RICS - Contract Practice

Question 1

What is a contract? What 4 elements does a contract need to be binding?

Answer 1

A contract is a legally binding promise by one party to another to fulfil an obligation in return for consideration.

1. Offer
2. Acceptance
3. Consideration
4. Intent to create legal relations

Question 2

What are express terms?

Answer 2

Terms that are expressly agreed between party.

Ideally these are written down in a contract, if verbal these are terms that have been discussed and agreed.

Question 3

What are implied terms?

Answer 3

A contractual term that hasn’t been expressly agreed but has been implied by either common law or statute.

Question 4

What is Tort?

Answer 4

A Tory is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act.

Question 5

How do statutory and contract provisions differ?

Answer 5

1. Statutory provisions are set out by law and must be complied with regardless.
2. Contract provisions relate to the contract in question.

Question 6

What is your opinion of verbal contracts?

Answer 6

While they are legally binding, the difficult lies in proving the specific terms and conditions of the agreement. Written contract is always preferred.

Question 7

What is the local democracy, economic development and construction act 2009?

Answer 7

1. The act amended the Housing Grants and Regeneration act 1996.
2. Changed the way construction contracts are entered into and introduced an amended regime for payment and adjudication.

Question 8

What are the key provisions under the Local Democracy, Economic Development and Construction Act 2009? Part 1 (6) (Contracts, Payment, Payment Notices)

Answer 8

1. Repeals requirement for construction contracts to be in writing. Allows parties to go to adjudication even if their involvement is not formally recognised in writing.
2. Construction contracts must have an adequate mechanism for determining what payments are due and when they become payable.
3. Pay when paid clauses can no longer be used to prevent payment of subcontractors.
4. The contract must specify that either the payer or payee will issue the payment notice.
5. This must be issued not later than 5 days after the payment due date and paid before the final date for payment identified in the contract.
6. Payment notice must specify the sum the payer or payee considers to be due at the payment due date and the basis on which that sum was calculated. Must be issued even if for zero payment.

Question 9

What are the key provisions under the Local Democracy, Economic Development and Construction Act 2009? Part 2 (6) (Payment notices, Pay less notices, Suspension of performance)

Answer 9

7. If the payer is required by contract to issue a payment notice and fails to serve that notice in the required form or within the set timeframe, the payee is entitled to issue a default payment notice.
8. 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.
9. Paying parties are required to either pay the notified sum specified in either the payment notice or default payment notice by the final date for payment or serve an effective pay less notice.
10. To be effective, a pay less notice must specify the sum that the paying party considers to be due on the date the notice is served, the basis for that sum and served no later that the prescribed period prior to the final date for payment.
11. Clarifies the contractor’s right to suspend carrying out the work in the event of non-payment.
12. To validly suspend performance of obligations, a default notice must be issued and there must have been a failure to pay. The non-payer is liable to pay the payee a reasonable amount by the way of costs incurred by suspending all or part of the work.

Question 10

What is a letter of intent?

Answer 10

A letter that indicated the employer’s intention to enter into a formal written contract for the works described. Typically asks the contractor to begin those works before the formal contract is executed.

Question 11

What information is typically included in a letter of intent? (9)

Answer 11

1. Description of work to be completed
2. Contract sum (if agreed), and a maximum expenditure of LOI
3. Date for possession
4. Date for completion
5. Insurance provision requirements
6. Method of payment
7. Expiration date of the letter.
8. Typically will state the employer’s right not to award the main contract
9. ADR method for dispute resolution.

Question 12

What are the advantages of a letter of intent?

Answer 12

Allows work to commence before the main contract is agreed and signed.

Question 13

What are the disadvantages of a letter of intent? (3)

Answer 13

1. May lead to a disincentive to sign the main contract.
2. Letter of intent is less robust than a main contract.
3. Employer’s negotiation strength can be reduced.

Question 14

When should a LOI be used? (2)

Answer 14

1. Where works must commence before a certain date.
2. Where materials have long lead periods and early procurement would aid the programme.

Question 15

What would you say if the client asked you to draft a letter of intent?

Answer 15

It is a legally binding agreement like a contract and should be drafted by a legal professional.

Question 16

What are the 3 main types of LOI?

