Contract Practice Flashcards
What are Liquidated Damages?
Damages that are charged against the contractor if they fail to meet a pre agreed completion dates.
They are a genuine pre estimate of the loss occurred by delay and are calculated by the employer.
What is the contractual procedure for claiming Liquidated Damages?
When contractor does not meet the completion date set out in the contract
Employer issues a non-completion notice
Employer then informs of the intention to deduct LDs
LDs can be claimed via a payment notice / payless notice.
What are unliquidated Damaged?
If actual loss incurred if significantly different to LD’s in the contract the client may pursue a claim through the courts.
What is the procedure for paying for offsite materials?
Offsite materials must be ‘listed’ in the contract.
Offsite materials require proof that the property or items are vested in the contractor before payment is made.
- Vesting Certificate certifying materials are properly identified, stored, and insured.
- Items clearly marked up with the clients’ details
- Materials should be ‘ready for incorporation’
- Stored apart from other materials
What is an offsite materials bond?
Allows the employer to claim under the bond should the offsite materials not be delivered to site as required by the building contract
What are the benefits of using a Standard for of Contract?
- Reduced drafting time as no legal team is required to draft bespoke amendments
- Reduced time in the contractor agreeing to the contract conditions
- Saves costs as legal team fees not required
- Balanced and fair T&Cs
- Familiar and understood by many
What are the positives and negatives of a Bespoke Contract?
Bespoke Contract Positives
• Tailor risks and responsibilities to suit the Client’s needs
• Simplify contracts
• Easier to administer if made so
• Faster dispute methods can be incorporated
• Used when bespoke legal frameworks are required for specific projects
Bespoke Contract Negatives
• Legal costs for drafting
• Time consuming to prepare and understand
• Untested in court
• Expert advice required to construct the contract
• Confusion created by lack of familiarity can lead to disputes
What is a letter of intent?
A letter of intent is a document expressing an intention to enter into a contract at a future - Not contractual
Allows work to proceed before the contract is finalized and/or executed or while the negotiations are ongoing
The three types of letter commonly referred to as letters of intent?
Comfort letters
Instructions to proceed with consent to spend
Letters recognizing the existence of a binding Contract(s).
What is a Comfort Letter? (Letters of Intent)
A comfort letter is a letter expressing a party’s intention to act in a particular way at some point in the future, or at the time of issuing the letter.
What is a ‘Instructions to proceed with consent to spend’? (Letters of Intent)
Allows work to proceed up to a certain value while the contract itself is being finalized.
Creates a legally binding contract between the parties which will pre-date the principal contract but be superseded once the principal contract is executed.
What is a ‘Letters recognizing the existence of a binding contract’? (Letters of Intent)
Issued only once the contract has been substantially agreed and usually marks the completion of negotiations between the parties.
What are the advantages of a Letter of Intent?
- Allows works to commence before the contract has been formally executed
- Indicates the Employer’s intention to award the Contract
- Allows Contractor to pre order materials or set up site establishment
- Programme benefits by initiating works sooner facilitation materials / plant with long lead in times
- They increase the confidence of both organizations to move forward.
What are the Risks of a Letter of Intent
- Doesn’t bind the Contractor to carry out any work
- Puts the Employer in a weak negotiating position
- Works under the LOI may proceed beyond the intention of the parties
- Until the Contract is signed, the Employer is potentially liable under a ‘Quantum Meruit’ basis (“as much as he has deserved” i.e. reasonable recommence for work done)
- Liability for any works carried out under a LOI is limited to six years
- No guarantee or obligation on the contractor to sign the originally tendered contract
What should be included in a Letter of Intent?
The parties – the names as stated within the contract documents
The works – described in clear and concise terms
The price (if agreed) – clearly stating whether the price is to be considered a maximum expenditure limit until the formal execution of the contract
A statement of the intention of the parties to enter into a formal contract
The dates for possession and completion and whether there is any sectional completion envisaged or required within the contract
Entitlements of both parties upon the revocation, frustration or repudiation of the contract
Procedure for calculating interim payments if work proceeds
Procedure for calculating and issuing final payment should the work not proceed or if a formal contract is not executed between the parties
Insurances that are to be provided
The maximum expenditure limit allowed under the letter of intent
Termination procedure
Confirmation that the contract created by the letter of intent will terminate upon execution of the principle contract(s)
Dispute resolution procedure.
How are LDs calculated?
