum is adjusted for changes in the costs of materials and labour as well as statutory contributions, taxes and levies.
80
What is the date for completion?
The date fixed and stated in the contract particulars.
81
How does this differ from the completion date?
This is the date for completion of the works that may be adjusted to take into account agreed Extension of Time.
82
What does it mean when ‘time is at large’?
* There is no fixed completion date.
* The contractor must only complete the works in a reasonable time.
83
What is practical completion?
* When the works are substantially complete with minor defects only.
* The employer is able to gain beneficial occupancy of the development.
* Half of retention is released.
* The employer surrenders the right to apply liquidated damages.
* The employer takes back possession of the works and is responsible for arranging insurances.
84
What is sectional completion?
The completion and handover of the works to the employer in agreed stages.
85
Do the works have to be totally completed before practical or sectional completion is achieved?
* Practical completion is a vague concept.
* It is not defined in JCT.
* It is reliant on the architect’s opinion that the works are complete.
* It should not be conditional.
* It is common practice for PC to be granted when the works are substantially complete however there may be minor defects or omissions with nothing to prevent the employer from taking beneficial
occupancy.
86
What is partial possession?
Where the employer requests and the contractor consents to the employer taking possession of the works or part of the works before the date for practical or sectional completion.
87
What is the difference between partial possession and sectional
completion?
Sectional completion is a contractual obligation to hand over the section at the stated date, partial possession relies on the contractor’s consent.
88
What does the architect have to do at partial possession?
Issue to a written statement to the contractor showing the relevant part and stating the relevant date.
89
What is the rectification period?
The contractor has an obligation to make good any defects, shrinkages or other faults that arise during this period of time.
90
How long is it?
It depends on the forms of contract is place but is typically 12 months so the building can be observed in all seasons.
91
What is a non-completion certificate?
This is issued by the architect to certify that the works or works section have not been completed by the relevant completion date.
92
What are the consequences of a non-completion certificate?
The employer has the right to withhold liquidated damages, as long as a withholding notice has been given
93
What are the different certificates you are aware of under JCT forms of
contract?
* Interim certificates.
* Practical completion or sectional completion certificates.
* Non completion certificates.
* Certification of Making Good.
* Final Certificate.
94
What are the three ways that benefits can be transferred under JCT contracts?
* Collateral warranties.
* Third party rights.
* Assignment.
95
What are collateral warranties?
* They create contractual relationships between the main parties of a contract with an external third party.
* The contractual relationship would not exist with the third party due to privity of contract.
96
Why are they used?
* Due to the principle of privity of contract, the rights and obligations under a contract can only be enforced by a party to that contract.
* Collateral warranties give remedies to external third parties that due to privity of contract would not
otherwise have them.
97
Who might want a collateral warranty?
* Any third party with a financial investment in a project but not party to the main contract.
* Funding institutions, future tenants or purchasers may use collateral warranties.
* The employer may want a collateral warranty with key subcontractors or suppliers, as if the main contractor were to go into liquidation, they would have no contractual link with them for redress in case of defective workmanship.
98
What are the common clauses / terms in collateral warranties?
* The obligations of the collateral warranties should mirror that of the main agreement.
* Therefore, if a party is in breach of the main agreement they would also be in breach of the warranty.
* Common terms include:-
o Limitation of liability.
o Reasonable skill and care or fitness for purpose.
o Requirements for PI insurance.
o Assignment rights.
o Novation rights.
99
Name some standard forms of collateral warranty that may be used
* CWa/F – JCT standard form of collateral warranty for a funder.
* CWa/P&T – JCT standard form of collateral warranty for a future purchaser or tenant.
100
What is assignment?
* Where the rights and benefits of one contractual party are transferred to a third party.
101
What is the standard commercial position regarding assignment?
* It is standard to allow assignment of rights twice without consent.
* The assignment should be notified in writing to the other party.
102
What is novation and how does this differ from assignment?
* Novation is where a new contract transfers the rights and obligations of one contractual party to a new third party.
