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.
Please define ‘express 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.
Please define what is meant by ‘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 that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act.
How do statutory provisions and contract provisions differ?
- 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.
What is your opinion of oral contracts?
While they are legally binding, the difficulty lies in proving the specific terms and conditions of the agreement. A written contract is always preferred.
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 written and oral contracts.
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 introduced an amended regime for payment and adjudication.
What are the key provisions under the Act?
Contracts:
The LDEDC Act repeals the requirement for construction contracts to be in writing; therefore, contracts that are partly in writing or wholly oral are now covered. This wil allow parties to go to adjudication even if their involvement is not formally recognised in writing.
Payment:
Under the HGCR Act, a construction contract must have an adequate mechanism’ for determining what payments are due and when they become payable.
Pay-when-certified clauses can no longer be used to prevent paying a subcontractor on the basis that a certificate in the main contract is yet to be issued.
Payment notices: contractual requirements:
- The construction contract must specify thal either the payer or the payee (but not both) will issue the payment notice.
- This must be issued not later than 5 days after the payment due date and before the final date for payment identified by the construction contract (the parties being free to agree how long the period is between the date the sum becomes due and the final date for payment).
- The payment notice must specify the sum the payer or payee considers to be is due at the payment due date and the basis on which that sum was calculated. A payment notice must be issued, even if the amount of the payment notice is nil.
Payment notices: payee’s notice in default of payer’s notice:
- If the payer is required by contract to issue a payment notice and fails to serve that notice in the required form or within the set timeframe, the payee is entitled to issue a default payment notice.
- A default payment notice obliges the payer to pay the amount due and allows the payee their statutory right to suspend performance for non-payment.
Pay less notice:
- Paying parties are required to either pay the notified sum specified in either the payment notice or default payment notice, by the final date for payment or serve an effective pay less notice. This allows the payer to amend the sum due if it is later discovered that work covered or the amount notified within the payment notice turns out to be unsound.
- To be effective, a pay less notice must specify the sum that the paying party considers to be due on the date the notice is served, the basis on which that sum is calculated and be served no later than the prescribed period prior to the final date for payment.
Suspension of performance for non-payment:
- The LDEDC Act clarifies the contractor’s right to suspend carrying out the work in the event of non-payment.
- To validly suspend performance of its obligations by reason of non-payment, a default notice must be issued and there must have been a failure to pay. The party in default (the party who has not paid) is liable to pay to the payee (the contractor stopping work) a reasonable amount by way of costs and expenses incurred by exercising the suspension of all or part of the work.
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 the 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.
- Expiration date of the letter.
- Typically, it states employers’ right not to award the main contract for whatever reason.
- ADR method for dispute resolution.
What are the advantages of a letter of intent?
Allows work to commence (or place orders) before the main contract is agreed and signed.
What are the disadvantages of a letter of intent?
- May lead to complacency and disincentivise both parties from signing the main contract.
- A letter of intent is usually less robust than the main contract.
- The employer’s negotiation strength is usually reduced.
Who issues the letter of intent?
The employer
In what circumstances might a letter of intent be used?
- Where the employer needs to commence work before a certain date.
- Where materials have long lead periods and early procurement would aid the programme.
- Starting construction might trigger external founding.
Who usually signs the letter of intent?
Both the employer and the 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, the document should be drafted by a legal or contract professional.
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 to as an “if” 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 was completed late) was 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 circumstances 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 that govern third party rights?
Contracts (Rights of Third Parties) Act 1999.
What is the overarching purpose of the Contracts (Rights of Third Parties) Act?
- The Act allows third parties to enforce terms of contracts that they are not party to, but that 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?
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 to subcontracts, so that (provided the relevant buiding contract and subcontract are drafted accordingly) an employer can unilaterally confer third party right in relation to work done by subcontractors. 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 or individuals) where one would not otherwise exist.
Can provide a working example of 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 undertake the work. 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 subcontractor owes directly, or to create other obligations and rights between them. This might be considered 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 a 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 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 one party wants to assign a benefit of the building contract to a third party, such as a purchaser or tenant.
- Banks and other funders will frequently take an assignment as an additional part of the security package for their loan to finance the development 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.
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 five different bonds that 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 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?
- 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 prevent idle tendering.
What is an off-site material 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 a 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 work 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 work being done.
- Some contracts require the purchase of materials in advance of the contract commencing. There is always a risk to the employer in advancing money to a contractor, particularly if it’s a new relationship.
