Contract practice Flashcards
What if the client tells you the LADs are to be £100,000 per week?
I would check that the LAD figure is based on a genuine pre-estimate of financial loss and explain that
in the event LAD’s are to be applied, they would need to substantiate this figure.
* I would also explain that if the figure inserted into the contract is shown to be punitive and not based
on genuine financial loss it is not likely to be enforceable.
* In this scenario the employer will have to pursue the Main Contractor for any actual direct loss that can
be substantiated through a formal dispute resolution procedure.
What are extensions of time?
- Extensions of time adjust the completion date and relieves the contractor’s liability to pay liquidated
damages for the period of the extension
What are liquidated damages?
- A genuine pre-estimate of the likely loss incurred by the employer should the completion date not be
met
What must be in place before Liquidated Damages can be deducted?
- A non-completion certificate.
- A withholding notice
What if the employer actually suffered no loss or damage?
- It doesn’t matter.
- The damages can still be deducted at the value stated in the contract
What are the benefits of being able to grant an extension of time?
- It relieves the contractor’s liability for liquidated damages for a delay that they did not cause.
- It enables another completion date to be set, which maintains the employer’s ability to deduct
liquidated damages if another delay occurs.
What happens when ‘time is at large’?
- There is no set completion date.
- The contractor only has the obligation to complete the works in a ‘reasonable time’.
- Liquidated damages cannot be claimed as there is no date to take them from.
- The employer would have to try and prove that the contractor had not completed in a reasonable time
What are Relevant Events in a JCT form of Contract?
- They are events that entitle the contractor to an extension of time.
What are the relevant events?
There are 13 relevant events set out in JCT forms including:
o Variations.
o Instructions.
o Execution of an approx. quantity that is not a reasonably accurate forecast.
o Deferment of possession of the site.
o Suspension by the contractor for non-payment.
o The carrying out of work by statutory authorities.
o Impediment, prevention or default by the employer.
o Loss or damages occasioned by the Specified Perils.
o Exceptionally adverse weather conditions.
o Strike or lock out.
o Civil commotion or terrorism.
o The exercise of any statutory power after the base date by the UK gov.
o Force majeure.
What are the main elements you would include within an interim
valuation?
- Preliminaries.
- Measured work.
- Variations.
- Materials on site.
- Materials off site.
- Loss and expense.
- Retention
What needs to be in place for you to include payments for materials on
site?
The materials should be for the works.
* They should be adequately protected.
* Delivered to programme.
* In a reasonable quantity
What needs to be in place for you to include payments for materials
off site?
- Proof that ownership will transfer to the employer upon payment (vesting certificate).
- Insurance until materials arrive at site.
- Materials are clearly labelled as for the site and set apart from other materials.
- A materials off site bond has been provided if required
What is a retention of title clause?
- Where the sub-contractor or supplier retains ownership of materials until they are paid for them by the
contractor. - This highlights the importance of vesting certificates as the employer may subsequently pay for
materials that are not owned by the contractor. - This legal principle can lead to disputes in the event of insolvency
How do you evaluate interim valuations?
- Go to site and inspect the works to form a view on the percentage of works undertaken.
- Check for materials on site and materials off site.
- Value time related and fixed preliminaries items undertaken.
- Value any agreed variations and claims.
- The valuation amount is presented as the gross valuation, less previous payment made and retention.
- Finally I would send my recommendation to the Architect or Contract Administrator for them to
prepare the payment certificate.
How do stage payments work?
- The stages and their values are set out in the contract particulars.
- The stages are usually related to the completion of significant design items for example completion of
the substructure or achieving a water tight structure.
What is the interim certificate conclusive of?
- Interim certificates are not conclusive.
- They carry no contractual significance to state that the quality of materials or workmanship is
satisfactory. - It is only the final certificate that is conclusive.
What is retention?
It is a percentage of each interim certificate deducted and retained by the employer from each interim
payment to the contractor.
What is the purpose of retention?
- It provides an incentive for the contractor to rectify any defects within the contract defects liability
period. - It provides some financial security to the employer in the event of a contractor default
When is the retention released to the contractor?
- Half of the retention is released in the interim certificate after Practical Completion.
- The remaining retention is released in the final certificate after the certificate of making good defects is
issued.
What is a typical retention percentage under JCT contracts?
- Usually retention is between 3% or 5% depending on the form in use.
