Contract Practice Flashcards
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 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.
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 constitutes a contract?
Offer
Acceptance
Consideration
Intention
Capacity
Legality
What are the NEC main options?
There are 6 main options;
A) Priced contract with an activity schedule
B) Priced contract with a bill of quantities
C) Target cost contract with an activity schedule
D) Target cost contract with a bill of quantities
E) Cost reimbursable contract
F) Management contract
What are the clause headings in a JCT Contract?
Agreement
Recitals
Articles
Contract Particulars
Attestation
Conditions
What is included in a set of Contract Documents?
Preliminaries
Schedule of Amendments
Contract Sum Analysis
Scope of Works
Specifications
Drawings
Pre-Construction Information
What are the JCT Payment Provisions?
7 days prior to due date, contractor to submit application for payment.
5 days from due date contract administrator shall issue their interim certificate.
14 days from due date is the final date for payment.
5 days prior to final date for payment employer may issue a pay less notice.
Tell me the differences between JCT and NEC contracts?
The NEC uses 6 main options whereas the JCT uses a suite of separate contracts.
The NEC is written in layman terms whereas the JCT used legal wording.
The NEC does not mention a QS, only a project manager.
The NEC uses Compensation Events whereas the JCT used Variations.
The programme is a contract document in NEC. 25% of monies due can be withheld if a compliant programme is not submitted.
JCT allows for provisional sums, NEC does not.
What other types of Contract are you aware of?
ICE - Published on behalf of the Institution of Civil Engineers
FIDIC - International Federation of Consulting Engineers
What happens at Practical Completion?
Once the Contract Administrator issues the certificate of Practical Completion:-
Liquidated Damages cease to be levied.
The Defects Rectification Period begins (usually 12 months).
Possession of the site passes to the employer.
Insurance of the works passes to the employer (if not already in their name).
Half retention is released (the remaining half is release once the Certificate of Making Good is issued/defect rectification period ends).
What is a Relevant Event?
An event on or off site that causes delay to the completion date of the works.
It would entitle the contractor to apply for an Extension of Time
Examples include:-
Variations and instructions
Exceptionally adverse weather
Force Majeure
Deferment of possession of the site by the employer
Civil commotion or terrorism
What is Loss and Expense?
Works that are materially affected by the relevant matter(s) for which the client is responsible.
What is a Relevant Matter?
A matter for which the employer is responsible, that materially effects the progress of the works.
This entitles the contractor to claim for direct loss and expense that has been occurred.
Examples include:-
Deferment of possession of the site by the employer
Disruption caused by works carried out by the employer
Failure to give the contractor access to site
Instructions for new work
What is the purpose of a Loss and Expense claim?
A claim for Loss and Expense should put a contract back into the position they would have been in, should the Relevant Matter not have occurred.
What are the Heads of Claim for Loss and Expense?
Prolongation
Thickening of preliminaries (extra site supervision)
Disruption (plant and labour to be underutilised)
Loss of Profit
Increase in material/labour costs during period of delay
Finance charges (interest)
How is a Loss and Expense claim paid for?
Contractor must give written notice of a claim as soon as it becomes reasonably apparent.
Once the total loss and expense has been ascertained, is should be added to the contract sum and paid on the next interim certificate.
Loss and expense claims are NOT subject to retention.
What are prolongation costs?
Type of financial claim made by contractors in respect of late running projects.
Typically include time related resources such as site management, site accommodation and key items of plant and machinery.
What are the payment options on a JCT Design & Build Contract?
Alternative A - Stage Payments
Alternative B - Periodic Payments
How does payment option Alternative A in the JCT Design & Build Contract work?
Alternative A is to use stage payments.
Stages are clearly identified in the Contract Particulars.
Payment for that stage is released upon completion.
This is a simplified payment option that an Architect could manage.
It can incentivise the contractor to complete stages promptly.
What is a Specified Peril?
Specified perils tend to be significant events that would cause very significant damage, such as fire, explosions, earthquakes, flooding and so on.
How do you price a Variation?
Variation is a modification to the design, quantity or quality of the work.
1) Use a contract rate - if there is a bill item of a similar nature.
2) Use a star rate - this is based on experience of what is fair and reasonable.
3) Use dayworks - Prime cost + labour + materials + plant + % additions
What is the key thing to remember when assessing loss and expense claims?
It should be actual cost incurred by the contractor.
What are some of the contracts in the JCT family?
JCT Standard Building Contract with / without / with approximate quantities
JCT Intermediate Contract
JCT Minor Works Contract
JCT Major Works Contract
JCT Design and Build Contract
JCT Management Contract
JCT Construction Management Contract
What are the drawbacks of a Bespoke Contract?
Costly.
Time consuming to produce.
Untested in court.
What are the benefits of a Bespoke Contract?
Contracts can be made simpler.
Contracts can be made easier to administer.
Contract can include incentives for contractor to reduce costs.
Would you recommend a Bespoke Contract?
No. They are untested in court.
The principle on Contra Referendum means that an ambiguous clause with be interpreted against the party who wrote it.
What do you know about the Housing Grants Construction and Regeneration Act 1996?
Intended to make sure payments are made promptly and to improve cashflow throughout the supply chain. Also intends to make sure disputes are resolved quickly.
Are you aware of the Local Democracy, Economic Development and Construction Act 2009?
It came in to force in England & Wales in 2011.
The act amended the Housing Grants Construction & Regeneration Act 1996.
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 of the Local Democracy, Economic Development and Construction Act 2009?
