Contract Practice Flashcards

1
Q

What 6 conditions need to be met for a contract to be in place?

A
  1. Offer by one party (OFFER)
  2. Acceptance by the other party (ACCEPTANCE)
  3. Consideration of the office (CONSIDERATION)
  4. Intent to form a contract (INTENT)
  5. Legality of contract (LEGALITY)
  6. Capacity to make agreement (CAPACITY)
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2
Q

What is a contract?

A

A legally binding agreement (between two parties) to provide goods or services within a specified timeframe.

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3
Q

What are the two ways in which a contract can be executed?

A
  • Under seal – signed by both parties, witnessed and executed as a deed
  • Under hand – signed by parties (simple contract)
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4
Q

What are the differences between under-hand and under-seal contracts?

A

Under seal:
- Requires valuable consideration (something of value)
- Executed as a deed (binding )
- Limitation period of 12 years

Under had:
- Does not require above
- Limitation period of 6 years

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5
Q

What is the construction act’s proper name? (HGCRA)

A

The Housing Grants, Construction and Regeneration Act (1996)

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6
Q

What does the HGCRA do?

A

Ensures that payments are made promptly throughout the supply chain and that disputes are resolved swiftly (provides adjudication mechanism)

Provides a framework for fairer contracts and working relationships.

  • Fairer payment conditions (Interim payments for contracts over 45 days; must state a date for final payment)
  • Set off / Improve the cashflow of the industry - (Employer must issue a withholding notice / pay less notice 7 days before the final date for payment)
  • Suspension – (Contractor has a right to suspend if not paid in accordance with the contract)
  • Adjudication - (Statutory right for parties to refer any dispute to adjudication)
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7
Q

What are the main suites of construction contract

A
  • JCT 2016 – Joint Contracts Tribunal
  • NEC 4 – New Engineering Contract
  • ICE 7 – Institution of Civil Engineers
  • FIDIC – International Federation of Consulting Engineers
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8
Q

Why use standard forms of contract?

A
  • Save time in drafting contracts
  • They are cheaper than getting a bespoke contract drawn up
  • Offer a level of familiarity with contract terms between the parties
    – Readily understood by construction professionals
  • Provides a checklist of items to be agreed
  • Benchmark for negotiating terms
  • Benefit from judicial precedents
    – Tried and tested contracts in court, therefore you should be able to predict the outcome in the courts.
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9
Q

Name some NEC forms of contract

A
  • ECC (Engineering Construction Contract)
  • TSC (Term Service Contract) – appointment of supplier to manage/provide a service e.g. site security
  • PSC (Professional Services Contract) – design and consultancy work
  • SC (Supply Contract)
  • ECS (Engineering and Construction Subcontract) – trickle down version of ECC for C & SC.
  • Short version of all of the above for more straight forward low risk work
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10
Q

What are the main types of NEC contract?

A
  • Option A – fixed price with activity schedule
  • Option B – fixed price with bill of quantities
  • Option C – Target cost with activity schedule
  • Option D – Target cost with bill of quantities
  • Option E – Cost reimbursable
  • Option F – Management contract
  • Option G – Term contract (for the appointment of a consultant based on a priced schedule of tasks)
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11
Q

What is a target cost contract and why use it?

A

A ‘target cost’ is agreed between the parties which is made up of the Contractor’s estimate of the ‘Defined Costs’ plus a fee which is used is to cover the Contractor’s costs, overheads and profit.

Pros:
-beneficial where isn’t yet fully defined
- where risks anticipated are greater than usual
- motivates contractors to work in most cost-efficient way
- promotes innovation
- lump sum contract can often be overinflated to account for risk

Cons:
- contractor may use cheaper products of a lesser quality
- Differences may occur between the contractor and the client if changes occur during the project due to which cost may increase.
- Requires a lot of commercial support and auditing to maintain the contract

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12
Q

Why use an Option E contract?

A

For emergency works – cost isn’t a priority and client carries all financial risk

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13
Q

What is the build of the NEC contract?

A
  • Core Clauses [1-9] (5. Payment, 6. Compensation Events)
  • Main Option Clauses [A-F] (C – Target contract with Activity schedule)
  • Dispute resolution [W1-W2]
  • Secondary option clauses [X1-X22], [Y(UK)1-Y(UK)2] & Z’s
  • Schedule of Cost Components (People, Equipment, Insurance) [and/or short]
  • Contract Data
    – Part one – Data provided by the Client
    – Part two – Data provided by the Contractor
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14
Q

What are defined costs in the NEC?