What is a retention bond?
- This is a bond provided by the contractor in lieu of taking retention from interim payments.
- It should be equal to the same value as the retention deducted.
- The requirement for the bond should be stated in the contract particulars.
- A standard form is provided in the JCT contract schedules
What happens if the contractor does not maintain the retention bond?
- The employer can deduct retention from interim payments.
- If the bond is subsequently taken out, the retention deducted must be repaid to the contractor
Why might a retention bond be used?
It may be used in difficult market conditions to aid the contractor’s cashflow
What are the disadvantages of a retention bond?
- The employer would have to pay the premium for taking out the bond.
- It may reduce the contractor’s incentive to complete making good defects promptly.
- It reduces the employer’s cashflow.
- The employer would not get the interest accruing on the amount of the retention bond
What is acceleration?
- Acceleration is the completion of works in a shorter time frame than that anticipated at tender or the
act of programme recovery by the contractor if they are in delay
What options may be considered to achieve acceleration?
- Re-sequencing the works or making sequential activities parallel.
- Increasing the working time by using working longer hours.
- Increasing the resources employed by using larger gangs.
- Changing the working methods for example using a dehumidifier to dry out the works faster.
- Increasing incentives for example offering bonus payments.
Which are the most and least efficient?
- Re-sequencing the works can be the most cost effective and efficient.
- The least efficient is usually increasing the working time and increasing the resources employed which
usually results in lower productivity
What is a fixed price contract?
- Where adjustments of the contract sum are limited to changes in statutory contributions, taxes and
levies
What is a fluctuating price contract?
- Where the contract sum is adjusted for changes in the costs of materials and labour as well as statutory
contributions, taxes and levies.
What is the date for completion?
- The date fixed and stated in the contract particulars.
How does this differ from the completion date?
- This is the date for completion of the works that may be adjusted to take into account agreed
Extension of Time.
What does it mean when ‘time is at large’?
- There is no fixed completion date.
- The contractor must only complete the works in a reasonable time.
What is practical completion?
- When the works are substantially complete with minor defects only.
- The employer is able to gain beneficial occupancy of the development.
- Half of retention is released.
- The employer surrenders the right to apply liquidated damages.
- The employer takes back possession of the works and is responsible for arranging insurances.
What is sectional completion?
The completion and handover of the works to the employer in agreed stages
Do the works have to be totally completed before practical or sectional
completion is achieved?
- Practical completion is a vague concept.
- It is not defined in JCT.
- It is reliant on the architect’s opinion that the works are complete.
- It should not be conditional.
- It is common practice for PC to be granted when the works are substantially complete however there
may be minor defects or omissions with nothing to prevent the employer from taking beneficial
occupancy.
What is partial possession?
- Where the employer requests and the contractor consents to the employer taking possession of the
works or part of the works before the date for practical or sectional completion
What is the difference between partial possession and sectional
completion?
- Sectional completion is a contractual obligation to hand over the section at the stated date, partial
possession relies on the contractor’s consent
What does the architect have to do at partial possession?
- Issue to a written statement to the contractorshowing the relevant part and stating the relevant date
What is the rectification period?
- The contractor has an obligation to make good any defects, shrinkages or other faults that arise during
this period of time.
How long is the rectification period?
- It depends on the forms of contract is place but is typically 12 months so the building can be observed
in all seasons.
What is a non-completion certificate?
- This is issued by the architect to certify that the works or works section have not been completed by
the relevant completion date.
What are the consequences of a non-completion certificate?
- The employer has the right to withhold liquidated damages, as long as a withholding notice has been
given.
What are the different certificates you are aware of under JCT forms of
contract?
- Interim certificates.
- Practical completion orsectional completion certificates.
- Non completion certificates.
- Certification of Making Good.
- Final Certificate.
What are the three ways that benefits can be transferred under JCT
contracts?
- Collateral warranties.
- Third party rights.
- Assignment.
What are collateral warranties?
- They create contractual relationships between the main parties of a contract with an external third party.
- The contractual relationship would not exist with the third party due to privity of contract
Why are they used?
- Due to the principle of privity of contract, the rights and obligations under a contract can only be
enforced by a party to that contract. - Collateral warranties give remedies to external third parties that due to privity of contract would not
otherwise have them.
Who might want a collateral warranty?
- Any third party with a financial investment in a project but not party to the main contract.
