Contract Practice Flashcards
What is a contract?
A legally binding promise (written or oral) by one party to fulfil an obligation to another in return for consideration.
For a contract to be legally binding, it must have:
- offer
- acceptance
- consideration
- legality of contract (cannot contain illegal terms)
- capacity to contract (must understand contract consequences e.g. not minors or mentally disabled people)
- intent to create legal relations
Define “express terms”
The terms of the agreement expressly agreed between the parties.
Ideally they’re written in the contract but if the contract is agreed verbally, these will be the terms discussed and agreed between the parties.
Define “implied terms”
The contractual terms not expressly agreed between parties but are implied into the contract by case law or statute.
What is tort?
Tort is a civil wrong causing a claimant to suffer loss or harm, resulting in legal liability for the person who committed the tortious act.
How do statutory provisions and contract provisions differ?
Statutory provisions are set out by law and must always be complied with,
whereas contract provisions relate to the contract and therefore only apply to a specific project.
They’re also set out by the parties and their solicitors, they control what these are.
What is your opinion of oral contracts?
Although they’re legally binding, I think they’re not the most ideal because it’s more difficult to prove the expressed terms of the agreement as they aren’t written down. Therefore I prefer written contracts.
What is a breach of contract?
This occurs when a party in a binding agreement fails to fulfil their obligations under the contract.
This can happen in both written and oral contracts.
What is the LDEDC (Local Democracy, Economic Development and Construction) Act 2009?
This Act amended the Construction Act (Housing Grants Construction and Regeneration Act 1996) in 2011.
It impacted adjudication, payment, suspension provisions in all “construction contracts” entered into on or after 1st October 2011.
What are the key provisions under the LDEDC Act?
Contracts!
- The Act covers construction contracts that are partly or completely oral, parties can now go to adjudication over these type of contracts.
Payment!
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Suspension of performance for non-payment!
- Clarifies the contractor’s right to suspend the works in the event of non-payment.
- However, a default notice must be issued and there must have been failure to pay. The party in default is liable to pay the contractor a reasonable amount for the costs and expenses incurred by suspending all or part of the work.
What is a letter of intent (LOI)?
A letter from the client to a contractor (or MC to a subcontractor) indicating the client’s intention to enter into a formal written contract for works described.
It usually asks the contractor to begin those works before the main contract is executed.
What information is typically included in a LOI?
- Name of client and contractor (or MC and subcontractor)
- Expiry date of letter
- Detailed description of the work to be completed
- Contract sum (if agreed)
- Method of payment
- Date for possession
- Date for completion
- Insurance provisions required
- Typically states employer’s right not to award the main contact for whatever reason
- ADR method
What are the advantages of a LOI?
Works on-site can commence before the main contract is agreed (earlier start on-site as LOI faster to produce than main contract)
Can see how the contractor performs before entering into a main contract with them.
What are the disadvantages of a LOI?
- Contractually less robust than the main contract
- Can disincentivise both parties from signing the main contract
- Employer loses incentive in negotiations of the main contract
Who issues the LOI?
The client
In what circumstances might a LOI be used?
- When an early start on site is important to the employer
- Where materials have long lead times and early procurement would aid the programme
- Starting construction works might trigger early founding
Who signs a LOI?
The client and contractor (or main contractor and subcontractor)
What would you say if the client asked you to draft a LOI?
LOIs are legally binding agreements like a contract, therefore I would not draft those.
What are the different types of LOI?
Comfort Letter:
- Expresses a party’s intention to act in a particular way at some point in the future, or at the time of issuing the letter.
Instruction to proceed with consent to spend:
- Allows works to proceed up to a certain value while the main contract is being finalised.
Recognition of contract (letter of acceptance):
- generally issued only once the contract has been substantially agreed and usually marks the completion of negotiations between the parties
- some forms of contract e.g. FIDIC use this to formally execute the main contract.
Are you aware of any case law relating to LOIs?
Ampleforth Abbey Trust vs Turner & Townsend:
The defendants were the PMs for building school accommodation for the claimant Trust. The defendants were responsible for procuring the building contractor and building contract. The building contract was never signed and the entire works (which were completed late) were procured under LOIs. Therefore, the Trust couldn’t claim liquidated damages under the building contract for the late completion of the works.
The judge held that the defendant had been negligent by failing to take the steps reasonably required of a competent PM to finalise the building contract between the Trust and contractor.
What is a parent company guarantee (PCG)?
