Contract Practice Flashcards
What is a contract?
- 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 binding contract should comprise four key elements: offer, acceptance, consideration and intent to create legal relations.
Define expressed terms
Express terms are the terms of the agreement which are expressly agreed between the parties.
Ideally, they will be written down in a contract between the parties but where the contract is agreed verbally, they will be the terms discussed and agreed between the parties.
What are implied terms?
A contractual term that has not been expressly agreed between the parties but has been implied into the contract either by common law or by statute.
What is tort?
- A tort is a civil wrong.
- Part of the civil law.
- A claim in tort is concerned with loss or harm.
How do statutory provisions and contract provisions differ?
- Statutory provisions are set out by law & must be complied with regardless
- Contract provisions relate to the contract in question & therefore only apply to a specific project.
What is your opinion of an oral contract?
-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 opinion.
What is a breach of contract?
- A breach of contract occurs when one party in a binding agreement fails to deliver according to the terms of the agreement. A breach of contract can happen in both a written and an oral contract.
What is LDEDCA?
Local Democracy Economic Development and Construction Act 2009
What is the Local Democracy, Economic Development and Construction Act 2009?
-October 2011 - the Local Democracy, Economic Development and Construction Act 2009 (the “2009
Act) came into force in England and Wales.
The Act amended the Housing Grants Construction and Regeneration Act 1996 (the Construction Act).
The Act changed the way construction contracts are entered into and in particular, introduced an amended regime for payment and adiudication.
What are key provisions under LDEDCA ?
Contracts
Payment
Payment notices: contractual requirements
Payment notices: payee’s notice in default of payer’s notice
Pay less notice
Suspension of performance due to non payment
What is a letter of intent ?
Typically used to describe a letter from an employer to a contractor (or from a main contractor to a subcontractor) indicating the employer’s intention to enter into a formal written contract for works described.
The letter of intent typically asks the contractor to begin those works before the formal contract is executed.
What information is typically included in a letter of intent ?
Detailed description of the work 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
What are the advantages of a letter of intent ?
Allows work to commence (or place orders) before the main contract is agreed/signed.
What are the disadvantages of a letter of intent?
May lead to complacency and disincentivise both parties from signing the main contract.
Contractually less robust than the main contract.
The employer loses incentive in negotiations of the main contract.
Who issues the letter of intent?
The employer
In what circumstances might you need a letter of intent?
Where the employer needs to commence works before a certain date.
Who signs a letter of intent
Employer and contractor
What would you say if the client asked you to draft a letter of intent?
It is a legally binding agreement like a contract; therefore, we would NOT draft those.
What are the different types of letters of intent?
Comfort letter
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.
Instruction to proceed with consent to spend
A letter with instructions to proceed and consent to spend is sometimes referred as an “iP” contract.
This type of letter allows work to proceed up to a certain value while the contract itself is being finalised.
Recognition of contract
This type of letter is also referred to as a letter of acceptance and is used by some forms of contract (such as FIDIC) to formally execute the contract itself. Generally, such a letter will be issued only once the contract has been substantially agreed and usually marks the completion of negotiations between the parties.
Are you aware of any case law relating to letters of intent?
Ampleforth Abbey Trust v Turner & Townsend.
The defendant project managers were retained by the Trust in relation to a project to build new accommodation at a school. The defendant’s retainer included obligations ‘facilitating, assisting and being involved in the procurement of the building contractor and the building contract’. The contractor never signed the building contract and the whole of the works (which were completed late) were procured using letters of intent. The effect of this was that the Trust was not able to claim liquidated damages under the building contract for the late completion of the works.
HHJ Keyser QC held that the defendant had been negligent in failing to take the steps reasonably required of a competent project manager for the purpose of finalising the building contract between the Trust and the contractor.
What is a parent company guarantee?
A parent company guarantee (PCG) is a form of security that may be required by clients to protect them in the event of default on a contract by a contractor that is controlled by a parent company (or holding company). Typically, such a default might be caused by the insolvency of the contractor
In what circumstance may a Parent company guarantee be required?
Parent company guarantees can be particularly useful where a small contractor is part of a large, financially stable group of companies. The guarantee is given by the parent company to the client and in the event the contractor defaults on their obligations, the parent company is required to remedy the breach, meeting all the contractor’s obligations under the contract (and / or covering loss and expense incurred by the client).
Are there any Acts which govern third party rights?
Contracts (Rights of Third Parties) Act 1999.
What is the overarching purpose of the third party rights Act?
The Act allows third parties to enforce terms of contracts that they are not a party to, but which benefit them in some way, or which the contract allows them to enforce.
It also gives parties access to various remedies if those contract terms are breached.
What are the advantages of third-party rights act?
