Contract Practice Flashcards
(98 cards)
1
Q
What if the client tells you the LADs are to be £100,000 per week?
A
- I would check that the LAD figure is based on a genuine pre-estimate of financial loss and explain that in the event LADs are to be applied, they would need to substantiate this figure
- I would also explain that if the figure inserted into the contract is show 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
2
Q
What are extensions of time?
A
Adjust the completion date and relieves the contractor’s liability to pay liquidated damages for the period of the extension
3
Q
What are liquidated damages?
A
A genuine pre-estimate of the likely loss incurred by the employer should the completion date not be met
4
Q
What must be in place before LDs can be deducted?
A
- a non completion certificate
- a withholding notice
5
Q
What if the employer actually suffered no loss or damage?
A
- it doesn’t matte
- the damages can still be deducted at the value stated in the contract
6
Q
What are the benefits of being able to grant an extension of time?
A
- relieves the contractor liability for liquidated damages for a delay that they did not cause
- enables another completion date to be set, which maintains the employer’s ability to deduct liquidated damages if another delay occurs
7
Q
What happens when ‘time is at large’?
A
- no set completion date
- the contractor only has the obligation to complete the works within ‘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 complete in a reasonable time
8
Q
What are Relevant Events in a JCT?
A
they are events that entitle the contractor to an extension of time
9
Q
What are types of Relevant Events?
A
- variations
- instructions
- deferment of possession of site
- suspension by the contractor for non-payment
- carrying out of work by statutory authorities
- strike or lock out
- adverse weather conditions
- civil commotion or terrorism
- force majeur
- exercise of any statutory power
10
Q
What are the main elements you include within an interim valuation?
A
- preliminaries
- measured work
- variations
- materials on site
- materials off site
- loss and expense
- retention
11
Q
What needs to be in place for you to include payments for materials on site?
A
- materials should be for the works
- they should be adequately protected
- delivered to programme
- reasonable quantity
12
Q
What needs to be in place for you to include payments for materials off site?
A
- vesting certificate
- insurance until materials arrive on site
- materials clearly labelled as fr the site and set apart from other materials
- material off site bond if required
13
Q
What is a retention of title cause?
A
- sub-contractor/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
14
Q
How do you evaluate interim valuations?
A
- go to site and inspect the works to form a view of the % of works undertaken
- check for materials on site and materials off site
- value time related and fixed prelims items undertaken
- value any agreed variations and claims
- the valuation amount is presented as the gross valuation less any previous payments made and retention
- I would send my recommendation to the architect/CA for them to prepare the payment cert
15
Q
How do stage payments work?
A
- the stages and their values are set out in the contract particulars
- the stages are usually related to the completion of significant design items e.g. substructure
16
Q
What is an interim certificate conclusive of?
A
- they are not conclusive
- they carry no contractual significance to state that the quality of materials or workmanship is satisfactory
- final certificate is conclusive
17
Q
What is retention?
A
it is a % of each interim certificate deducted and retained by the client from each interim payment to the contractor
18
Q
What is the purpose of retention?
A
- provides an incentive for the contractor to rectify any defects within the contract defects liability period
- provides some financial security to the employer in the event of a contractor default
19
Q
When is retention released to the contractor?
A
- half of 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
20
Q
What is the typical % of retention in a JCT?
A
3-5%
21
Q
What is a retention bond?
A
- bond provided by the contractor in lieu of taking retention from interim payments
- should be equal to the same value as the retention deducted
- requirement for the bond should be stated in the contract particulars
- standard form is provided in the JCT contract schedules
22
Q
What happens if the contractor does not maintain the retention bond?
A
- the employer can deduct retention from interim payments
- if the bond is subsequently taken out, the retention deducted must be repaid to the contractor
23
Q
Why might a retention bond be used?
A
it may be used during difficult market conditions to aid the contractor’s cashflow
24
Q
What are the disadvantages of a retention bond?
A
- 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
- reduces the employers cashflow
- the employer would not get the interest accruing on the amount of the retention bond
25
What is acceleration?
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
26
What options may be considered to achieve acceleration?
- re-aequencing the wrks or making sequential activities parallel
- increasing the working time by working longer hours
- increasing the resources employed by using larger gangs
- changing the working methods e.g. dehumidifier to dry out works
- increasing incentives e.g. bonus payments
27
What are the most and least efficient ways to accelerate the programme?
- resequencing the works can be the most cost effective
- least efficient is usually increasing the working time and increasing the resources employed which usually results in lower productivity
28
What is a fixed price contract?
where adjustments of the contract sum are limited to changes in statutory contributions, taxes and levies
29
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, taxies and levies
30
What is the date for completion?
the date fixed and stated in the contract particulars
31
How does this differ from the completion date?
this is the date of completion of the woks that may be adjusted to take into account agreed extension of time
32
What is practical completion?
- when the works are substantially complete with minor defects only
- the employer is unable to gain beneficial occupancy of the development
- half of retention is released
- employer surrenders the right to apply liquidated damages
- employer take back possession of the works and is responsible for arranging insurances
33
What is sectional completion?
the completion and handover of the works to the employer in agreed stages
34
Do the works have to be totally completed before practical or sectional completion is achieved?
