Contract Practice Flashcards
What are the various forms of JCT contract you are aware of?
JCT Standard Building Contract
JCT Design and Build Contract
JCT Intermediate contract
JCT Minor Works Contract
What are the forms of executing a contract
- Under Hand (Simple contracts)
- Under Seal (Formal contracts or Deeds)
What are the provisions in a JCT Standard Building contact?
- Requires a contract administrator.
- Quantity Surveyor required
- Collateral warranties
- Retention on payments
- Retention bond
- Insurance for new building insured by the contractor.
- Insurance for new building insured by the contractor.
- Insurance for existing buildings/works insured by Employer or in the case of existing buildings by other means
What are the differences of a contract under seal and under hand?
Under Hand
No formalities for execution
Made verbally or in writing.
Legally binding as long as it satisfies all the requirements for a valid contract.
No seal signature required.
Under seal
Formalities required for execution.
Executed with seals, signature and witness
Legally binding and enforceable in court
Seal is typically affixed to the document
Commonly used in formal legal documents such as deeds, mortgages and agreements for the transfer of property or land
What is a collateral warranty?
A document which provides rights to a party (usually a developer/funder or owner) against a party with whom they have no privity of contract.
What is assignment of a contract?
Transferring an agreement’s rights, obligations, and property to another party.
What is novation?
When a contract is novated, both parties agree that the responsibilities and obligations of one party are transferred from the original signee to a third party
What is privity of contracts
A contract cannot confer rights or impose obligations upon anyone who is not a party to that contract
What are the components of a contract?
Offer, Acceptance, Awareness, Consideration, Capacity, Legality.
Can you tell what information you would include a part of a construction contract?
- The main contract
- Any schedule of amendments
- Employers’ requirements and appendices
- Contract drawings and specifications
- Surveys and reports
- Contractors proposals
- Contractor pricing schedule
- H&S information
If want to transfer the design risk to the client, what contractor would you advise on?
JCT Design and Build
On your HRA Project what notice did you have to serve after being informed the contractor had gone into administration.
Less less notice
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 LDs 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?
- Variations.
- Instructions.
- Deferment of possession of the site.
- Exceptionally adverse weather conditions.
- Strike or lock out.
- 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 vesting certificate?
Proof that ownership will transfer to the employer upon payment
What should be include in a vesting certificate
Client and contractor details
Address of where the material is being stored
Details of the items being vested
Value of the item being vested
Photographs of the items labeled in client’s ownership
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.
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 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
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 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 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 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.
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 CA or EA 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 or sectional 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.
Why are collateral warranties 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 who are not privity of the contract
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 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 in the construction industry?
Performance bonds
What is a performance bond?
- 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. But will be defer depending on the size of nature of the project
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 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 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.
When are LOI’s used
- Letters of Intent are used when an early start on site is required.
- They can be used to instruct initial design or survey worksto 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 LOI 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.
