Contract Practice

Question 1

What is the Construction Act?

Answer 1

• The Housing Grants, Construction and Regeneration Act, also known as the ‘Construction Act’, has been an important part of the law affecting the construction industry since it came into force on 1 May 1998.
• The right to be paid in interim, periodic or stage payments.
• The right to be informed of the amount due, or any amounts to be withheld.
• The right to suspend performance for non-payment.
• The right to adjudication.
• Disallowing pay when paid clauses.

Part 8 of the Local Democracy, Economic Development and Construction Act substantially amends the Construction Act. It affects all “construction contracts” in England, Wales and Scotland. The amendments to the Construction Act came into force in relation to construction contracts entered into on or after 1 October 2011 in England and Wales, and 1 November 2011 in Scotland.

The aims of the amendments are:

to increase clarity and certainty as to payment in construction contracts;
to introduce a ‘fairer’ payment regime, and improve rights for contractors to suspend their work in non-payment circumstances; and
to make adjudication more accessible for the resolution of disputes.

Question 2

What are some of the common forms of contract and subcontract that are in use?

Answer 2

JCT (Joint Contracts Tribunal), NEC3 (New Engineering Contract), International Federation of Consulting Engineers (FIDIC), bespoke contracts are also used.

Question 3

What is a “Letter of Intent”, and what information is typically included in a Letter of Intent?

Answer 3

• The letter of intent typically asks the contractor to begin those works before the formal contract is executed.
  Information typically included in Letter of Intent:
• Detailed description of works to be completed.
• Contract Sum (if agreed)
• Date for possession
• Date for completion
• Insurance provisions required
• Method of payment
• Expiry date of letter
• Typically states employers’ right not to award the main contract for whatever reason
• ADR method

Question 4

What are “Third Party Rights”?

Answer 4

The Contracts (Rights of Third Parties) Act 1999 enables third party rights to be created by a contract. This is seen by some to offer an alternative to collateral warranties.

The overarching purpose of the act is that it allows third parties to enforce terms of contracts that they are not party to, but which benefit them in some way, or which the contract allows them to enforce.

Question 5

What is are “Collateral Warranties”?

Answer 5

• A collateral warranty is a formal contractual agreement which runs alongside another contractual agreement – its purpose is to create a contractual relationship between two parties where one would not otherwise exist.
• The employer places a contract with a contractor, the contractor then places several subcontracts with its suppliers to actually do the works, the employer has a direct contractual relationship with the contractor, but he has no contractual relationship with any of the subcontractors (this is known as “privity of contract”)

Question 6

What is a contract?

Answer 6

• A contract is a legally binding promise (written or oral) by one party to fulfil an obligation to another party in return for consideration.
• A basic contract should comprise 4 key elements: offer, acceptance, consideration and intent to create legal relations.

Question 7

Can you list 5 different bonds which might be used on a project?

Answer 7

• Performance bond.
• Retention bond.
• Off-site materials bond.
• Advance payment bond.
• Tender bond.

Question 8

What is the typical value of a performance bond?

Answer 8

Usually 10% of the contract sum.

Question 9

What is a retention bond?

Answer 9

• Typically, an employer could hold up to 5% of the contract value for a period of up to 12 months. The main contractor or subcontractor then must wait for the funds to be returned at the end of the making good of defect period, this can affect business cash-flow.
• A retention bond will provide the employer with the same level of comfort at the retention, but the contractor/subcontractor has the real benefit of retaining the cash in their account.

Question 10

What is an advanced payment bond?

Answer 10

• An advanced payment bond is required to protect and support payments to contractors by the employer in advance of works being done.
• An advanced payment bond protects the payment being advanced in exchange for a bond underpinned by a suitable guarantor to give peace of mind to both parties.

Question 11

What is retention?

Answer 11

A percentage of the sums certified for payment under the construction contract (typically 3-5%) is held by the employer during the construction phase.

Question 12

What is the purpose of retention?

Answer 12

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

Question 13

What are domestic subcontractors?

Answer 13

• Domestic subcontractors are chosen by the contractor to execute a package of works.
• The employer’s consultants (e.g. PM, QS etc) nor the employer themselves influence the appointment or conditions.