- Funding institutions, future tenants or purchasers may use collateral warranties.
- The employer may want a collateral warranty with key subcontractors or suppliers, as if the main
contractor were to go into liquidation, they would have no contractual link with them for redress in
case of defective workmanship
What are the common clauses / terms in collateral warranties?
- The obligations of the collateral warranties 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.
- Common terms include:-
o Limitation of liability.
o Reasonable skill and care or fitness for purpose.
o Requirements for PI insurance.
o Assignment rights.
o Novation rights
Name some standard forms of collateral warranty that may be used
- CWa/F – JCT standard form of collateral warranty for a funder.
- CWa/P&T – JCT standard form of collateral warranty for a future purchaser or tenant.
What is assignment?
- Where the rights and benefits of one contractual party are transferred to a third party
What is the standard commercial position regarding 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 novation and how does this differ from assignment?
- Novation is where a new contract transfers the rights and obligations of one contractual party to a new
third party. - Assignment is the transfer of contractual rights or contractual benefits only as burdens cannot be
assigned.
What is the key issue after a design team has been novated?
Whether the new party has the right to take action against the novated party for breaches that occurred
before the novation
How does novation affect the employer’s rights?
- They lose all contractual relations with the novated party and therefore the right to take action for a
breach. - It is therefore common for there to be a collateral warranty between the employer and novated party
What is a limitation clause?
- These are clauses that limit a party’s liability for potential losses
- Examples of limitation clauses could be:-
o Limitation to a fixed sum.
o Limitation to the extent of PI insurance.
o Exclusion of consequential loss.
o Limitation to loss that can be recovered from a third party.
o Limitation to responsibility or a net contribution clause.
What is available to protect clients from sub-contractors failing?
- Collateral warranties can be used as a direct link between the employer and subcontractor.
- In the event that the subcontractor fails to carry out his obligations the employer can have a contractual
remedy to sue the subcontractor for breach of contract. - They could also use a performance bond
What are step in rights and why do they exist?
- They typically permit funders to step into another parties’shoes, usually the employer.
- They provide funders protection in the event employer defaults on its loans.
- The funder can then take ownership of the development and sell it off if required.
- A key problem is that the main cause will often result from the developer not being able to sell the
development resulting in them being in arrears. - The funder will stand less of chance of selling the asset than an experienced developer.
What is reasonable skill and care?
- The ordinary skill and care expected of an ordinary competent man carrying out the particular service
What is fitness for purpose?
- The provision of a service that is suitable for the employer’s intended purpose.
- It is clearly a more onerous obligation than reasonable skill and care.
What is a bond?
- A surety bond is a guarantee from the surety in favour of the employer that the contractual obligations
will be fulfilled by the main contractor. - The bond if called upon will provide financial compensation up to a stated value if the other party does
not fulfill their obligations under the contract. - It does not guarantee the completion of the works.
What form must a bond be in?
- It must be in writing, it is common for it to be executed as a deed.
- It will contain a duration, usually until practical completion and a financial limit.
What is a Retention Bond?
- An alternative to the normal contractual retention provisions whereby the Employer holds retention
money from the Contractor which does not help the Contractor’s cash flow. - A bond will increase in value from the start of a project to mirror retention normally held throughout
the project. - They may reduce in value upon completion.
- Clients need to be wary of hidden costs to the employer such as lost interest on retained monies and
the cost of the retention bond being passed to the Employer through the tender price. - The choice of a bond may benefit the contractors cash flow
When would you use a retention bond?
- When the client does not wish to hold retention on the contractor, but requires some assurance or
financial cover for rectifying defects at the end of the contract in the event that the contractor fails to
return and correct them himself.
What is a parent company guarantee?
- An arrangement where the contractual performance of one company in a corporate group is
underwritten by the other members of that corporate group. - This means that it must complete the works itself if it can or pay the financial equivalent.
Which is the most common type of parent company guarantee in the construction industry?
- Performance bonds.
What does this do?
- Performance bonds are typically provided by banks or insurance companies.
- They give the employer a guarantee of payment up to a stated amount of money should they suffer a
loss as a result of the contractor’s breach of his contractual obligations
What is the standard value of a performance bond?
- 10% of the contract value, the premium for taking out the bond is added to the contract sum
How can the employer call for payment?
- They have to prove that the contractor has defaulted in their obligations under the main contract and
that loss has been suffered
What is the purpose of a tender bond?