- 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.
What are antiquities?
Items as:
- Historical artefacts, pottery and coins.
- Bones or fossils.
- Something of historical interest or value.
- Archaeology.
What should the contractor do if they discover such objects?
- Cease work and seek advice prior to proceeding.
- Take the necessary measures to preserve in the existing location and condition.
- Inform the contract administrator or project manager of the discovery and the location.
When objects of interest are discovered, who is liable for the delay and expense incurred?
- This depends on how the risk is allocated within the contract.
- Significant delays and costs can arise, which can be a serious event for the employer and/or contractor.
What are defects?
- Broadly defined as a defect in workmanship, design, materials, or systems used.
- The result is a failure of the building project or structure that causes damage to people or property. This, in turn, leads to financial losses or harm to the owner.
- The NEC contract defines a defect as:
- A part of the work which is not in accordance with the scope or,
- A part of the work designed by the contractor which is not in accordance with the applicable law or the contractor’s design which the project manager has accepted.
What are patent defects?
- Patent defects are those which can be discovered by reasonable inspection.
- Patent defects would include wall cracks, sagging gutters, broken windows, missing tiles, etc.
What are latent defects?
Latent defects are those which cannot be discovered by reasonable inspection, for example, problems with foundations may not become apparent for several years after completion when settlement causes cracking in the building.
Examples include:
- defective tanking in basements
- Inadequate wall ties or wind posts
- Misplaced reinforcement
- Inadequate foundations
Why is the defect rectification period typically 12 months?
- 12 months will allow the building to go through all seasons of the year; therefore, most defects (with exception of latent defects) will become apparent within this period.
What is novation?
- Under a design & 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.
Are novation agreements required under traditionally procured projects?
Not usually; this is because the designers are typically retained by the employer.
What are some of the advantages of novation?
- Reduced learning curve - by working with the client at an early stage, the design team can gain a strong understanding of the project requirements. If the design team are not novated, this learning is potentially lost, and parts of the process will need to be replicated with a new design team.
- Reduced contractual risk for the employer - the process of novation and the transfer of responsibility to the contractor means the employer assumes minimum risk contractually.
What are some of the disadvantages of novation?
- Following novation of consultants, the employer will generally require collateral warranties.
- The client may need to employ a shadow team for compliance purposes.
- There is potential for conflict-of-interest, particularly in relation to services that remain to be performed.
What is retention?
A percentage of the sums certified for payment under the construction contract, typically 3-5%, are held by the employer during the construction phase.
Are you aware of any guidance issued by RICS associated with retention?
Retention - 1st edition 2012.
What is the purpose of retention?
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.
What can the employer use retention monies for?
- If the contractor does not return to correct the defects, then the retention may be used to fund the payment of others to correct the defects.
- The project manager / contract administrator will need to check the contract for the ability to do this and the relevant notices that should be given to the contractor prior to appointing others to undertake the works.
How is retention released to the contractor?
Typically, retention monies are released in 2 stages:
- At the time of issuing the completion/practical completion statement, the first half of the retention monies will be certified and released.
- The second half of the retention monies will be certified and released upon the expiration of the rectification period.
Who typically benefits from interest accruing on retention money?
Usually, the employer.
Are there any alternatives to holding retention?
It is possible to procure a retention bond to cover the retention that would otherwise have been deducted.
What is professional negligence?
- Professional negligence occurs when a professional fails to perform their responsibilities to the required standard or breaches a duty of care. -This poor conduct subsequently results in financial loss, physical damage or injury to their client or customer.
How can the employer recover a loss if the consultant or contractor is professionally negligent?
Make a claim on their professional indemnity insurance (PII).
What is product liability insurance?
- Manufacturers and/or suppliers of products incorporated in construction work are at risk of claims being made against them for damages if defects in those products result in damage or injury.
- Product liability insurance protects the policyholder against liability resulting from these defects.
What is public liability insurance?
- Public liability insurance protects against liabilities for injury to third parties or their property.
- For example, a member of the public could make a claim if a fallen brick damaged their car or if a supplier tripped over an unsecured cable.
What is employer liability insurance?
Employers’ liability insurance can pay the compensation amount and legal costs if an employee claims compensation for a work-related illness or injury.
What is Contractor Design Portion (CDP)?
Typically used on traditionally procured projects, design responsibility for specific elements of the building is transferred to the contractor.