A
  • Used to assess CEs in all NEC4 ECC main options
    o Stated in SSCC for options A & B
    o SCC for C-E
  • For cost-reimbursable options C, D, E and F, it is also used for routine payment.
    – essentially costs that can be recovered by the contractor
  • Defined Cost is costs based on rates and percentages stated in the Contract Data and other amounts at open market or competitively tendered prices

Essentially, Defined Cost = payments due to subcontractors + the cost of components for other works (such as plant, equipment, people etc.) - disallowed cost.

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15
Q

What are disallowed costs in the NEC?

A

Cost the Contractor may have incurred and fall within the definition of Defined Cost, but which the PM decides:

  • The costs have only been incurred due to some failure or default of the Contractor (inc. certain defects)
  • is not justified by the Contractor’s accounts and records;
  • should not have been paid to a Subcontractor or supplier in accordance with his contract;
  • was incurred only because the Contractor did not:
    follow an acceptance or procurement procedure;
    give an early warning which this contract required.

Disallowed Costs are therefore cost borne entirely by the Contractor

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16
Q

What is the NEC payment process?

A

Contractor submits AFP before due date > PM has 7 days to assess from due date > payment must be made within three weeks of due date.

Monthly assessment date - Amount due = Price for Work Done to Date - less retention

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17
Q

What is the schedule of cost components (SCC)?

A

It is NOT a list of rates or prices.

It just sets out what the contractor will be paid for and how that is calculated. And nearly all the items in the schedule of cost components are paid for at what they have actually cost the contractor.

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18
Q

What are the categories in the SCC / SSCC?

A
  1. People
  2. Equipment
  3. Plant and Materials
  4. Subcontractors
  5. Charges
  6. Manufacture and fabrication
  7. Design
  8. Insurance
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19
Q

Name some common examples of Z clauses

A
  • Change periods for reply
  • Final accounting process
  • Contractor to comply with applicable codes of practice
  • Potentially add/remove CEs
  • Confidentiality agreements
20
Q

What is the difference between ‘Plant and Materials’ and ‘Equipment’ under the NEC?

A
  • Plant and Materials – intended to be included in the works
  • Equipment - Contractor’s plant that is used to construct the works (taken away at the end of the job) – temporary sheet piles or scaffolding
21
Q

How are ambiguities dealt with under the NEC?

A

Clause 17 - The PM shall issue an instruction resolving the matter.

22
Q

What updates have occurred between the NEC3 and NEC4?

A

Worth mentioning:
* Improved clarity across suite
* Payments – Contractors must submit AFPs. NEC3 = PM obliged to assess if they don’t
* Default periods for EW meetings
* Programme – ‘treated acceptance’ when PM doesn’t respond to C’s submission
* Requirement for Contractor to operate a quality management system
* Introduction of W3 option (dispute avoidance board)

General:
* Terminology
– W.I becomes Scope
– Employer becomes Client
– Risk Register becomes Early Warning Register
– PCG becomes ultimate holding guarantee (X4)
* Gender neutral

23
Q

Name some differences between the NEC and JCT

A
  • NEC written in layman’s terms and is easy to understand
  • No QS in NEC only the Project Manager
  • Tries a more collaborative approach to works “act in a spirit of mutual trust and cooperation”
  • Variation (JCT) = Compensation Event (NEC)
  • Compensation event vs. relevant matters and relevant events
    – NEC has period for replies (incentivises the parties to respond to each other)
    – JCT responses / notifications aren’t time-barred
24
Q

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

A
  • Relevant event TIME – delay to the completion date (caused by client or neutral) entitling the contractor to an EOT
  • Relevant matter COST – enables the contractor to claim direct loss and / or expense that has been incurred through the fault of the client or neutral.
25
Q

What is a bespoke contract and the risks?

A

Contract conditions that are drafted specifically for a project.

Risks:
Decreased familiarity - apprehensiveness from contractors
Time and cost to draft
Not tested in court
Potential ambiguities

26
Q

What is the Client under NEC?

A

‘Entity, individual or organisation commissioning and funding the project, directly or indirectly.’

27
Q

Who is the contract administrator in the JCT?

A

An agent acting on behalf of the client as the contract administrator for design and build contracts.

