Contract Law Flashcards
What are the minimum requirements for forming a legally binding contract?
- Offer
- Acceptance
- Consideration
- Intent
- Legality
- Capacity
What is the purpose of a contract?
- Defines the obligations of parties involved
- Allocates risk between parties
What is a construction contract?
Legally binding written or verbal agreement between 2+ parties for providing a service in exchange for something of value
What is Privity of Contract? How is it mitigated?
Law that prevents a person who is not a party to a contract, enforcing a term of that contract
Collateral warranties
What are Collateral Warranties?
Supporting document to a contract that creates a contractual link with a 3rd party outside of the contract.
Extends duty of care - used where there is design responsibility i.e. designer to funder
Might be provided to the employer, funders, purchasers and tenants - “ a beneficiary”
Often quicker and easier to deal with than 3rd Party Rights Act (1999)
What is the Contracts Rights of Third Parties Act (1999)?
Allows 3rd party rights to be created
Must expressly be identify the 3rd party
Enables right to enforce a TERM of the contract - not the whole contract!
What are the provisions of the Construction Act 1996?
- Adjudication must be written in (if not, Scheme for Construction Contracts applies)
- Payment must be certified within 5 days of the due date, even fi no amount is due
- Pay when paid clauses banned
- Right to be paid in interim periodic or stage payments
- Right to suspend for non-payment
2011 amendments!
- Right to pay less notice
- Contractor recovers costs & EoT due to non-payment
- Applies to verbal & written contracts
How else is the Construction Act known as?
HGCRA - Housing Grants, Construction and Regeneration Act 1996
Amended by the LDEDCA in 2009 - Local Democracy, Economic Development and Construction Act. Came in to force in 2011
What is the Public Contracts Regulations 2015?
Implements the EU Public Sector Procurement Directive
OJEU - Office Journal of EU
Sets out the requirements of contracts for Public Sector works
FTS now
Sets out when a tender would be excluded
Tender must be Most Economically Advantageous Tender (MEAT)
What is the Scheme for Construction Contracts?
Applies when construction contracts do not comply with Construction Act. Replaces non-compliant contracts.
Part 1 - provisions for adjudication
Part 2 - provisions relating to payment
What is the Joint Fire Code? When would the Joint Fire Code apply?
Provides guidance on fire safety for construction sites, including prevention and detection
Applies to projects with a value >£2.5m or high risk
A large project is one with a value >£20m
What is insolvency?
The inability to pay ones debts
Types include: administration, company voluntary arrangement, administrative receivership, compulsory liquidation
What is the difference between liquidation and administration?
Liquidation - selling all of a companies assets before dissolving the company completely
Administration - aims to help company repay debts to escape insolvency
What clauses would you expect to see in a collateral warranty?
-Warrantor’s obligations
-Insurance
-Limitation of Liability
-Copyright
-Assignment
- Step in rights
-Jurisdiction
-Third party rights
What is the difference between collateral warranties & 3rd party rights?
CW - contractual link where there would not have been one. Require solicitor to draft. Preferred by employers due to familiarity and a tangible document in place. Argued that step in rights are easier to enforce.
3rd party - allow a named 3rd party to enforce a TERM of a contract, providing the CPs identify the 3rd parties
What if contractor doesn’t provide a collateral warranty?
Case law where courts forced a CW to be provided
What is a Pay Less Notice?
Right under Construction Act 1996
Right to be informed of intention to pay less than set out in payment notice
What is a Performance Bond?
Used to insure against the risk of a contractor failing to fulfill contractual obligations e.g. insolvency
Typically at 10% of project value (cost usually 1%)
Covers the cost of finding a new contractor
Usually stays in place until PC or end of Defects Liability Period when final certificate is issued
Conditional or unconditional (employer to provide proof of contractor not meeting obligations or not)
What is a PCG?
Protects in the instance a smaller contractor is controlled by a parent company
PC would be liable to meet the contract obligations where the contractor has failed
Covers defect liability period
If wider business goes bust then there is no guarantee
Usually no cap on value or duration as such
What is the Defects Liability Period?
AKA. Rectification period in JCT
Begins at certification of PC and typically lasts 6 - 12 months - NOT ISSUES APPARENT AT PC!!!
Client reports defects to CA who decides if they are defects or maintenance issues.
It is the Contractors responsibility to identify & rectify defects so important that those raised by client are not seen as a comprehensive list of all defects
What is the difference between limitation and rectification periods?
Limitation - claim made via PII for LATENT defects (negligence in design or construction). 6-12 years
Rectification - defects that become apparent during the stated period (6-12 months) which the contractor is to put right at own costs. Following final certificate at the end of the rectification period, the contractor is no longer obliged to attend site to rectify anything
Why does it matter if a contract is signed under hand or under deed?
Impacts limitation period!
Under hand - 6 years
Under deed - 12 years (D = douze)
What are the types of Letters of Intent?
