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 ‘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 oral contracts?
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 the Local Democracy, Economic Development and Construction Act 2009?
October 201 1 - 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 adjudication.
What are the key provisions under the Act? LEDC
Contracts
Payment
Payment notices : Contractual requirements
Payment notices: Payee’s notice in default of payers notice
Pay less notice
Suspension of performance for 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?
LOI
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 a letter of intent be used?
Where the employer needs to commence works before a certain date.
Where materials have long lead in times and early procurement would aid the programme.
Starting construction works might trigger early founding.
Who signs it? - LOI
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, we would NOT draft those.
What are the different types of letters of intent?
Comfort Letter,
Instruction to proceed with consent to spend,
Recognition of contract
Are you aware of any case law relating to letters of intent?
Ampleforth Abbey Trust v Turner & Townsend.
he defendant project managers were retained by the T rust 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 PCG 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 I 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 Act?
Contrats (Third party rights) ACT 1999
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?
Time and costs,
Certainty,
Subcontractors
What are the disadvantages of third-party rights?
Lack of flexibility,
Need for careful drafting
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 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.
What happened in the case of ‘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 five 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.
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?
Asbestos
Cease work and seek advice prior to proceeding.
Take necessary measures to preserve in 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 - 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 damages to people or property. This, in turn, leads to financial losses or harm to the owner.
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 which may not become apparent for several years after completion when settlement causes cracking in the building.
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 to 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 - 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
the contractor means the employer assumes minimum risk contractually.