* Assignment is the transfer of contractual rights or contractual benefits only as burdens cannot be assigned.
103
What is the key issue after a design team has been novated?
Whether the new party has the right to take action against the novated party for breaches that occurred before the novation.
104
How does novation affect the employer’s rights?
* They lose all contractual relations with the novated party and therefore the right to take action for a breach.
* It is therefore common for there to be a collateral warranty between the employer and novated party.
105
What is a limitation clause?
* These are clauses that limit a party’s liability for potential losses
* Examples of limitation clauses could be:-
o Limitation to a fixed sum.
o Limitation to the extent of PI insurance.
o Exclusion of consequential loss.
o Limitation to loss that can be recovered from a third party.
o Limitation to responsibility or a net contribution clause.
106
What is available to protect clients from sub-contractors failing?
- Collateral warranties can be used as a direct link between the employer and subcontractor.
- In the event that the subcontractor fails to carry out his obligations the employer can have a contractual
remedy to sue the subcontractor for breach of contract.
- They could also use a performance bond.
107
What are step in rights and why do they exist?
* They typically permit funders to step into another parties’ shoes, usually the employer.
* They provide funders protection in the event employer defaults on its loans.
* The funder can then take ownership of the development and sell it off if required.
* A key problem is that the main cause will often result from the developer not being able to sell the development resulting in them being in arrears.
* The funder will stand less of chance of selling the asset than an experienced developer.
108
What is reasonable skill and care?
The ordinary skill and care expected of an ordinary competent man carrying out the particular service.
109
What is fitness for purpose?
* The provision of a service that is suitable for the employer’s intended purpose.
* It is clearly a more onerous obligation than reasonable skill and care
110
What is a bond?
* A surety bond is a guarantee from the surety in favour of the employer that the contractual obligations will be fulfilled by the main contractor.
* The bond if called upon will provide financial compensation up to a stated value if the other party does not fulfil their obligations under the contract.
* It does not guarantee the completion of the works.
111
What form must a bond be in?
* It must be in writing, it is common for it to be executed as a deed.
* It will contain a duration, usually until practical completion and a financial limit.
112
What is a Retention Bond?
* An alternative to the normal contractual retention provisions whereby the Employer holds retention money from the Contractor which does not help the Contractor’s cash flow.
* A bond will increase in value from the start of a project to mirror retention normally held throughout the project.
* They may reduce in value upon completion.
* Clients need to be wary of hidden costs to the employer such as lost interest on retained monies and the cost of the retention bond being passed to the Employer through the tender price.
* The choice of a bond may benefit the contractors cash flow.
113
When would you use a retention bond?
When the client does not wish to hold retention on the contractor, but requires some assurance or
financial cover for rectifying defects at the end of the contract in the event that the contractor fails to return and correct them himself.
114
What is a parent company guarantee?
* An arrangement where the contractual performance of one company in a corporate group is
underwritten by the other members of that corporate group.
* This means that it must complete the works itself if it can or pay the financial equivalent.
115
Which is the most common type in the construction industry?
Performance bonds
116
What do performance bonds do?
* Performance bonds are typically provided by banks or insurance companies.
* They give the employer a guarantee of payment up to a stated amount of money should they suffer a
loss as a result of the contractor's breach of his contractual obligations.
117
What is the standard value of a performance bond?
10% of the contract value, the premium for taking out the bond is added to the contract sum.
118
How can the employer call for payment?
They have to prove that the contractor has defaulted in their obligations under the main contract and that loss has been suffered
119
What is the purpose of a tender bond?
* This covers the party inviting the tender if the lowest tenderer refuses to enter into a contract with them.
* This can be important if the inviting party is in turn tendering for work on the basis of that tender.
* It should also prevent idle tendering as there is an incentive to submit a price.
120
What is a Notional Final Account?
* A final account that is prepared when the Main Contractor is facing insolvency.
* This will typically be of a greater value than the original forecast final account due to costs incurred by
the client to appoint a new Contractor to complete the works.
