3 - Contract Practice Flashcards
What should you consider when recommending a form of contract?
- Complexity
- Overall value
- Risk
- Client behaviours
- Control of quality or design
- Time constraints
- Quality constraints
- Nature of client (public, private)
What does a Contract need to be binding?
1) Offer
2) Acceptance
3) Consideration
4) Intention
5) Capability
6) Legality
What are the differences between Under Hand or Under Seal (as a Deed)?
- Under hand limits liability for a claim to 6 years
- Under seal limits liability for a claim for 12 years
- Under hand requires any one person given authority by a director
- Under seal requires two directors listed on Companies House, or Director and Company Secretary
- If Under Seal (as a Deed) then this must be explicitly stated
When would you expect something to be signed Under Hand vs. Under Seal?
- Under hand for simpler projects or for temporary elements of projects, such as a large scaffold/temporary works scheme.
- Under deed when it’s a full construction project with potential for latent defects to occur.
Explain the make up of an NEC ECC Contract
- Core clauses:
General Terms Contractors Responsibilities Time Testing and Defects Payment Compensation Events Title Risk and Insurance
- Choose one of 6 main options
- Select W option for Dispute Resolution - option W2 in the UK due to the Construction Act
- Choose relevant secondary X options
- Select Y options (have to select Y(UK)2 because of LDEDCA)
- Contract Data Parts 1 and 2
- Scope
Can you identify all the Main NEC ECC options?
A - Priced Contract with Activity Schedule
B - Priced Contract with BoQ
C - Target Contract with Activity Schedule
D - Target Contract with BoQ
E - Cost Reimbursable Contract
F - Management Contract
When would you use Option B?
- Design is largely complete to provide good BoQ
- Client wants to pay only what they should for the actual quants
- Allows interim payments based on typical valuation
- Client takes risk of Quants
- Eases cashflow
- Can be administrative heavy
When would you use Option A?
- When requirements are well defined
- When you want Contractor to take the risk
- Simple stage payments based on activity schedule
When would you use Option C?
- For D&B
- Not greatest level of design, enough to price, but need to get on with the project
- When Client risk under A/B would be too great
- Incentivise the contractor to reduce cost
- Parties are collaborative and want to work together
When would you use Option E
- Emergency works (repair fire damage)
- Just need to get on with it
When would you use Option F
- Very experienced
- Don’t want to pay large PC overheads
- Cost risk with Client
What JCT Contracts do you know of?
- Minor Works (up to £100K, small, simple)
- Intermediate Works (up to £500k, medium, simple)
- Major Works (£millions, large, complex)
- Standard Building Contract (£millions, large, complex)
- Design and Build (£any value, technically)
- Constructing Excellence (£millions)
What is the difference between Reasonable and Best Endeavours?
Reasonable is less onerous than Best.
Best implies that no stone should be left unturned and that may mean a party has to use extra resources to do so. If they don’t, they may find themselves in breach.
What is the CE process under NEC?
- NCE issued by Contractor within 8 weeks of it occurring.
- PM responds within 1 week confirming or rejecting
- PM accepts and requests quotation
- Contractor submits quotation
- PM reviews within 2 weeks
- PM accepts and implements CE
Key Rules
- Deemed acceptance by PM if don’t respond to quotation
- PM can request quotation on the basis EWN should have been issued
- PM can assess quotation
- PM can request Contractor make assumptions in their quotation
What Insurances are required under JCT?
- CAR insurance in following options
A - Taken out by Contractor
B - Taken out by Employer
C - Taken out by Employer (existing building) - Employers Liability Insurance
- Professional Indemnity Insurance
- Non-Negligence Insurance (6.5.1)
- Can also provide Latent Defects insurance
What Insurances are required under NEC?
NEC4 states the four specific events for which the contractor is liable. These are:
- Claims from third parties
- Loss or damage to works, plant, materials, and equipment
- Loss or damage to client property
- Death or injury of employees
Can you tell me about design liability in NEC4?
- If X15 is selected then Design is limited to Reasonable Skill and Care.
- X15 requires PII to be taken out.
- If not, it needs to be to suit Scope, which is therefore Fit for Purpose.