Question 14

What are named subcontractors?

Answer 14

• The employer provides a list of named subcontractors which are pre-approved.
• The contractor selects one form the list through the tendering process.
  Once appointed by the contractor, they then become a domestic subcontractor.

Question 15

What are the advantages of naming subcontractors?

Answer 15

Naming a subcontractor provides the employer with more control to the selection of a subcontractor by the contractor, while still leaving them with the element of choice and the responsibility of monitoring their performance.

Question 16

What are nominated subcontractors?

Answer 16

• A nominated subcontractor is selected by the employer to carry out an element of the works (still employed by the contractor).
• Nominated subcontractors are usually imposed upon by the contractor.

Question 17

What are the disadvantages of nominated subcontractors?

Answer 17

• As the subcontractor is being imposed on the contractor, the contractor will generally be allowed the right to object under certain conditions (e.g. safety reasons)
• the contractor and subcontractor may have conflicting procedures, ethics, attitudes etc.

Question 18

What are the advantages of nominated subcontractors ?

Answer 18

On the basis the employer has nominated them in the first instance, their work should be of high quality and acceptable to the employer.

Question 19

What is insolvency?

Answer 19

Insolvency is concerned with the inability to pay debts.

Question 20

What can be done at tender stage to identify potential contractor insolvency?

Answer 20

• Thoroughly check financial accounts for stability
• Check for front loading of the tender submission
• Bank references
• Use credit checking agencies (Dun and Bradstreet report)
• Previous references (from consultants and employers)
• Request a bond and/or parent company guarantee - this will not prevent insolvency but will give the employer comfort in the event of default.

Question 21

What is termination?

Answer 21

When a contract is terminated, the parties to the contract are no longer obliged to perform their obligations under the contract.

Question 22

Can the contractor suspend works for non-payment?

Answer 22

• If the notified sum is not paid before the final date for payment, the Construction act 2009 puts the payee in a stronger position then before. It can now suspend performance of any and all its obligations, not just the work.
• The contractor can stop insuring the works, postpone applying for necessary consent or refuse to implement a variation instruction.
• The payee will be entitled to a “reasonable amount” to its re-mobilization costs, as well as an extension of time.

Question 23

What are delay damages / LDs?

Answer 23

• A genuine pre-estimate of loss suffered by employer because of late completion of the works. The damages are inserted into the contract prior to signing by contracting parties.

Key Points

• LDs should not be a penalty.
• Quick remedy to avoid having to prove actual loss due to the breach.
• The contractor knows their liability.
• The employer should calculate the figure (consultants should not do this on their behalf).

Question 24

What sort of expenses/costs can the employer include in the damage calculation?

Answer 24

• Loss of rent or income
• Additional professional fees
• Expected costs incurred by other parties
• Cost of not having facility (storage, rent, abortive costs etc)
• Capital salaries
• Associated legal costs.

This figure should not be a penalty. thus the employer needs to be realistic when identifying potential costs.

Question 25

What if a client tells you the damages £100k per week?

Answer 25

• Exercise due diligence - check they believe £100k per week is a genuine pre-estimate of likely loss
• if there is a concern - explain the dangers that the damages might be construed to be a penalty.

Question 26

Under a JCT contract, what contractual documentations should be in place before damages can be deducted?

Answer 26

• A non-completion notice/certificate is in place.
• The contractor is notified that the employer may require the payment of; or deduct LDs.
• A pay less notice is served.

Question 27

What is a LD holiday or LD free period?

Answer 27

• This is essentially just a grace period during which the contractor has no commercial liability for delay.
• For example, if the contractor has a two-week LD holiday LDs will only begin accruing after the delay has continued for two weeks.

Question 28

What is the difference between liquidated and unliquidated damages?

Answer 28

• Contracting parties might agree to pay a certain amount on breach of contract. When such provisions are created in the contract, they are known as liquidated damages.
• Unliquidated damages are granted by the courts based on an assessment of the loss or injury caused to the party suffering the breach of contract.