121
What is the standard value?
* 1-5% of the tender sum
122
What is the purpose of a materials off site bond?
It covers the employer against loss or damage to materials already paid for through interim valuations before the materials are delivered to site.
123
What are the arguments against requesting bonds?
* They shouldn’t really be needed if the tenderer selection process is operated effectively as only reliable
and capable contractors are then selected.
* Unnecessary premiums are added to the contract sum, which are unlikely to be called upon.
* If the developer is a serial developer this may add a lot of money to their project costs.
124
Where might bonds be appropriate?
* If the contractor is new or unproven.
* To protect the interests of a ‘one off’ developer.
* In a difficult economic climate, when the risk of insolvency is higher and PCGs are risky.
125
What are the pro’s and con’s of Parent Company Guarantees?
* They are not as secure as Bonds because of the financial link between a parent company and subsidiary whereas a performance bond is provided by a third-party finance institution.
* Advantages are that they do not need to be paid for, they can be unlimited, and they can make the parent company responsible for performance as well as a financial guarantee.
126
What is an ‘on demand’ bond?
* An 'on demand' bond is one which is paid straight away upon the default occurring and request for payment.
* There is no requirement to satisfy any review or specific condition to demonstrate the default.
* Whereas with conditional Bonds, the employer must satisfy the surety that the default has occurred and
the bond must identify what this condition is. It may also require litigation or arbitration resulting in delays and costs
127
What is a Highway Bond?
* A Developer who undertakes speculative housing developments will frequently be required to enter into an agreement with a Local Authority for the adoption of roads and sewers.
* If for any reason the Developer fails to complete the adoption of the roads and sewers to the required standards then the Local Authority will complete this on his behalf and call on the bond to claim back
costs.
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What provisions are available for ensuring Contractor carries out works properly?
* To provide assurance that the contractor will perform these obligations, a Parent Company Guarantee (PCG) or a Performance Bond may be provided.
* A PCG can only be used where the contractor is a subsidiary to another company.
* The parent company guarantees the performance and will become liable if it does not perform.
* Alternatively, a performance bond can be provided by the assurers and is used to protect the client in the event the contractor does not perform in the event that specific performance requirements are not met.
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What is the difference between insurance and indemnity?
* The purpose of indemnity is to protect against legal responsibility or to compensate, it is open ended.
* Insurance is a fund that enables the indemnifying party to make any payments that may arise. It includes time and financial limits.
* The contract sets out the insurances required to cover the indemnities that the party is liable for.
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What is insurance?
A transfer of a defined risk to an insurance company in exchange of a premium.
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What are the two main types of insurance?
Liability and loss insurance
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What is liability insurance?
Financial cover for the legal liabilities that the insured party owes to others
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What is loss insurance?
Financial cover for losses that fall directly on the insured party.
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What is subrogation?
A legal technique where the insurer steps into the shoes of the insured in order to take the benefit of any legal rights or remedies they may have against a third party responsible for the loss.
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What does ‘joint names’ mean?
* Where the employer and contractor are insured under the same policy.
* It stops the insurer having the right of subrogation against the other party if they caused the loss.
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Is an LOI that includes a spend limit any use to a contractor?
* It is only useful to the contractor if the LOI is legally binding.
* In order for an LOI to be legally binding it must have the basis of a simple contract (offer, acceptance
& consideration) & both parties must intend to create legal relations.
* Without either of these 4 criteria the LOI is worthless.
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When are LOI’s used?
* Letters of Intent are used when an early start on site is required.
* They can be used to instruct initial design or survey works to be carried out or procurement of materials on a tight programme.
* LOIs are issued to commence works while discussions are ongoing regarding the main contract.
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Are LOIs legally binding?
* There is no legal significance of letters of intent.
* The courts will look at all the correspondence between the parties to establish if a contract has been
formed.
* If it is found that a contract exists, then it will determine obligations.
* If there is no contract, then the letter of intent will have no contractual effect and quantum merit will be
applied.