Can you tell me about some Secondary X Options and what changes were made in NEC4?
X15 - Liability for design - reduces to Reasonable Skill and care
X8 - Undertakings to Others (Collateral Warranties)
X22 - ECI (Stage 1 and 2)
What was the Third Party Rights Act 1999?
Reformed the principle of contract privity in English law to allow third party rights
What was the Latham Report 1994?
‘Constructing the Team’ - identified two key things:
1) Payment practices were poor
2) Disputes were expensive and time consuming.
Led to many of the elements of the HGCRA
What are the key elements of the HGCRA?
- Right to stage/interim payments after 45 days
- Right to adjudication
- Removal of pay when paid
- Right to be informed of amounts due
- Right to suspend works
What are the key elements of the LDEDCA?
- Withholding notice changed to Pay Less
- Contracts don’t just have to be in writing
- Payment notice still required even if zero
- Payment notice required 5 days after due date
- Remove pay when certified loophole
- Remove unfair allocation of adjudicator’s costs
What is Tort Law?
Area of law that mainly deals with negligence. Allows parties to bring a case against another due to the Duty of Care.
What are the three general types of LOI?
- Letter of comfort
- Instruction to spend
- Recognition of contract
What are the key things to consider about LADs?
- Zero/Nil means zero for anything!
- If blank, that ULAD can apply
- Must be a genuine pre estimate of the loss
What is the difference between a bond and a guarantee?
- Bond is a financial 3rd party underwrite of costs incurred due to an obligation not being fulfilled.
- Guarantee is a 3rd party guaranteeing to fulfill that obligation.
What are some issues to watch out for with Bonds, Warranties and Guarantees?
- How they relate to the main contract
- Any time bars on correspondence?
- Exact process must be followed
Give me 3 key clauses from NEC
- 60.2 - Compensation Events
- 10.2 - Mutual trust and cooperation
- 63.10 - Discrepancies
What are some key changes in NEC4?
- New ECI X Option
- Deemed acceptance of programme
- Gender neutral language
- ‘Dividing Date’ rule for assessing CEs
- X15 Option for design liability
What is the NEC EWN process?
- Parties give EWNs to each other if prices, programme, or quality are affected.
- PM enters on the EWN register and issues out.
- PM instructs EWN meeting within first two weeks and then when they want to throughout.
- If scope change is decided as a solution, needs to be instructed when EWN register is re-circulated.
What if a client is not happy about PII levels?
- Just accept it
- Get project specific PII
- Look at additional items such as Latent Defects Insurance
What happens at Practical Completion?
- Works deemed complete
- Defects period begins
- LADs fall away
- Insurance for building responsibility of Client
- Half retention released
What happens at Sectional Completion?
- Works for that section deemed complete
- Defects period beings BUT NOT FOR NEC
- LADs for that section fall away
- Half retention for that section released BUT NOT FOR NEC
- Insurances to be resolved
What happens at Partial Possession?
- Works for that section deemed complete
- Defects period beings BUT NOT FOR NEC
- After calculation, LADs for that section fall away
- After calculation, Half retention for that section released, BUT NOT FOR NEC
- After calculation, Insurances to be resolved
What happens with Employer’s Use of the Works
- Only by agreement
- Cant prevent the contractor working
- Need to check insurance
What are the core payment options in JCT
- Stage payments (milestone payments)
- Periodic payments for COWD
What are the payment options under NEC?
A – Priced Contract with Activity Schedule
B – Priced Contract with Bill of Quantities
C - Target Cost Contract with Activity Schedule
D – Target Cost with Bill of Quantities
E – Cost Reimbursable Contract
F – Management Contract
What is assignment?
Assigning the benefit of a contract to another party - i.e. the developer after they’ve finished to a new landlord.
What are the three Notices required for deducting LADs under JCT?
- Notice of non-completion
- Notice of intention to deduct
- Notice of withholding or demanding payment
Explain a Performance Bond
Pays out 10% of contract value in the event of Contractor default.
What is a Bid/Tender Bond?
Used to prevent idle tendering. Usually around 1% of contract value and covers the cost of re-tendering.
