Contract Practice Flashcards
What is a contract?
A legally binding agreement between two parties, written or spoken, that is intended to be enforceable by law.
What makes a contract valid?
The law will consider a contract to be valid if the agreement contains all of the following elements:
- Offer and acceptance;
- An intention between the parties to create binding relations;
- Consideration to be paid for the promise made;
- Legal capacity of the parties to act;
- Genuine consent of the parties; and
- Legality of the agreement
Please define ‘express’ terms
Express terms are the terms of an 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 ‘implied’ terms.
A contractual term that has not been expressly agreed between the parties but has been implied into the contract either from common law or statute.
What is tort?
A tort is a civil wrong and is part of 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 and must be complied with regardless.
Contract provisions relate to the contract in question and therefore only apply to a specific contract.
What is your opinion of oral contracts?
Whilst they are legally binding, the difficulty lies in proving the specific terms and conditions of the agreement. Having written contract is always the preferred option.
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.
What is the Local Democracy, Economic Development and Construction Act 2009?
In 2011, the LDEDCA 2009 came into force in England and Wales.
The Act amended the Housing Grants and Regeneration Construction Act 1996 (HGRCA) and changed the way construction contracts are entered into and in particular, introduced an amended regime for payment and adjudication.
What are the key provisions under the LDEDCA Act?
Contracts:
Verbal contracts are now covered.
Payment:
The HGRCA introduced 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 that either the payer or the payee will issue the payment notice.
This must be issued no later than 5 days after the payment due date and paid before the final date for payment identified by the construction contract.
The payment notice must specify the sum the payer/payee considers to be due at the payment due date and the basis of which that sum was calculated. A payment notice must be issued, even if the amount of the payment notice is nil.
Payment notices - payees 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 in 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 a pay less notice. This allows the payer to amend the sum due if it is later discovered that work covered or the amount in the payment notice turns out to be unsound.
Suspension of performance for non payment:
The LDEDC clarifies the contractor’s right to suspend carrying out the works in the event of non-payment.
A default notice must be issued and there must have been failure to pay. The party in default is liable to pay the payee a reasonable amount by way of costs and expenses incurred by exercising the suspension of the works.
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 sub contractor) indicating the employer’s intention to enter into a formal written contract for works described.
It 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 works to be completed
- Contract sum (if agreed)
- Date for possession
- Date for completion
- Insurance of provisions required
- Method of payment
- Expiry date of letter
- Typically states employer’s right not to award main contract for whatever reason
- Alternative dispute resolution method (ADR)
What are the advantages of a letter of intent?
Allows work to commence before the main contract is agreed/signed.
What are the disadvantages of a letter of intent?
- May lead to complacency and dis-incentivize 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 a letter of intent be used?
- Where the employer needs to commence works before a certain date
- Where materials have long lead times and early procurement would aid the programme
Who signs a letter of intent?
Both the 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 letter of intent?
Comfort letter - is a letter expressing a party’s intention to act in a particular way at some point in the future at the time of processing the letter
Instruction to proceed with consent to spend - is a letter with instructions to proceed and consent to spend and sometimes referred to as an ‘if’ contract. This allows work to proceed up to a certain value while the contract itself is being finalized.
Recognition of contract: this is also referred to a letter of acceptance. Generally this will only be issued once the contract has been substantially agreed and usually marks the completion of negotiations between the parties.
What is a parent company guarantee?
A 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. Typically, such a default might be caused by the insolvency of a contractor.
In what circumstance may a PCG be required?
Parent Company Guarantees may 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 if the contractor defaults on their obligations, the PCG is required to remedy the breach, meeting all the contractor’s obligations under the contract (and/or covering loss and expenses incurred by the client).
Are their any Acts which govern third party rights?
Contracts (Rights of Third Parties) Act 1999.
This Act allows third parties to enforce terms of contracts that they are not 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?
Time and cost: Since no separate document (e.g. 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 to 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 collateral warranties are circulated for signature.
Subcontractors: The third party rights process can also be extended to sub-contracts, so that an employer can confer third party rights in relation to works 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 to very clearly ensure that all 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 and its purpose is to create a contractual relationship between two parties 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 contracts with several subcontracts with its suppliers to actually do the works, the employer has a direct contractual relationship with the contractor but no contractual relationship with any of the subcontractors (this is know as ‘privity of contract’).
In these circumstances the employer may wish to have direct contractual relationships with the subcontractors 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. future tenant, purchasers, funders etc.
The employer may want a collateral warranty with key sub contractors or suppliers, if the contractor were to go into liquidation, otherwise there is 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 a financial commitment backed up by a third party whereas a collateral warranty passes on contractual obligations.
Bonds are contained within the contract.
Collateral warranties are a side agreement to the contract.
Are there alternatives to collateral warranties?
Contracts (Rights of Third Parties) Act 1999 allows third parties to obtain benefits from contracts which are entered into by others.
What are three ways that benefits can be transferred under a building contract?
Collateral warranties
Third party rights
Assignments
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 the contract to a third party, such as a purchaser or a 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 position of the employer under them in the event of the employer defaulting on its financial obligations during the works.
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 some 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 the circumstance where a contractor has defaulted under the contract.
Why 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 provide evidence 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 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 insolvent and there is no bond in place, the employer will be liable to pay all costs to deal with 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.