- practical completion is a vague concept and is not defined in JCT
- it is reliant on the architects 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
35
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
36
What is the difference between partial possession and sectional completion?
sectional completion is a contractual obligation and partial possession relies on the contractor's consent
37
What does the architect have to do at partial possession?
issue a written statement to the contractor showing the relevant part and stating the relevant date
38
What is the rectification period?
the contractor has an obligation to make good any defects that arise during this period of time
39
How long is rectification period?
typically it is 12 months so the building can be observed through all seasons
40
What is a non completion certificate?
this is issued by the architect to certify that the works or works sections have not been completed by the relevant completion date
41
What are the consequences of a non completion certificate?
the employer has the right to withhold liquidated damages as long as witholding has been given
42
what are the different certificates you are aware of under JCT?
- interim certificate
- practical completion certificate
- non completion certificate
- making goods certificate
- final certificate
43
What are the three ways that benefits can be transferred under JCT?
- collateral warranties
- third party rights
- assignment
44
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
45
Why are collateral warranties used?
- due to 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 remedy to external third parties that due to privity of contract would not otherwise have them
46
Who might want a collateral warranty?
- 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 subcontractors in case main contractor goes into liquidation
47
What are common clauses in collateral warranties?
- the obligations of collateral warranties should mirror that of the main agreement
- if a party is in breach of the main agreement they would also be in breach of the warranty
- common terms: limitation of liability, reasonable skill and care of fitness for purpose, requirements for PI insurance, assignment rights and novation rights
48
Name some standard forms of collateral warranty that may be used
- JCT standard form of collateral warranty for a funder
- JCT standard form of collateral warranty for a future purchaser or tenant
49
What is assignment?
where the rights and benefits of one contractual party are transferred to a third party
50
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
51
What is novation and how does it 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 benefits only as burdens cannot be assigned
52
What is the key issue after a design team has been notated?
whether the new party has the right to take action against the novated party for breaches that occurred before the novation
53
How does novation affect the employers 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 notated party
54
What is a limitation clause?
- clauses that limit a party's liability for potential loss e.g. limitation to a fixed sum, limitation to the extent of PI insurance, exclusion of consequential loss, limitation to loss that can be recovered from a third party, limitation to responsibility r a net contribution clause
55
What is available to protect clients from subcontractors failing?
- collateral warranties can be used as a direct link between the employer and the subcontractor
- in the event that the subcontractor fails to carry out the obligations the employer can have a contractual remedy to sue the subcontractor for breach of contract
- they could also use a performance bond
56
What are step in rights and why do they exist?
- they typically permit funders t step into another parties' shoes, usually the employer
- they provide funders protection in the event employer defaults on its loans
- the funder can take ownership of the development and sell it off if required
- 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
57
What is reasonable skill and care?
the ordinary skill and care expected of an ordinary competent person carrying out the particular service
58
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
59
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
60
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
61
What is a retention bond?
- an alternative to traditional retention provisions whereby the employer holds retention money from the contractor which does not help the contractors cashflow
- 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 cashflow
62
Who 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 they contractor fails to return and correct them himself
63
What is a parent company guarantee?
- an arrangement where the contractural 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
64
Which is the most common type of bond in the construction industry?
performance bonds
65
What does a performance bond 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
66
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
67
How can the employer call for payment (performance bond)?
they have to prove that the contractor has defaulted in their obligations under the main contract and that loss has been suffered
68
What is the purpose of a tender bond?
- 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 be prevent idle tendering as there is an incentive to submit a price
69
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
70
what is the standard value of a tender bond?
1-5% of the tender sum
71
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
72
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
73
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
74
What are the pros and cons of a PCG?
- 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
75
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 for 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
76
What provisions are available for ensuring contractor carries out works properly?
- to provide assurance that the contractor will perform these obligations, a 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, 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
77
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
78
What is insurance?
a transfer of a defined risk to an insurance company in exchange of a premium
79
What are the two main types of insurance?
liability and loss insurance
80
What is liability insurance?
financial cover for the legal liabilities that the insured party owes to others
81
What is loss insurance?
financial cover for losses that fall directly on the insured party
82
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
83
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
84
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 and consideration) and both parties must intend to create legal relations
- without either of these 4 criteria the LOI is worthless
85
When are LOI's used?
- LOIs 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
86
Are LOIs legally binding?
- there is no legal significance of LOIs
- 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 LOI will have no contractual effect and quantum merit will be applied
87
What is a pay less notice and when would you use it?
88
Difference between JCT and NEC
89
Difference between Contract Administrator and Employers Agent?
90
Do you need a cost manager on a project?
91
Client say they want to use NEC, what do you advise?
92
What would you do if materials arrived earlier on site? Do you pay for it?
93
How would you treat defective works on site?
94
What are different valuation methods for variations?
95
Name some different JCT contracts?
96
What are the difference between some with and without quantities?
97
What is a contract?
98
What is the criteria needed for a contract to be in place?