Explain a Retention Bond
Used in lieu of holding retention. Eases Contractor cashflow but can reduce leverage on Contractor and Client doesn’t get interest.
What is the programme submission process in NEC?
- First programme for acceptance.
- Regular intervals thereafter - defined in Contract Data
- PM has 2 weeks to review. Can reject for numerous reasons
- If no answer, Contractor notifies of failure
- If still no answer, default acceptance
What happens when a Contractor misses a Key Date
Contractor is liable to pay the incurred costs to the employer as a result, but only the specific project costs.
Explain Latent Defects Insurance
Can provide extra security for resolving latent defects if they are not covered under the Contractors other insurances, or if the Contractor has gone insolvent.
What is the Contract Sum Analysis in JCT?
A form of pricing document included with D&B contracts. Sets out the breakdown of costs of the works in the format required by the Employer.
When can the CSA be amended?
- Changes
- Loss and Expense
- Expenditure against provisional sum
- Acceleration
What are the key parts of the JCT contract?
Remember ACCCE:
- Agreement
- Conditions
- CPS
- CSA
- ERs
Can you explain Novation?
Transfer of obligations between one set of parties to another set.
What are the benefits/risks of Novation?
- Confusion over who the master is
- No recourse for the original party to claim due to contract privity. Would need collateral warranty.
- Retains the same design team and knowledge.
What are the benefits/risks of a Collateral Warranty?
- Lots of paperwork in big projects
- Addresses the issue of Privity and offers protection in the event of insolvency of a party
- Alternative to Third Party Rights
- Can cost a lot in legal fees
What are the three key reasons for issuing an EWN?
- Prices could go up
- Key date, sectional or completion could be delayed
- Impair performance of the works
Explain the Defects Process under JCT
- DLP usually 12 months
- After defects closed, a MGD cert is issued.
- Remaining retention released
Explain the Defects Process under NEC
- Defects Date usually 52 weeks after Completion
- Defects Rectification Period defined in Contract Data . This is the time required to rectify a defect.
- Supervisor issues the Defects Certificate.
- Remaining retention released.
Give me 3 Relevant Events in JCT
- Inclement Weather
- Possession of the works
- Civil Commotion
Give me 3 Relevant Matters in JCT
- Variations
- Disruption caused by Client
- Delays in receiving information
Give me 3 Compensation Events under NEC
- Change to the Scope
- Weather (objective test)
- Client doesn’t do something in line with Accepted Programme
What is Opening Up in JCT? What is the equivalent in NEC?
- Exposing potential defects
- Called ‘Inspections’ under NEC and instructed by the Supervisor
- If defect found, Contractor pays. If no Defect, the Employer pays.
What is the design acceptance process in JCT?
- A, B, or C status. Employer must state why they are giving B or C.
What is the design acceptance process in NEC?
- Whatever the scope says, but in any case it must be given to PM for acceptance before works start.
Does NEC have a final account proceedure?
Yes under NEC4 - 4 weeks after Defects date of 13 weeks after termination.
What is the Scheme for Construction Contracts?
Principle set out rules that are automatically used in the event a construction contract does not comply with the Act
What as the Ashley vs. Blue Case?
Two men in a pub - Blue thought an oral contract existed - it didn’t.
Name some Secondary X Options
X1 - Adjustment for inflation X2 - Changes in the Law X5 - Sectional Completion X7 - Delay Damages X15 - Contractors Design X16 - Retention
Name some Secondary X Options that were brought in by NEC4
X15 - Contractor’s Design
X21 - Whole Life Cost
X22 - Early Contractor Involvement
Why would you recommend an NEC Contract over a JCT Contract?
- Programme and proactiveness
- Open Book procedure with the Defined and Disallowed Costs
- Early Warning and CEs
- Target Cost ability
What projects may be suitable for NEC?
- Any type with any level of design
- NEC more commonly used in larger value projects (above £25m) but not necessarily
When might you recommend JCT over NEC?
- When Client wants to be given the keys at the end
- Risk passed to Contractor
- When Client is litigious/less collaborative
Other than the ECC, what other types of contract do the NEC publish?
