RICS - Contract Practice Flashcards

(60 cards)

1
Q

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

A

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
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2
Q

What are express terms?

A

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.

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3
Q

What are implied terms?

A

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

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4
Q

What is Tort?

A

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.

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5
Q

How do statutory and contract provisions differ?

A
  1. Statutory provisions are set out by law and must be complied with regardless.
  2. Contract provisions relate to the contract in question.
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6
Q

What is your opinion of verbal contracts?

A

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

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7
Q

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

A
  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.
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8
Q

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

A
  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.
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9
Q

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)

A
  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Clarifies the contractor’s right to suspend carrying out the work in the event of non-payment.
  6. 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.
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10
Q

What is a letter of intent?

A

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.

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11
Q

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

A
  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.
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12
Q

What are the advantages of a letter of intent?

A

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

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13
Q

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

A
  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.
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14
Q

When should a LOI be used? (2)

A
  1. Where works must commence before a certain date.
  2. Where materials have long lead periods and early procurement would aid the programme.
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15
Q

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

A

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

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16
Q

What are the 3 main types of LOI?

A
  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.
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17
Q

Ampleforth Abbey Trust v Turner & Townsend (2012)

A
  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.

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18
Q

What is a Parent Company Guarantee?

A

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.

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19
Q

When are Parent Company Guarantees useful?

A

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).

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20
Q

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

A

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.

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21
Q

When might bonds be appropriate? (3)

A
  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.
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22
Q

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

A
  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.
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23
Q

What are the cons of Parent Company Guarantees?

A
  1. Not as secure as Bonds because of the financial link between a parent company and subsidiary.
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24
Q

What Act governs third party rights?

A

Contracts Act 1999

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25
What is the purpose of the Contracts Act 1999?
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.
26
What are the advantages of third party rights? (3)
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.
27
What are the disadvantages of third party rights? (2)
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.
28
What is a collateral warranty?
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.
29
What is the difference between a bond and a collateral warranty?
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.
30
What are the three ways that benefits can be transferred under a building contract?
1. Collateral warranties 2. Third party rights 3. Assignment
31
Why would collateral warranties be needed under a D&B contract?
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.
32
What is assignment? When might this be applied?
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.
33
What is a bond?
Protection for the owner against non-payment, lack of performance, company default or warranty issues.
34
Give 5 examples of bonds that might be used on a project?
1. Performance bond 2. Retention bond 3. Off-site materials bond 4. Advance payment bond 5. Tender bond
35
What is the difference between an on-demand and conditional performance bond?
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.
36
What is a tender bond?
Provides security against the risk of the successful bidder failing to enter the contract, and should prevent idle tendering. Is provided by the tenderer.
37
What is the standard value of a tender bond?
5% of the tender sum.
38
What is the argument against requesting a tender bond? (2)
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.
39
What is an off-site material bond?
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).
40
What is a retention bond?
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.
41
What are the disadvantages of a retention bond? (2)
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.
42
When might a retention bond be used?
In difficult market conditions to aid the contractor's cash flow.
43
What is an advanced payment bond?
A bond taken out to protect and support payments to contractors by the employer in advance of work being done.
44
What are defects?
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.
45
What are patent defects?
Those which can be discovered by reasonable inspection, including wall cracks, sagging gutters, broken windows, missing tiles etc.
46
What are latent defects?
Those which cannot be discovered by reasonable inspection e.g problems with foundations may not become apparent for several years after completion.
47
Why is the defect rectification period typically 12 months?
Allows a building to go through all seasons of the year which should mean most patent defects become apparent.
48
What is Novation?
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.
49
What are the advantages of novation? (2)
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.
50
What are the disadvantages of novation? (3)
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.
51
What is retention? What Guidance has the RICS published on this?
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
52
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.
53
What can the employer use retention money for?
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.
54
When is retention released to the contractor? (2)
1. First half is released upon issue of a practical completion statement. 2. Second half at the expiration of the rectification period.
55
What is Professional Negligence?
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.
56
What is Product liability insurance?
Protects the policyholder against liability resulting from defects associated with defects in products that are sold resulting in damage or injury.
57
What is Public liability insurance?
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.
58
What is Employer liability insurance?
Pays the compensation amount and legal costs if an employee claims compensation for a work-related illness or injury.
59
What is CDP?
Design responsibility transferred to the contractor for specific elements of the building.
60