Answer 16

1. Comfort Letter - Expresses a party’s intention to act in a particular way at some point in the future.
2. Instruction to proceed with consent to spend - Instructs to proceed up to a certain value whilst contract is being agreed.
3. Recognition of contract - Used in FIDIC to mark completion of contract negotiations.

Question 17

Ampleforth Abbey Trust v Turner & Townsend (2012)

Answer 17

1. T&T found negligent as they were deemed competent PMs who failed to agree MC with contractor (Kier) who completed late, and LOI did not allow employer to implement LDs to the contractor.

LOI was repeatedly extended due to MC not being agreed between parties. The Court concluded that with the benefit of a contract, Kier could have been held liable for £340,000 by way of damages so, after factoring in the one-third risk that no contract would have been completed, this left damages of £226,667 payable by the T&T.

Question 18

What is a Parent Company Guarantee?

Answer 18

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.

Question 19

When are Parent Company Guarantees useful?

Answer 19

When a small contractor is part of a large financially stable group of companies, the guarantee is given by the parent company to the client, requiring the parent company to remedy a breach of contract and meet all the contractor’s obligations under the contract (including Loss and Expense incurred by the client).

Question 20

What is a performance bond? What is the standard value of a performance bond?

Answer 20

1.Give the employer a guarantee of payment up to a stated amount of money should they suffer a loss as a result of a contractor’s breach of contractual obligations.
2. Usually 10% of the contract value, and the premium for taking out the bond is often added to the contract sum.

Question 21

When might bonds be appropriate? (3)

Answer 21

1. If the contractor is new or unproven.
2. There is concern over the contractor’s finances/commercial standing.
3. In a difficult economic climate, where the risk of insolvency is higher.

Question 22

What are the pros of Parent Company Guarantees? (3)

Answer 22

1. Do not need to be paid for as opposed to performance bonds.
2. Can be unlimited.
3. Can make the parent company responsible for performance as well as a financial guarantee.

Question 23

What are the cons of Parent Company Guarantees?

Answer 23

1. Not as secure as Bonds because of the financial link between a parent company and subsidiary.

Question 24

What Act governs third party rights?

Answer 24

Contracts Act 1999

Question 25

What is the purpose of the Contracts Act 1999?

Answer 25

1. Allows third parties to enforce terms of contracts that they are not a party to but that benefit them in some way. 2. Gives parties access to various remedies if those contract terms are breached.

Question 26

What are the advantages of third party rights? (3)

Answer 26

1. Act reduced the time and cost associated with warranties being drawn up, signed and circulated. 2. Once the rights conferred on third parties are agreed by all parties, there is limited room to revisit wording when protection is required. 3. Can be extended to subcontracts so that an employer can unilaterally confer third party rights in relation to work done by subcontractors, removing the need to chase large numbers of warranties.

Question 27

What are the disadvantages of third party rights? (2)

Answer 27

1. They lack flexibility once a schedule of rights has been agreed. 2. Need to be drafted very carefully to ensure all rights are conferred on the third party.

Question 28

What is a collateral warranty?

Answer 28

A formal contractual agreement which runs alongside another contractual agreement, its purpose is to create a contractual relationship between two parties where one would otherwise not exist.

Question 29

What is the difference between a bond and a collateral warranty?

Answer 29

Bond - A financial commitment backed up by a third party, which is contained within the contract. Collateral warranty - Side agreement to the contract which pass on contractual obligations.

Question 30

What are the three ways that benefits can be transferred under a building contract?

Answer 30

1. Collateral warranties 2. Third party rights 3. Assignment

Question 31

Why would collateral warranties be needed under a D&B contract?

Answer 31

Design team appointed by MC, need to create a contractual link between the client and design team in case of Contractor insolvency or non-completion of contract.

Question 32

What is assignment? When might this be applied?

Answer 32

Process whereby the benefit of a contract is transferred from one party to another, but the burden of contract remains with the original party to the contract. When one party wants to assign a benefit of the building contract to a third party e.g purchaser or tenant.

Question 33

What is a bond?

Answer 33

Protection for the owner against non-payment, lack of performance, company default or warranty issues.

Question 34

Give 5 examples of bonds that might be used on a project?

Answer 34

1. Performance bond 2. Retention bond 3. Off-site materials bond 4. Advance payment bond 5. Tender bond

Question 35

What is the difference between an on-demand and conditional performance bond?