Time and cost
Since no separate document (i.e. a 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
Certainty
Once the rights to be conferred on third parties are negotiated and agreed by all parties, there is limited room to revisit the wording when protection is required as is often the case when new collateral warranties are circulated for signature.
Subcontractors
The third-party rights process can also be extended onto subcontracts, so that (provided the relevant building contract and subcontract are drafted accordingly) an employer can confer third party rights in relation to work done by subcontractors unilaterally. This avoids the need to chase large numbers of individual warranties.
What are the disadvantages of third-party rights?
Lack of flexibility
Once the schedule of third-party rights being conferred has been agreed, there is limited room for negotiation. While this can be an advantage as it will help to keep costs down, in some circumstances the inflexibility could cause a problem if a specific provision is required for a particular party, such as an incoming tenant or purchaser.
Need for careful drafting
Recent cases have shown the importance of drafting provisions relating to the enforcement of third-party rights very clearly to ensure that all the necessary rights are conferred on the third party, for example the right to commence adjudication proceedings if this is required.
Why might third-party rights be used instead of collateral warranties?
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.
What is a collateral warranty?
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 (e.g. companies: individuals) where one would not otherwise exist.
Can you provide a working example how a collateral warranty could be used?
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’).
In these circumstances the employer may wish to have a direct contractual relationship with the subcontractor so that it can enforce the obligations that the subcontract owes directly, or to create other obligations and rights between them. This might be considered as a security measure if the contractor should become insolvent or if its employment were to be terminated for any reason.
Who might want a collateral warranty?
Any third party with a financial or inherent interest in the project but is not party to the main contract.
E.g. funding institution, future tenants, purchasers, etc.
The employer may want a collateral warranty with key subcontractors or suppliers, if the contractor were to go into liquidation, otherwise they would have no contractual link with them for redress in case of defective workmanship etc
What is the difference between a bond and collateral warranty?
A bond is usually a financial commitment backed up by a third party, a collateral warranty passes on contractual obligations.
Bonds are contained within the contract.
Collateral warranties are a side agreement to the contract.
Are there any alternatives to collateral warranties?
An alternative method to confer such rights is provided by the Contracts (Rights of Third Parties) Act 1999 which allows third parties to obtain the benefits from contracts, which are entered into by others
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.
In light of the particular wording used in the collateral warranty, there was no doubt that it should be treated as a construction contract under section 104 of the Housing Grants, Construction and Regeneration Act 1996.
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 employer will need to retain 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?
Assignment can arise where a party to a construction contract, collateral warranty or consultant’s appointment wants to assign the benefit under that contract to a third party, such as a purchaser or tenant of a building.
Banks and other funders will also frequently take an assignment of the benefit of a suite of construction documents in respect of a development, as an additional part of the security package for their loan to finance the development. A bank will want to acquire the benefit of such documents to be able to assume the position of the employer under them in the event of the employer defaulting on its financial obligations during the works.
What are some of the typical clauses of assignment?
It is standard to allow assignment of rights twice without consent.
The assignment should be notified in writing to the other party.
What is a bond?
Construction bonds are protection for the owner against non-payment, lack of performance, company default and warranty issues.
An arrangement where a contractual duty owed by one party to another is backed up by a third party.
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?
A Performance Bond is a form of security provided by a contractor to a developer or employer.
It consists of an undertaking by a bank or insurance company to make a payment to the employer in circumstances where the contractor has defaulted under the contract.
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 might be heading into recession.
The employer simply wants to protect their commercial exposure.
What is the difference between on-demand and conditional performance bonds?
On-demand bonds - Money set out in the bond is immediately available on demand without needing to satisfy any preconditions whatsoever (including establishing the contractor’s liability) unless the
demand is fraudulent.
Conditional bonds - Requires the employer to provide evidence that the contractor has not performed their obligations under the contract and that they have suffered a loss consequently.
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?
In the event a contractor goes into insolvency and there is no bond in place, the employer will be liable to pay all costs to deal with the insolvency.
Costs include 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 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?
Requested by the employer when inviting contractors to tender for a contract.
A tender bond provides security against the risk of the successful bidder failing to enter the contract.
It should help to prevent idle tendering.
What is an off-site materials bond?
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 goods paid for (in the event they are not delivered to site).
What is a retention bond?
A retention bond is a type of performance bond. Like all surety bonds, it involves three parties:
Contractor.
Employer.
Bond provider (surety company).
In the bond agreement, the surety will act as guarantor between the two parties. The surety will pay the employer up to the full amount (like they would have in place of cash retention) if the contractor fails to perform the obligations or remedy defects immediately after contract completion.
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 advanced payment bond?
An advanced payment bond is required to protect and support payments to contractors by the employer in advance of works being done.
Some contracts require the purchase of materials in advance of a contract commencing, there is always a risk to the employer in advancing money to a contractor who may not be well known to them to allow the purchase of goods to enable the contract to commence.
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.