Comfort Letter - to reassure intention to create a contract. Least detailed, lacks contractual items. NOT LEGALLY BINDING
Consent to spend - gives permission to pay for works that are being done, details relating to works that can be undertaken, caps on value, caps on time. LEGALLY BINDING
Recognition of contract - has contractual details e.g. dispute resolution. Offers the most protection to parties of the contract. Client may be liable for costs and losses. LEGALLY BINDING
To be legally binding executory contract, it must be an offer capable of being accepted
What typical clauses might you find in a letter of intent?
Start date
Expiry date (when letter becomes invalid)
Scope
Value (cap of works to be undertaken)
Intention to enter into a formal contract
Key T&C’s
Insurances (those required)
When would you use a letter of intent
Only where there is good reason to start work in advance of concluding the formal contract
Used only as a safeguard of legal right while the contract documents are being finalised
- Immediate start on site required
- Long lead times
- Contract details still being negotiated
Coventry - where planning approval was due to expire, tender was due to expire and market conditions at the time were seeing significant fluctuations in material prices
What are the dangers of using a letter of intent?
Details of the contract have not been finalised
Contract is at large - i.e. contractor not bound to complete the works, only needs to be of reasonable quality at a reasonable rate
There are no detailed provisions for interim payments, rectification period, LADs or introducing change
What were the specifics of the LOI on your project?
Cap on spend at £3.2m
PII at £5m
Rectification period of 12 months
LAD’s at £3,000 pw
Date of possession
Date of contract to be signed - Sept 2021
Date of expiry of instruction 24th Sept
Date of first interim payment
Termination process
Can a QS draft a Loi!
No. A QS may advise on clauses and content such as:
Site possession date
Date of payments
Scope
Consent to spend amounts
Named parties e.g. CA / Principle Designer
What are liquidated damages?
A pre-estimate of losses that will be incurred by the employer should the Contractor miss the completion date. Set out in Contract Particulars
How would you calculate LAD’s?
This is for the client to do, not a QS role.
Would advise to consider loss of income, additional professional fees, additional storage costs
What is the process of recovering LAD’s?
Non completion notice issued by the CA
Employer notifies contractor of their intention to levy LAD’s
Can be withheld via pay less notice or recovered as a debt
What are the benefits of LAD’s?
Certainty - gives certainty to both parties as to what would happen if a breach occurs
Limitation of liability - places a cap on the liability of the contractor, never exceeds the agreed amount
Saves time & expense - pre-agreed, reduces disputes, focus on the issues at hand
Deterrent against breach of Contract - financial consequences known
What happens if the LAD section is blank?
Cannot levy liquidated damages
Could pursue unliquidated damages in court, will need to prove actual loss
If “nil” is inserted this may prejudice ability to seek unliquidated damages
Are LAD’s a penalty?
No - genuine loss incurred by client due to late completion
If they are a penalty, the common law view is they would not be enforceable
What are unliquidated damages?
Occur where actual losses are significantly different to those that were estimated at the time of contract
Not preagreed
Determined by court
Need to be proven - collation of records
What are unliquidated damages?
Occur where actual losses are significantly different to those that were estimated at the time of contract
Not preagreed
Determined by court
Need to be proven - collation of records
Can you recommend payment for materials off-site?
Dependant on contract
Material would be specifically referenced in contract
Requires a vesting certificate in name of Employer, insurances, labelled correctly, secure and safe storage, off-site materials bond
What is a vesting certificate?
Confirms ownership of goods, plant or materials will transfer from own party to another on payment
What are the three ways to transfer benefits under a contract?
Novation - transfer of contractual rights and obligations
Assignment - transfer benefits e.g. right to payment and claims for breach of contract. Does not transfer burdens e.g. obligations to pay
Collateral Warranties
What is another name for limitation period?
Latent defects period!
Still no obligation for contract to rectify the latent defect but allows building owner to seek compensation for action for damages, breach of contract or negligence
What is the CDM 2015?
Construction Design and Management Regulations (revised in 2015)
Ensures H&S issues are considered throughout a projects development
Replaced the role of CDM coordinator with principle designer to give opportunity of influence to someone involved throughout design
When is a project notifiable under CDM?
Notifiable to H&S executive when it is expected to last longer than 30 days, have more than 20 workers at the same time, exceeds 500 person days
What are preliminaries?
Provide a description of the works allowing contractor to assess costs. Specify the general conditions. Do not form part of a package of works.
Cost of delivering the works providing general plant, site facilities, site staff that are not included in the rates
What examples of prelims would you expect to see in a contract?
Method statements
Description of reporting requirements
The site
General works descriptions
Site logistics
Quality management procedures
Requirements for insurances, bonds, warranties and guarantees
What are preambles?
An explanation of a document to aid understanding e.g. contract. Avoid repeating information set out in the main documents
What are preambles?
An explanation of a document to aid understanding e.g. contract. Avoid repeating information set out in the main documents
What are examples of preambles?
Description of parties to a contract
Backgrounds to the document
Tendering procedures
Objective of the project
What is the difference between time charge and fixed prelims?
Time - based on cost over duration i.e. site management / security
Fixed - lump sum payment items that have staged payments e.g. scaffolding where the bulk of the cost is in erecting and taking don
What is retention?