Completes the following:
* Co-ordinating the tender process
* Co-ordinating novation of consultants, collating contract documents
* Managing change control
* Issuing payment certificates/undertaking valuations (no need for a QS)
* Agreeing handover
* Managing defects
* Agreeing final accounts

28
Q

Who is the project manager under the NEC?

A

PM administers the contract but should act honestly and reasonably.

29
Q

What is assignment?

A

Rights and Benefits of a contract are transferred to a 3rd party

30
Q

What is novation?

A

A new contract that transfers the rights and obligation of one contractual party to a new third party i.e design rights and obligations of architect transferred to contractor.

31
Q

If the design team is novated, what should the client put in place?

A

A collateral warranty to the design team to give them remedies for breach of contract

32
Q

What is a limitation clause?

A

Clauses that limit a party’s liability for loss:
* Limitation to a fixed sum
* Limitation to the extent of PI insurance
* Limitation to loss that can be recovered from a third party
* Limitation to responsibility – net contribution cause
Secondary Clause X18 = Limitation of Liability

33
Q

What is a net contribution clause?

A

Clause that limits a party’s liability to the proportion of loss that they are responsible for.

34
Q

What are three ways that benefits can be transferred under contracts?

A
  1. Collateral Warranties – (Create contractual relationships between parties; someone with a financial interest in the project such as bank, future tenant etc; employer may want a collateral warranty with key sub-contractors)
  2. Third Party Rights – (Third Party Right Act 1999; used to give a non-party to a contract a right to enforce some terms of the contract; After 11th May 2000)
  3. Assignment
35
Q

What is the Scheme for Construction Contracts?

A

Applies when construction contracts do not comply with the HGCRA:
- supplements the provisions of the contract where it has deficiencies relative to the requirements of the HGCRA or;
- replaces the contract where it is non-compliant.

36
Q

What is the ‘Contracts’ (Rights of Third Parties) Act (1999)?

A

Used to give a non-party to a contract a right to enforce some terms of the contract (the benefits)

37
Q

Why might third party rights be used instead of collateral warranties?

A

If a lot of warranties are required, it involves a lot of administration and cost – easy for third party rights (avoiding the need to produce detailed additional agreements).

38
Q

What is Y(UK)3?

A

Allows a third party to be expressly identified in the contract, which then allows the third party a contractual remedy rather than having to pursue a claim in tort which is unlikely to succeed.

39
Q

What are collateral warranties?

A

Create contractual relationships between parties where there would otherwise not have been any.
They are alongside another agreement.

40
Q

Why use collateral warranties?

A
  • Rights and obligations under a contract can only be enforced by a party to that contract
  • Collateral warranties give remedies to parties that due to privity of contract would not otherwise have them
41
Q

Who might want a collateral warranty?

A
  • Any third party with a financial interest in a project but not party to the main contract i.e. funding institution, future tenants, purchasers etc.
  • The employer may want a collateral warranty with key sub-contractors or suppliers, as if the main contractor were to go into liquidation they would have no contractual link them for redress in case of defective workmanship etc.
42
Q

Why use collateral warranties over a third party right?

A
  • Collateral warranties can be perceived as being more effective since they mirror the responsibilities of the underlying contract.
  • Third party rights lack the feeling of comfort to be had from receiving a signed physical document so are less popular
  • Can enforce a whole contract rather than specific terms
43
Q

What are the common clauses/terms in collateral warranties?

A
  • The obligations of the collateral warranty should mirror that of the main agreement
  • Therefore, if a party is in breach of the main agreement, they would also be in breach of the warranty
  • Limitation of liability
  • Reasonable skill and care vs. fitness for purpose
  • Requirements for PI insurance
  • Assignment of rights
  • Novation rights
44
Q

How are collateral warranties included in the NEC?

A

NEC4 - Via secondary clause X8 – Undertakings to the Client or others.
NEC3 – Z clause

45
Q

What are letters of intent?

A

Method of instructing the contractor to proceed with works prior before the contract has been formally executed / A document outlining an agreement between two parties, before a formal contract has been created

46
Q

What are the advantages and disadvantages of letters of intent?

A

Advantages:
- Earlier commencement of works
- Provides safeguards

Disadvantages:
- Less robust than main contract
- May lead to complacency

47
Q

In your opinion, what makes CEs better than JCT’s approach?

A
  • Deals with time and cost together
  • Cost of delay therefore assessed at the same time
  • Has an associated early warning process for effective risk management
  • Time-barred / Prospective assessment