- This covers the party inviting the tender if the lowest tenderer refuses to enter into a contract with
them. - This can be important if the inviting party is in turn tendering for work on the basis of that tender.
- It should also prevent idle tendering as there is an incentive to submit a price
What is a Notional Final Account?
- A final account that is prepared when the Main Contractor is facing insolvency.
- This will typically be of a greater value than the original forecast final account due to costs incurred by
the client to appoint a new Contractor to complete the works.
What is the standard value?
- 1-5% of the tender sum.
What is the purpose of a materials off site bond?
- It covers the employer against loss or damage to materials already paid for through interim valuations
before the materials are delivered to site.
What are the arguments against requesting bonds?
- They shouldn’t really be needed if the tenderer selection process is operated effectively as only reliable
and capable contractors are then selected. - Unnecessary premiums are added to the contract sum, which are unlikely to be called upon.
- If the developer is a serial developer this may add a lot of money to their project costs
Where might bonds be appropriate?
- If the contractor is new or unproven.
- To protect the interests of a ‘one off’ developer.
- In a difficult economic climate, when the risk of insolvency is higher and PCGs are risky
What are the pro’s and con’s of Parent Company Guarantees?
- They are not as secure as Bonds because of the financial link between a parent company and subsidiary
whereas a performance bond is provided by a third-party finance institution. - Advantages are that they do not need to be paid for, they can be unlimited, and they can make the
parent company responsible for performance as well as a financial guarantee
What is an ‘on demand’ bond?
- An ‘on demand’ bond is one which is paid straight away upon the default occurring and request for
payment. - There is no requirement to satisfy any review or specific condition to demonstrate the default.
- Whereas with conditional Bonds, the employer must satisfy the surety that the default has occurred and
the bond must identify what this condition is. It may also require litigation or arbitration resulting in
delays and costs
What is a Highway Bond?
- A Developer who undertakes speculative housing developments will frequently be required to enter
into an agreement with a Local Authority for the adoption of roads and sewers. - If for any reason the Developer fails to complete the adoption of the roads and sewers to the required
standards then the Local Authority will complete this on his behalf and call on the bond to claim back
costs.
What provisions are available for ensuring Contractor carries out
works properly?
To provide assurance that the contractor will perform these obligations, a Parent Company Guarantee
(PCG) or a Performance Bond may be provided.
* A PCG can only be used where the contractor is a subsidiary to another company.
* The parent company guarantees the performance and will become liable if it does not perform.
* Alternatively, a performance bond can be provided by the assurers and is used to protect the client in
the event the contractor does not perform in the event that specific performance requirements are not
met.
What is the difference between insurance and indemnity?
- The purpose of indemnity is to protect against legal responsibility or to compensate, it is open ended.
- Insurance is a fund that enables the indemnifying party to make any payments that may arise. It
includes time and financial limits. - The contract sets out the insurances required to cover the indemnities that the party is liable for.
What is insurance?
A transfer of a defined risk to an insurance company in exchange of a premium
What are the two main types of insurance?
- Liability and loss insurance
What is liability insurance?
- Financial cover for the legal liabilities that the insured party owes to others
What is loss insurance?
- Financial cover for losses that fall directly on the insured party
What is subrogation?
A legal technique where the insurer steps into the shoes of the insured in order to take the benefit of
any legal rights or remedies they may have against a third party responsible for the loss.
What does ‘joint names’ mean?
- Where the employer and contractor are insured under the same policy.
- It stops the insurer having the right of subrogation against the other party if they caused the loss.
Is a letter of intent that includes a spend limit any use to a contractor?
- It is only useful to the contractor if the LOI is legally binding.
- In order for an LOI to be legally binding it must have the basis of a simple contract (offer, acceptance
& consideration) & both parties must intend to create legal relations. - Without either of these 4 criteria the LOI is worthless
When are Letters of intent used?
- Letters of Intent are used when an early start on site is required.
- They can be used to instruct initial design or survey works to be carried out or procurement of
materials on a tight programme. - LOIs are issued to commence works while discussions are ongoing regarding the main contract.
Are they legally binding?
There is no legal significance of letters of intent.
* The courts will look at all the correspondence between the parties to establish if a contract has been
formed.
* If it is found that a contract exists, then it will determine obligations.
* If there is no contract, then the letter of intent will have no contractual effect and quantum merit will be
applied