Calculated by loss of revenue, ie loss of income, loss of rent, business profits
Who calculates LDs?
The employer and their team calculate the LADs and not the QS.
What date is it from when LD’s can become enforceable?
- It is the day after the completion date
* The contractor has the whole day of the date of completion date to complete works.
What would you do if the client couldn’t deduct LD’s off a payment certificate?
Contractor would owe employer monies = would be a debt
Would you include the deduction of LD’s in a final account?
No, the employer deducts this and it’s shown in their overall project costs
Why would you use a Schedule of Amendments?
Give the Employer a more favorable position / allocate risk
Risk - Contractor can take responsibility for the existing building and achieving the ER’s within it, regardless of what was later found, subject to opening up and testing pre-contract.
What are the disadvantages of amending contracts?
Lack of judicial precedent
Amendment may have unintended effects / go beyond the original intent of the amending party
Amendments may be over-ruled by statute, e.g. The Construction Act in respect of dispute resolution provisions
Time required to draft
Legal fees required to draft
Could result in more disputes
What are the Risks of a Letter of Intent?
- Doesn’t bind the Contractor to carry out any work
- Puts the Employer in a weak negotiating position
- Works under the LOI may proceed beyond the intention of the parties
- Until the Contract is signed, the Employer is potentially liable under a ‘Quantum Meruit’ basis (“as
much as he has deserved” i.e. reasonable recommence for work done) - Liability for any works carried out under a LOI is limited to six years
- No guarantee or obligation on the contractor to sign the originally tendered contract
What are the main elements of a letter of intent?
- The parties - The contract intended to be entered into is stated
- The intended contract sum is stated
- The works (described)
- Any limits on value/time/scope
- Procedures in relation to payment, termination, dispute resolution
- Must state that the contract will apply retrospectively
- The maximum expenditure limit allowed under the LOI
- Confirmation that the contract formed by the LOI will terminate upon execution of the principle contract
- The basis for calculating payment should be principle contract not be executed
What is the difference between uniquely listed and non-uniquely listed items? (Offsite materials)
Typically, the uniquely listed items are specific for the project and would not need a materials off-site
bond unless stated. Examples of this could be steelwork that is used directly on the frame.
Non-uniquely listed items are not specific for the project and do require a bond in place. Examples of
this are concrete and rebar.
What is included in a vesting certificate?
Information about the two parties
Project Address and Material storage address
Insurance certificate against loss or damage
Schedule of quantity applied, cost of materials
What is the final account?
Detailed statement of all the adjustments to the contract sum and therefore the total amount that the employer is liable to pay
Who prepares the Final Account?
The quantity surveyor
What are the relevant time periods?
- The contractor must send the architect/QS all the info they need to do the final adjustment of the contract sum within 6 months of PC
- Within 3 months after receipt the QS must ascertain the amount of loss and expense
- AND the QS shall prepare a statement of all adjustments to be made to the contract sum – i.e. final account
- The architect must ‘forthwith’ send the statement to the contractor
What is its purpose of the Final Account?
To enable the final payment certificate to be issued
When must the final certificate be issued?
Two months from the later of:
a) End of the Rectification Period
b) Issue of the Certificate of Making Good
c) When the architect gives the contractor a detailed statement (final account)
What is released to the contractor in the final certificate?
The remaining retention
When is the final date for payment after issue of the final certificate?
28 Days
Explain more about work that has to be the architect’s satisfaction (Final Account)
- There is no definition of ‘reasonable satisfaction’ in the contract
- It is down to the architect’s subjective opinion
- If the contractor his not satisfied his recourse is to refer the matter to adjudication
What are Articles of Agreements?
This sets out the parties to the contract
What are the Recitals of a Contract?
This sets out the nature of the works
Also sets out the priority of documents
What are the Articles of the Contract?
This sets out the; Contract Sum, Employers Agent, Principle Contractor
What is the structure of JCT DB?
ARACACS
• Articles of Agreement: Date, Employer details, Contractor details
- Recitals: Project Description,
- Articles: Contract sum, EA details, Principal Designer Details
- Contract Particulars: Liquidated Damages, Retention %, Start and Completion date, Rectification period, Due Date, Insurance of Works option, Base Date,
- Attestation: Select whether contract executed as a deed or underhand
- Conditions of Contract: Procedures to be carried out as per contract
- Schedules i.e. Design Submission Procedure & S2VQ, Insurance Options, TPR
What happens at practical completion?