Question 29

What is a “Pre-Construction Services Agreement”?

Answer 29

a PCSA is a contract between the employer and contractor for pre-construction services. The PCSA documents the services that the contractor is to perform before signing the building contract and identifies the terms and conditions under which these services are to be performed.

Question 30

When might a PCSA be used?

Answer 30

In a two-stage tender approach to facilitate early contractor investment.

Question 31

How can a PCSA benefit a project?

Answer 31

Early involvement of the contractor should improve the buildability and cost-certainty of the design as well as creating a better integrated project team and reducing the likelihood of disputes.

Question 32

What sort of activities can the PCSA be used for?

Answer 32

• Contribute to the design process
• Advise on buildability, sequencing and construction risk
• Advise on the selection of specialist subcontractors.
• Help develop the cost plan and construction programme.
• Help develop the method of construction.
• Assist with any planning application matters or other approvals.

Question 33

What should be considered when drafting a PCSA?

Answer 33

• Arrangements do not commit the employer to enter into the building contract. It is important that the employer have means of securing an alternative bid if the second-stage negotiations fail.
• The scope of the service for the contractor is clearly defined and unambiguous.
• Usual programme and delay damage clauses are carefully drafted by the legal team.

Question 34

What are some of the considerations when selecting the appropriate building contract?

Answer 34

• Nature of the client
• Priorities - cost, time, quality and risk allocation
• Procurement choice
• Value of the work
• Type/nature of the work
• Public or private employer
• Complexity of the work
• Size and location of the work

Question 35

What is a bespoke contract?

Answer 35

• Bespoke contracts are contracts that are tailored to fit the specific requirements of the project
• Bespoke contracts are often used when standard forms are not suitable

Question 36

What are the advantages of standard forms over bespoke contracts?

Answer 36

• Written by legal experts
• Rights and obligations of each party are clearly set out to the required level of detail
• Parties should be familiar with the provisions in the form - greater consistency in application and with fewer unforeseen anomalies.

Question 37

What is your opinion of oral contracts?

Answer 37

Whilst they are legally binding, the difficulty lies in proving the specific terms and conditions of the agreement. Having a written contract is always the preferred option.

Question 38

What is a tort?

Answer 38

• A tort is a civil wrong
• Part of the civil law
• a claim in a tort is concerned with loss or harm

Question 39

How do statutory provisions and contract provisions differ?

Answer 39

• Statutory provisions are set out by law and must be complied with regardless
• Contract provisions relate to the contract in question & and therefore only apply to a specific project.

Question 40

What is a tender bond?

Answer 40

• Requested by the employer when inviting contractors to tender for a contract
• A tender bond should provide security against the risk of the successful bidder failing to enter the contract.
• It should help prevent idle tendering.

Question 41

What is an off-site materials bond?

Answer 41

Covers an employer against the risk of paying the contractor for materials being manufactured off-site. If the contractor or subcontractor becomes insolvent, the employer can claim on the bond for good paid for (in the event they are not delivered to site).

Question 42

What is novation?

Answer 42

• Under a design and build contract, novation normally refers to the process by which design consultants are initially contracted to the client, but are then “novated” to the contractor.
• The contractor will then go on to manage the remaining design process with the existing design team, rather than bring their own consultants onboard.

Question 43

What is partial (early) possession?

Answer 43

• a building contract may allow the employer to take partial possession of part of the works, before they have been formally completed.

Question 44

What are the key points of partial possession?

Answer 44

• Not agreed in advance (prior to signing of the building contract)
• Usually, completion is deemed to have occurred for that section
• a voluntary agreement between employer and contractor
• Contractor must give consent

Question 45

Please can you give me an overview of NEC ECC contract?

Answer 45

• Suitable for any construction-based contract between employee and contractor
• It is intended to be suitable for any sector of the industry, including civil, building, nuclear, oil and gas, etc.
• There are six main options to choose from.

Question 46

What are the 6 main options (NEC3 ECC)?

Answer 46

Option A: Priced contract with activity schedule
Option B: Priced contract with bill of quantities
Option C: Target contract with activity schedule
Option D: Target contract with bill of quantities
Option E: Cost-reimbursable contract
Option F: Management contract

Question 47

Which NEC ECC main option carries the most financial risk for the employer?