Contracts - Revokes the requirement for the contracts to be in writing. Will allow parties to go to adjudication even if their contract is not formally in writing.
Payment - Under the Housing Grants, Construction & Regeneration Act 1996 the contract must have an adequate mechanism for determining what and when payments are due.
Pay when certified clauses can no longer be used to prevent paying a sub-contractor on the basis that a main contract certificate is yet to be issued.
Payment Notices - Either the payer or the payee will issue the payment notice.
The payment notice must specify the sum due and must be issued if that notice is 0.
The payee can suspend performance for non payment.
Pay less notice - Paying parties are required to either pay that in the payment notice or issue a pay less notice.
A pay less notice must specify the sum the paying party consider correct and must be within the final date for payment.
What should you do before terminating a contract?
Discuss the situation with the employer and other party.
Take note of all relevant clauses for termination.
Seek expert assistance.
Write and serve notice in accordance with the contract, detailing the breach.
Prepare documents, final account, secure site, alternative contractor.
What are the timeframes for agreeing a final account?
3 months from receipt of all relevant information.
The contractor has 6 months from PC to send relevant information.
Does the JCT D&B contract include novation provisions?
No. This will need to be added to the contract as an amendment.
Who developed the NEC contracts?
The Institution of Civil Engineers (ICE).
What dictates contract selection?
The procurement route
Industry sector (JCT or NEC) - Public/Private?
Size and complexity of the works (Minor Works or SBC)
Risk and Responsibility (any CDP?)
Basis of Contract Sum (with quants, without quants or with approximate quants?)
Why is it preferable to use a familiar form of contract?
Because using an unfamiliar suite would introduce unnecessary risk.
A contractor would price this risk in their tender price.
Did your client include a schedule of amendments in the contract? If so, why?
Yes, they included their standard schedule of amendments that is drafted by their legal advisor.
These amendments have the following affects;
Alter the project risk allocation (by reducing the number of relevant matters and relevant events)
Insert additional obligations (requirement for contractor to provide bonds, collateral warranties & PCG)
Amended payment terms i.e from 21 days to 28 days
What legislation covers insolvency?
The Insolvency Act 1986 & 2000.
Where can you find information on insolvency?
RICS has published a regulation / insolvency sheet which offers advice on regulation issued and the recommended course of action for a chartered surveyor.
Companies House also produces a document that provides info on insolvency.
What is Corporate Recovery?
It is the process of bringing and actions taken to being an ailing company back to full health.
It can involve financial, restructuring, accounts and legal advice.
What is a contract?
A legally binding promise by one party to fulfil an obligation to another party in return for consideration.
Offer
Acceptance
Consideration
Intent
Please define express terms?
Terms of the agreement which have been defined in the contract.
Please define implied terms?
Terms that have not been specified in the contract but know to exist.
E.G the Sale of Goods Act 1979
What is tort?
A tort is a civil wrong.
A claim intort is concerned with loss or harm.
How do statutory provisions and contract provisions differ?
Statutory laws are set out by law and must be complied with regardless.
Contract provisions relate to the contract in question and only apply to a specific project.
What is your opinion of an oral contract?
Whilst they are legally binding, the difficulty lies with proving the specific terms and conditions of the agreement.
What is a breach of contract?
Occurs when one party in a binding agreement fails to deliver according to the terms of the agreement.
What is a letter of intent?
Typically used to describe a letter from an employer to a contractor indicating the employer’s intention to enter into a formal contract for the works.
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.
Contract sum.
Date of possession.
Date for completion.
Insurance provisions.
Method of payment.
Expiry date of letter.
ADR method.
Advantages of a letter of intent?
Allows work to commence before the main contract is agreed.
What are the disadvantages of a letter of intent?
May lead to complacency and disincentivise both parties from signing the main contract.
Contractually less robust than the main contract.
Employer loses incentive in negotiation of the main contract.
Would LD’s still be applicable if the employer actually suffered no loss or damage?
Yes. 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 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 labelled.
They should be adequately protected.
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.
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/end of defects period.
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 is a vesting certificate?
They certify that ownership of the goods, plant or materials listed in a schedule will transfer from one party to the other upon payment.
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?
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.
Increasing incentives for example offering bonus payments.
Which are the most and least efficient ways of acceleration?
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 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 contract administrator have to do at partial possession?
Issue a certificate for partial possession.
Release half retention for that area of works.
Reduce LD’s proportionally.
Ensure clients insures site.
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?
Typically 12 months.
What is a non-completion certificate?
This is issued by the contract administrator 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 three ways that benefits can be transferred under JCT
contracts?
Collateral warranties.
Third party rights.
Assignment.
Why are collateral warranties used?
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.
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 is assignment?
Where the rights and benefits of one contractual party are transferred to a third party, but the burden of the contract remains with the original 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 the burden remains with the original party.
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 i.e. Limitation to a fixed sum.
What is available to protect clients from sub-contractors failing?
Collateral warranties can be used as a direct link between the employer and subcontractor.
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.
What is reasonable skill and care?
The ordinary skill and care expected of an ordinary competent person 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 a more onerous obligation than reasonable skill and care.
Who signs a letter of intent?
Employer and contractor.
What would you say if the client asked you do draft a letter of intent?
It is a legally binding document, therefore we would not draft those.
What are the different types of letter of intent?
Comfort Letter - A letter expressing a party’s intention to act in a particular way.
Instruction to proceed with consent to spend - Allows work to proceed up to a certain value.
Recognition of contract - Used by contracts such as FIDIC. Only issued once the contract is substantially agreed.