A form of security that protects the client should the contractor default. The parent company (or holding company) guarantees to the client that if the contractor defaults on their obligations (typically through insolvency), they will remedy the breach, meeting all the contractor’s obligations under the contract (and/or covering loss and expense incurred by the client).
In what circumstances may a PCG be required?
- When a small contractor is part of a large, financially stable group of companies.
- The client may simply want this extra form of security.
Are there any Acts which govern third party rights?
Contracts (Rights of Third Parties) Act 1999
What is the overarching purpose of the Contracts Act 1999?
The Act allows third parties to enforce terms of a contract which they are not party to, on the condition that:
1) third party must be expressly identified in the contract, by name, class or description
2) the provision must confer a benefit on the third party.
E.g. tenant or building purchaser suffers loss due to subcontractor’s poor workmanship can now create a contractual relationship between them.
It also gives parties access to various remedies if those contract terms are breached.
https://www.lexisnexis.com/uk/lexispsl/construction/document/391372/56NS-GV21-F186-33HC-00000-00/Contracts__Rights_of_Third_Parties__Act_1999_in_construction_overview
What are the advantages of third-party rights?
Certainty:
- Once the third party rights are agreed, there is little room to revisit the wording when protection is required as is often the case with collateral warranties. This can help reduce costs.
Time & Cost:
- Since no separate document (i.e. collateral warranty) is being entered into, using the Act cuts down on the time and cost associated with warranties being drawn up, signed and circulated.
Subcontractors:
- Third party rights can be extended into subcontracts so that (provided the relevant building contract and subcontract are drafted accordingly) a client can grant third party rights in relation to work done by subcontractors unilaterally, without needing to chase many individual warranties.
unilaterally = undertaken by one person or party
What are the disadvantages of third-party rights?
Lack of flexibility:
- Once the schedule of third party rights has been agreed, there is limited room for negotiation. This could be problematic if a specific provision is required for a particular party e.g. incoming tenant or purchaser.
Need for careful drafting:
- Recent cases have shown the importance of drafting clauses relating to third party rights very clearly to ensure all necessary rights are conferred on the third party, e.g. the right to commence adjudication proceedings if required.
Why might third party rights be used instead of collateral warranties?
- Third party rights are easier to setup because they’re in the contract, no separate document is required.
- If many collateral warranties are required, it can involve lots of administration, time and cost.
What is a collateral warranty?
A collateral warranty is a contractual agreement whose purpose is to create a contractual relationship between two parties where one would not otherwise exist.
Can you provide a working example of how a collateral warranty could be used?
Should a client place a contract with a contractor, the contractor then places contracts between themselves and many subcontractors, the client has a direct contractual relationship with the contractor, but not with the subcontractors (“privity of contract”)
Should the client want a direct contractual relationship with a subcontractor, e.g. to enforce obligations or create other obligations between them, a collateral warranty would be required.
This could be a security measure if the contractor became insolvent or its employment was terminated for any reason.
Who might want a collateral warranty?
- Any third party with a financial interest in the project but is not party to the main contract e.g. future tenant, building purchaser, funder.
- The employer may want a collateral warranty with key subcontractors or suppliers, otherwise if the contractor went into liquidation, they would have no contractual link with them for redress in case of defective workmanship etc.
What is the difference between a bond and a collateral warranty?
- A bond is a financial commitment backed up by a third party, whereas a collateral warranty passes on contractual obligations.
- Bonds are contained within the contract, whereas collateral warranties are a side agreement to the contract.
Are there any alternatives to collateral warranties?
The Contracts (Rights of Third Parties) Act 1999 provides an alternative where third parties can obtain benefits from contracts which they are not party to.
What are the three ways that benefits can be transferred under a building contract?
- Collateral warranties
- Third party rights
- Assignment
Are you aware of any case law relating to collateral warranties?
Parkwood Leisure v Laing O’Rourke:
Laing O’Rourke gave a collateral warranty to Parkwood, the tenants of the Cardiff International Pool, concerning Laing O’Rourke’s construction of that facility. The Court was required to determine whether this collateral warranty was a “construction contract” under Section 104 of the Housing Grants, Construction and Regeneration Act 1996. The court ruled the collateral warranty was a construction contract based on its particular wording.
There is a high probability that collateral warranties will be needed under a D&B contract, can you explain why?
The design team typically sit below the contractor under a D&B contract. Therefore the client needs to create a contractual link with the design team using a collateral warranty.
What is assignment?
Assignment is the process whereby the benefit of a contract is transferred from one party to another, but the burden of the contract remains with the original party to the contract.