An amount deducted from the amount due to contractor at interim payments to provide client security that contractor will return to correct any defects during defects liability period
What is retention?
An amount deducted from the amount due to contractor at interim payments to provide client security that contractor will return to correct any defects during defects liability period
Set out in Contract particulars. Standard rates will apply if nothing is entered (varies with different contracts).
A % is released upon completion of works (usually approx half) but prior to end of defects liability period
Where contractor does not rectify works, retention can be used to rectify
Right to be held in separate bank account - important in cases of insolvency
What alternatives to retention are there?
Retention bonds - agreement between employer & surety that acts as a guarantor should the works not be completed.
Equivalent amount of retention is held in a bond.
QS should still prepare statements under JCT SBC (not needed under D&B)
Bonds are typically in a maximum aggregate - where exceeded, can increase bond or retention deducted from interim payments
Retention bonds should be called upon prior performance bonds if both are provided (PB - surety for non performance, RB - rectify failures)
What are the benefits / risks of retention bonds?
May see less risk priced into contracts
Help contractor cash flow
May have to certify certain conditions before call on the bond (on demand mitigates this)
What are the types of retention bond?
Conditional (default)
Unconditional (on demand)
What is the difference between sectional completion and partial possession?
Sectional completion - agreed in advance, included in CP. LAD’s separate for each section.
Partial possession - not planned, (already has it’s P!), Employer needs consent from contractor. LAD’s are as per CPs and reduced pro rata to the value of the part of the works taken over. Treated as a variation so potential cost impacts (may impact sequencing)
Upon SC or PP, rectification period for that part of works commences, no longer liable for LAD’s, half retention is released and Employer must ensure those works
What insurances may be required under a contract?
All risk - all risks associated with construction project, usually under joint with contractor and principal client. Covers against unforeseen loss or damage to building, public liability, tools plant etc
Employers Liability - compensation if an employee is ill or injured due to work
Public Liability - Contractors to cover against personal injury, death, loss or damage to 3rd party members
PII - professional services, covers negligence of service providers
Performance bond - covers client against risk of contractor failing to fulfill contractual obligations e.g. insolvency. Contractor takes out
Latent defects insurance - cover where latent defects are apparent, more complete cover than CW
What alternatives are there to SC and PP?
Early use - contractor remains responsible for that part of works with H&S and insurance. Consent of contractor required.
Grants early access but may be denied for sequencing, access or H&S reasons
What are the different forms of dispute resolution?
Negotiation
Mediation - neutral 3rd party
Adjudicator - ruling given 28 days after hearing
Arbitration - judge gives ruling
Litigation - lawyers, public, harmful to reputations
What is the difference between Deed and Underhand?
Deed - 2 signatures, witness, limitation period of 12 years
Underhand - 1 signature, limitation period of 6 years
What is a PCSA?
Contract entered prior to main building contract allowing contractor to collaborate with the Employer and carry out services such as furthering design, advising on buildability, tender packages etc.
Typically used on 2 stage tenders
When can you use a PCSA?
When main contract is:
-SBC
-D&B
-Major Project
-Intermediate
Regardless of design responsibility
Where novation to contractor of specialist sub / supply / consultancy contracts
Minor adaptations to use with CM
Not for between employer or main contractor and specialist sub contractors
What are the benefits of novation?
Client maintains early input from designer
Retain a single point of responsibility as contractor takes all rights and obligations
Consistency of design
What are the disadvantages of novation?
Lack of control of design development - no longer Employer monitored
Employer loses contractual relations with novated party and therefore right to take action against breach in contract - usually a CW between Employer and Novated Party
What are retention statements?
Statement showing which elements of work are subject to retention and which are not
What is a relevant event?
Event causing delay to completion. Caused by client or neutral event
EoT
What examples of Relevant Events are there?
- Variations
- Exceptionally adverse weather
- Delay in giving contractor site possession
- National strikes
- Force majeure
What is a relevant matter?
Matter that the client is responsible for and materially effects the progress of works.
Claim direct loss and expense
What examples of Relevant Matters are there?
- Failure to give access / possession to site
- delays in receiving instructions
- disruption from works carried out by client
- Instructions relating to variations and expenditure of provisional sums
- Issues relating to CDM
What is the difference between a Performance Bond and Parent Company Guarantee?
PCG - covers defect liability period, don’t cap on value. If the wider business goes bust, then there is no guarantee
PB - usually a cost that is passed onto the client, default or on-demand bond, expiry date written into contract (typically PC or end of rectification period)
What are joint name policies?
‘Joint name insurance policies include contractor and employer and are where the insurers have no right of recourse against any named insured
What would be included in the contract documents for a traditionally procured project?
- Articles of agreement and conditions of contract
- Preliminaries
- Pricing document i.e. bills of quantities
- Drawings and specifications
- Any bonds or warranties
- Contractor’s Proposals if any contractor’s designed portion included
- Pre-construction information
What would be included in the contract documents for a design and build project?
- Articles of agreement and conditions of contract
- Employer’s Requirements
- Contractor’s Proposals
- Contract Sum Analysis