The Employer takes back possession of the works
Practical completion certificate is issued by the Contract Administrator or Employers Agent
Half of retention is released Defects rectification period begins Transfer of insurances back to the Employer from Contractor
What are the different types of bond specified under JCT?
Advance payment bond: Provided by the Contractor in order to protect the Employer against the loss
of any monies he has advanced to the contractor. If advanced payments are to be made, the
contractor is required to provide a bond unless the contract particulars state otherwise
Materials off-site bond: They are provided by the contractor in order to protect the employer against
the loss of off-site materials that he has paid for. If payment for materials for off-site are to be made
the contractor is to provide a bond unless the contract particulars state otherwise
Retention bond: A substitute for the deduction of retention. Must be executed on or before the date of
possession and be for the value of the total sum of retention that would have been deducted.
Traditional ‘retention’ money is paid by the client to the contractor but the bond enables the client to
have the same surety. The value of this bond will increase/decrease as the contract sum changes e.g.
through variations
What is an advance payment? How is this referenced in the contract docs?
The Client may agree to make an advance payment to the Contractor to a supplier for high value /
specialist items / long lead items.
This will be specified in the Contract Particulars
Typically, on a construction project an advanced payment bond will be required by the client
What are bonds used for?
These are intended to encourage performance and provide a financial recompense in the event of
failure.
On Demand bonds
Where the surety is obliged to make payment under the bond upon request to do so – there is no
need for proof of loss
Conditional Bond
The surety will only make payment if the beneficiary produces the required evidence e.g. court orders
Materials Offsite
What is the difference between uniquely listed and non-uniquely listed items?
Typically, the uniquely listed items are specific for the project and would not need a materials off-site
bond unless stated. Examples of this could be steelwork that is used directly on the frame.
Non-uniquely listed items are not specific for the project and do require a bond in place. Examples of
this are concrete and rebar.
What is included in a vesting certificate?
Information about the two parties
Project Address and Material storage address
Insurance certificate against loss or damage
Schedule of quantity applied, cost of materials
How would you value Materials on site? (Unfixed materials section 2.21 JCT DB)
Use contract rates where possible but deduct allowances for installation (Supply of materials only)
Who takes ownership of materials stored on site?
Where their value has been included in any interim payment, they become the Employer’s property but subject to Insurance Option B or C (is applicable), the Contractor shall remain responsible for loss of damage to them.
How would you advise a Client if a contractor claimed for materials offsite that were not listed in the contract?
State there’s no contractual obligation to pay for offsite materials not listed in the contract
However, the Contractor may be under cashflow pressures, and by agreement of the Client, offsite materials could be included to assist the contractor provided the contractual procedures are followed (ie vesting cert etc) to minimize risks
What has to happen for a Contractor to be entitled to an Extension of Time?
Contract must notify of a delay as soon as reasonably apparent included, cause of delay and estimate delay time
What are the principles of forming a legally binding contract?
Offer (Tender from Builder)
Acceptance (By the Client)
Consideration (Money as Payment)
Legality (Must not be against the Law)
Capacity (Sound mind to make a binding contract)
Genuine Consent (Eg not entered into by fraud)
You talk about various forms of contract, under what circumstances would you use a Minor Works Contract?
Smaller, basic construction projects where the work is of a simple nature.
where the Employer is to provide drawings and/or a specification and/or work schedules to define
adequately the quantity and quality of the work
Projects that last no longer than 12 months
Suitable for traditional procurement - where client is responsible for the design
Generally works up to £250k (However JCT doesnt State
When would you use an Intermediate Building Contract?
Construction projects involving all the recognised trades and skills of the industry but no complex building services work or other complex specialist work
Where the employer is to provide the Contractor with drawings and bills of quantities, a specification or work schedules to define adequately the quantity and quality of the work
Suitable for traditional procurement - where client is responsible for the design
Works up to £1 million
What’s the difference between a Contract Administrator and and Employers Agent?
CA Employer for traditional Contracts
EA - design & Build Contracts
Most of the functions are the same, issuing certificates and administering the works
Key difference is the EA doesn’t do any design
What are typical Contract Documents?
Vol 1 - Form of Contract
Insurances
Vol 2 - Contractors Proposals
Construction Phase Plan
Contract Sum Analysis
Payment Date Schedule
Vol 3 - Employer's Requirements ER's / General preliminaries Design Info Reporting Requirements Change Control Procedures Pre Construction H&S info