- DBO (Design Build Operate)
- Supply Contract
- Professional Service Contract
- Facilities Management Contract
What is the problem with Fitness for Purpose clauses?
- No-one signs up to them
- Absolute requirement to adhere to the scope
- PII insurers only pay out if there has been negligence.
- FFP can be Contractor’s fault even if no negligence.
What is Prevention in Contract terms?
When something happens that prevents the contractor from undertaking works that was not their own doing and did not plan for because it was so unlikely to happen.
How was Covid-19 dealt with contractually under JCT D&B?
- EOT as a force majeure is a relevant event.
How was Covid-19 dealt with contractually under the NEC contracts?
- C.E. as clause 60.1 (19) sets out that Covid19 ticked all four of the following:
- Stopped contractor completing the whole of the works or by the Planned Completion date in the AP
- Neither party could prevent
- Experienced contractor would reason that it had such a small chance of occurring, they would never allow for it.
- Is not one of the other compensation events in the contract
Can you explain the Floor Painting process in NEC? How did you know it would take 4 weeks?
- It was a Proposed Instruction issued to Contractor
- Initial feedback was that it would be 4 weeks
- Client thought this would therefore absolve LDs
- Advised otherwise
- Quotation received with correct programme impact
- Client instructed me to request if cost of painting could be reduced in lieu of LDs, less a bit.
- Contractor agreed to Client’s offer.
- Instructed a revised quote stating that it would be 4 weeks plus additional 2 weeks of Time-Risk.
- Quote received and accepted.
- Implemented
On the Swansea project, what happened with the third party design approval?
- Client responsibility to get approval for the design under a separate contract agreement.
- Client had not really chased the approval because they were busy, and now the third party engineer was going on leave
- Advised me of this and was rather nonchalant as they believed it didn’t really matter. Lots of float.
- Advised otherwise, and raised an EWN immediately.
- Worked out with contractor we could work with phased design approval. This also worked with third party.
- Instructed change to WI to reflect this.
Explain the EWN procedure.
- Contractor and Employer notify one another via an EWN if they are are of something that might happen which could affect the prices, impact the key date/sectional/planned completion and/or impair performance of the works.
- Added to the EW register.
- Can instruct each other to attend meeting.
Explain the EW Register Process
- EW Register issued one week after starting date
- PM instructs Contractor to attend within 2 weeks after Starting Date.
- Thereafter held as per frequency in the contract data, or earlier if either party instructs.
- EW register issued out after the meeting. If includes instruction, this is implemented when issued.
What are the reasons for rejecting a programme under NEC? On what basis did you reject the programme on the North Pole fuelling example?
- Not realistic
- Not practicable
- Does not show all the information required
- Does not comply with the scope
North Pole programme was rejected as it was a bit of all of the above!
What is repudiation? Give an example.
A party commits a breach of contract that is sufficiently serious to warrant termination, such as abandoning the site.
What is contained in a Collateral Warranty?
Principal covenant - fulfil obligations under the underlying contract
Assignment - Benefit of a warranty can be assigned in the same way as any contractual benefit.
Step-in rights - Often given to beneficiaries who have an interest in the project before it is completed (eg they have provided funding). Ability to step in to the shoes of the Employer under the original contract.
Limitation/exclusion of liability - Job specific.
Insurance - Insurances required for duration of warranty
What were the objectives of the NEC?
- Promote proactive proper management of contracts
- To be easy to read and use
- Include all standard options and optional clauses
- Flexibility
- Collaborative
- Resolve problems and move on rather than wait until the end
What are the core clauses of the NEC?
- General Terms
- Contractors Responsibilities
- Time
- Testing and Defects
- Payment
- Compensation Events
- Title
- Risk and Insurance
What is the difference between the main 6 NEC options?
A&B - Risk with Contractor
C&D - Risk shared
E&F - Risk with Client
Can the Contractor change their activity schedule?
- Yes, to align it with the Accepted Programme.
- Must be provided to PM for acceptance.
- PM can reject if it’s not related to programme, disproportionately redistributes the prices, or increases the prices
What are some of the Employer’s risks under NEC?
- Fault in the Client’s design in scope
- War, Civil War, Rebellion
- Third party claims due to the works which are unavoidable