Can you provide a working example to explain how assignment might be applied?
Common example in construction projects:
Main contractor assigns the benefit of their key sub-contracts to the employer. Then in the event of contractor default and consequent termination of the main contract, the employer can enforce the rights in the sub-contract against the subcontractor, including rectification of the works and the performance of particular obligations.
What are some of the typical clauses of assignment?
- The assignment should be notified in writing to the other party.
- It’s standard to allow assignment of rights twice without consent of the other party to the contract.
What is a bond?
- An arrangement where a contractual duty owed by one party to another is backed up by a third party.
- Construction bonds are protection for the owner against non-payment, lack of performance, company default and warranty issues.
Can you list 5 different bonds which might be used on a project?
- Performance bond
- Retention bond
- Off-site materials bond
- Advance payment bond
- Tender bond
What is a performance bond?
- Protects the employer against the risk of the contractor defaulting over the contract.
- Provided by a contractor to a developer or employer.
When might the employer want a performance bond?
- If the contractor is new or unapproved
- If there is concern over the contractor’s finances/commercial standing
- The economy may be heading into recession
- The employer may simply want to protect their commercial exposure
What is the difference between on-demand and conditional performance bonds?
On-demand bonds: Immediately available on demand without needing to satisfy any preconditions whatsoever (including establishing the contractor’s liability) unless the demand is fraudulent.
Conditional bonds: Employer must provide evidence that the contractor has defaulted under the contract and that they have consequently suffered a loss.
What is the typical value of a performance bond?
Usually 10% of the contract sum
What is the typical cost of a performance bond?
The cost largely depends on the financial stability of the contractor and the number of previous claims (if any)
What is the risk of not having a performance bond?
- If the contractor becomes insolvent and there is no bond, the employer will be liable to pay all costs to deal with the insolvency, i.e. sourcing a new contractor to complete the works and any premium that will attract.
- The employer will not be able to pursue the contractor as the company will be in the process of liquidation.
Are there any alternatives to a performance bond?
- If the contractor is part of a group of companies, then the employer may wish to consider a Parent Company Guarantee (PCG).
- If the smaller company breaches the contract, the parent company is obligated to step in and remedy the breach.
What is a tender bond?
- Protects the employer against the risk of the successful bidder failing to enter the contract.
- Requested by the employer when inviting contractors to tender for a contract.
- It should help to prevent idle tendering.
What is an off-site materials bond?
- Protects the employer against the risk of paying the contractor for materials being manufactured off-site which are never delivered to site due to insolvency of the contractor or subcontractor.
What is a retention bond?
- Protects the employer against the risk of the contractor failing to remedy defects after PC.
- The amount which would usually be retained through a percentage is instead held by the insurer.
- Like the usual percentage retention, 50% is released at PC and the other 50% at the end of the rectification period.
What are the disadvantages of a retention bond?
- The employer will ultimately have to pay the premium for taking out the bond (usually through the contract sum)
- May reduce the contractor’s incentive to complete the works promptly and to the desired standard.
Why might a retention bond be used?
May be used in difficult market conditions to aid the contractor’s cash flow.
What is an advance payment bond?
- Protects the employer against the risk of making an advance payment to a contractor who then defaults.
What are antiquities?
Items of historical interest or value such as:
- Historical artefacts, pottery and coins
- Bones or fossils
What should the contractor do if they discover antiquities?
- Cease work and seek advice prior to proceeding.
- Take necessary measures to preserve antiquities in existing location and condition.
- Inform the contract administrator or project manager of the discovery and location
When objects of interest are discovered, who is liable for the delay and expense incurred?
- This depends on how the risk is allocated in the contract.
- Significant delays and costs can arise - can be a serious event for the employer and/or contractor.
What are defects?
Aspects of the works which are not in accordance with the contract, e.g. in terms of workmanship, design or materials used. Defects can be ‘patent’ or ‘latent’.
What are patent defects?
Defects which are obvious or can be discovered by reasonable inspection e.g. wall cracks, sagging gutters, broken windows, missing tiles etc.
What are latent defects?
Defects which cannot be discovered by reasonable inspection or which become apparent over time.
- E.g. problems with foundations may not become apparent until several years after completion when settlement causes cracking in the building.
When a latent defect becomes apparent it becomes patent rather than latent.
Why is the defect rectification period typically 12 months?
Allows the building to experience all four seasons of the year, therefore most patent defects will become apparent during this period.