Answer 47

• Option E, this is because the contractor is reimbursed the actual costs they incur in carrying out the works, plus an additional fee.

Order from most to least employer risk E, F, D, C, B, A

Question 48

What are relevant events?

Answer 48

• A relevant event is an event on or off site that causes a delay to the completion date of the works.
• For example, a relevant could be something that happens during the design and manufacture process to delay things, or a site event that prolongs the construction works.

Question 49

Can you provide some examples of relevant events in the contract?

Answer 49

• Variations and instructions
• Deferment of possession of site
• Suspension by the contractor for non-payment
• The carrying out of work by statutory undertakers
• Impediment, prevention, or default by the employer
• loss or damages occasioned by a specific peril (fire, flood etc.)
• Exceptionally adverse weather conditions
• Force majeure

Question 50

What are relevant matters?

Answer 50

• A matter for which the employer is responsible that materially effects the progress of the works
• This may enable the contractor to claim direct loss and / or expense that has been incurred

Question 51

Can you give some examples of relevant matters?

Answer 51

• Failure to give the contractor possession of the site
• Failure to give the contractor access to and from the site
• Delays in receiving instructions

Question 52

What is the difference between a relevant event and a relevant matter?

Answer 52

• Relevant events entitle the contractor to claim additional time
• Relevant matters entitle the contractor to claim additional costs (loss and expense)

Question 53

What is the “Final Account”?

Answer 53

The final account is the conclusion of the contract sum (including all necessary adjustments) and signifies the agreed amount that the employer will pay the contractor. It includes any works that are paid to the contractor through the main contract.

Question 54

What is involved in preparing the final account?

Answer 54

As a matter of preparation the PQS should ensure that all contracts instructions have been accounted for that all other potential cost-related items are scheduled out.

Question 55

What is the “Defects Liability Period”?

Answer 55

The defects liability period begins upon certification of practical completion and typically lasts six to twelve months.

Question 56

What is a loss and expense claim?

Answer 56

Loss and expense claims are often associated with delays but can be for any event where the Contractor incurs loss due to the failure of the employer (relevant matter)

Question 57

What is the key thing to remember when assessing loss and expense claims?

Answer 57

• It should be for actual loss incurred by the contractor
• The prices in the contract bill of quantities, contract schedule or preliminaries should not be used (actual costs may be more or less than these).

Question 58

What is “Phasing” (sectional completion)?

Answer 58

Where all the works are procured under a single contract, phasing can be allowed for by sectional completion clauses. These allow different completion dates for different sections of the works.

Question 59

What is the benefit of phasing?

Answer 59

Phasing construction works can be beneficial in allowing a project to move forwards despite there being no guarantee of funding being available to complete it. Completing certain sections of work can make funding more attractive to potential lenders and investors than if the project has not begun at all. It can also enable the client to begin to generate income from the completed parts of the development.

Question 60

What is an advance payment bond?

Answer 60

An advance payment, or simply an advance, is the part of a contractually due sum that is paid or received in advance for goods or services, while the balance included in the invoice will only follow the delivery.

Question 61

Does the NEC contract have relevant events and relevant matters like JCT?

Answer 61

No, NEC contracts deal with these issues under the single heading - compensation events.
- Compensation events deal with both time and money.

Question 62

What are some of the key differences between NEC and JCT contracts?

Answer 62

• NEC is drafted in plain English
• The QS is not mentioned in NEC, only PM
• JCT has prov sums, NEC does not.
• JCT: variations NEC: Compensation events.

Question 63

What are the differences between Third Party Rights and Collateral Warranties?

Answer 63

• If a lot of collateral warranties are required, it can involve a lot of administration and cost.
• Third-party rights are easier to get in place because there is no separate document required.

Question 64

There is a high probability that collateral warranties will be needed under a D&B contract, can you explain why?

Answer 64

The design team typically sit below the contractor under a D&B contract; therefore, the employer will need to retain a contractual link with the design team (using a collateral warranty).