Answer 35

On demand - Money is immediately available on demand without needing to satisfy precautions, unless the demand is fraudulent. Conditional - Requires employer to provide evidence that the contractor has not performed their obligations and that they have suffered a loss consequently.

Question 36

What is a tender bond?

Answer 36

Provides security against the risk of the successful bidder failing to enter the contract, and should prevent idle tendering. Is provided by the tenderer.

Question 37

What is the standard value of a tender bond?

Answer 37

5% of the tender sum.

Question 38

What is the argument against requesting a tender bond? (2)

Answer 38

1. Shouldn't be required if the tender selection process is operated effectively. 2. Unnecessary additional costs are added to the contract sum which are unlikely to be called upon.

Question 39

What is an off-site material bond?

Answer 39

Covers an employer against the risk of paying the contractor for materials being manufactured off site. If the contractor becomes insolvent, the employer can claim on the bond for goods paid for (if they aren't delivered to site).

Question 40

What is a retention bond?

Answer 40

A bond provider will act as a guarantor between the two parties. Pays the employer up to the full amount of what retention would have been if the contractor fails to remedy defects after contract completion.

Question 41

What are the disadvantages of a retention bond? (2)

Answer 41

1. Employer has to pay the premium for taking out the bond (usually through the contract sum). 2. May reduce the contractor's incentive to complete work promptly and to the desired standard.

Question 42

When might a retention bond be used?

Answer 42

In difficult market conditions to aid the contractor's cash flow.

Question 43

What is an advanced payment bond?

Answer 43

A bond taken out to protect and support payments to contractors by the employer in advance of work being done.

Question 44

What are defects?

Answer 44

A defect in workmanship, design, materials or systems used. The result is a failure of the building project or structure that causes damage to people or property.

Question 45

What are patent defects?

Answer 45

Those which can be discovered by reasonable inspection, including wall cracks, sagging gutters, broken windows, missing tiles etc.

Question 46

What are latent defects?

Answer 46

Those which cannot be discovered by reasonable inspection e.g problems with foundations may not become apparent for several years after completion.

Question 47

Why is the defect rectification period typically 12 months?

Answer 47

Allows a building to go through all seasons of the year which should mean most patent defects become apparent.

Question 48

What is Novation?

Answer 48

The process where a new contract transfers rights and obligations of one contractual party to a new third party. This often occurs under a design & build where design consultants are novated to a contractor.

Question 49

What are the advantages of novation? (2)

Answer 49

1. By working with the client at an early stage, design team can gain strong understanding of project requirements. 2. Reduced contractual risk for the employer - responsibility goes to the contractor.

Question 50

What are the disadvantages of novation? (3)

Answer 50

1. Employer will generally require collateral warranties following novation. 2. Client may need to employ a shadow team for compliance purposes. 3. Potential for conflict-of-interest, particularly in relation to services that remain to be performed.

Question 51

What is retention? What Guidance has the RICS published on this?

Answer 51

1. A percentage of the sums certified for payment that is retained by the employer from each interim payment to the contractor. 2. Retention 1st edition 2012 Black Book

Question 52

What is the purpose of retention?

Answer 52

Used as an assurance of project completion and is intended as a safeguard against subsequent defects that the contractor may fail to remedy.

Question 53

What can the employer use retention money for?

Answer 53

Depending on contract terms and notices that are given to the contractor, money can be used to correct defects if the contractor does not return to correct them.

Question 54

When is retention released to the contractor? (2)

Answer 54

1. First half is released upon issue of a practical completion statement. 2. Second half at the expiration of the rectification period.

Question 55

What is Professional Negligence?

Answer 55

When a professional fails to perform their responsibilities to the required standard or breaches a duty of care. This poor conduct results in financial loss, physical damage or injury to their client.

Question 56

What is Product liability insurance?

Answer 56

Protects the policyholder against liability resulting from defects associated with defects in products that are sold resulting in damage or injury.

Question 57

What is Public liability insurance?

Answer 57

Protects against liabilities for injury to third parties or their property e.g a fallen brick damaging a car or someone tripping over an unsecured cable.

Question 58

What is Employer liability insurance?

Answer 58

Pays the compensation amount and legal costs if an employee claims compensation for a work-related illness or injury.

Question 59

What is CDP?

Answer 59

Design responsibility transferred to the contractor for specific elements of the building.