Contract Practice

Question 1

What if the client tells you the LADs are to be £100,000 per week?

Answer 1

I would check the LAD figure is based on a genuine pre-estimate of financial loss and explain that I the event LADs are to be applied, they would have 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

In this scenario the employer will have to pursue the MC for any actual direct loss that can be substantiated through a formal dispute resolution procedure

Question 2

What are extensions of time?

Answer 2

Extensions of time adjust the completion date and relieves the contractor’s liability to pay LADs for the period of the extension

Question 3

What are liquidated damages?

Answer 3

A genuine pre-estimate of the likely loss incurred by the employer should the completion date not be met

Question 4

What must be in place before LDs can be deducted?

Answer 4

A non-completion certificate

A withholding notice

Question 5

What if the employer actually suffered no loss or damage?

Answer 5

It doesn’t matter

The damages can still be deducted at the value stated in the contract

Question 6

What are the benefits of being able to grant an extension of time?

Answer 6

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

Question 7

What happens when ‘time is at large’?

Answer 7

There is no set completion date

The contractor only has the obligation to complete the works in ‘a reasonable time’

LDs 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

Question 8

What are Relevant Events in a JCT form of Contract?

Answer 8

They are events that entitle the contractor to an extension of time

Question 9

What are the relevant events?

Answer 9

There are 13 relevant events set out in JCT forms including:
- Variations
- Instructions
- Execution of an approx. Quantity that us not a reasonably accurate forecast
- Deferment of possession of the site
- Suspension by the contractor for non-payment
- The carrying out of work by statutory authorities
- Impediment, prevention or default by the employer
- Loss or damages occasioned by the Specified Perils
- Exceptionally adverse weather conditions
- Strike or lock out
- Civil commotion or terrorism
- The exercise of any statutory power after the base date by the UK gov
- Force majeure

Question 10

What are the main elements you should include within an interim valuation?

Answer 10

Preliminaries
Measured work
Variations
Materials on site
Materials off site
Loss and expense
Retention

Question 11

What needs to be in place for you to include payments for materials on site?

Answer 11

The materials should be for the works

They should be adequately protected

Delivered to programme

In a reasonable quantity

Question 12

What needs to be in place for you to include payments for materials off site?

Answer 12

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

Question 13

What is a retention of title clause?

Answer 13

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

Question 14

How do you evaluate interim valuations?

Answer 14

Go to site and inspect the works to form a view on the % 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 by recommendation to the Architect or Contract Administrator for them to prepare the payment certificate

Question 15

How do stage payments work?

Answer 15

The stages and their values are set out in the contract particulars

The sages are usually related to the completion of significant design items, e.g. completion of the substructure or achieving a water-tight structure

Question 16

What is the interim certificate conclusive of?

Answer 16

They are not conclusive.

They carry no contractual signficance to state that the quality of materials or workmanship is satisfactory

It is only the final certificate that is conclusive

Question 17

What is retention?

Answer 17

It is a percentage of each interim certificate deducted and retained by the employer from each interim payment to the contractor

Question 18

What is the purpose of retention?

Answer 18

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

Question 19

When is the retention released to the contractor?

Answer 19

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

Question 20

What is a typical retention percentage under JCT contracts?

Answer 20

Usually retention is between 3% or 5% depending on the form in use

Question 21

What is a retention bond?

Answer 21

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

Question 22

What happens if the contractor does not maintain the retention bond?

Answer 22

The employer can deduct retention from interim payments

If the bond is subsequently taken out, the retention deducted must be repaid to the contractor

Question 23

Why might a retention bond be used?

Answer 23

It may be used in difficult market conditions to aid the contractor’s cash flow

Question 24

What are the dis advantages of a retention bond?

Answer 24

The employer would have to pay the premium for taking on the bond

It may reduce the contractor’s incentive to complete making good defects promptly

It reduces the employer’s cash flow

The employer would not get the interest accruing on the amount of the retention bond

Question 25

What is acceleration?

Answer 25

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

Question 26

What options may be considered to achieve acceleration?

Answer 26

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 teams

Changing the working methods e.g. using a dehumidifier to dry out the works faster

Increasing incentives e.g. offering bonus payments

Question 27

Which are the most and least efficient acceleration options?

Answer 27

Most = resequencing can be the most effective and most cost effective

Least = usually increasing working time and resources employed as this usually leads to lower productivity

Question 28

What is a fixed price contract?

Answer 28

Where adjustments of the contract sum are limited to changes in statutory contributions, taxes and levies

Question 29

What is a fluctuating price contract?

Answer 29

Where the contract sum is adjusted for changes in the costs of materials and labour as well as statutory contributions, taxes or levies

Question 30

What is the date for completion?

Answer 30

The date fixed and stated in the contract particulars

Question 31

How does Date for Completion (stated in contract docs) differ from the completion date?

Answer 31

This is the date for completion of the works that may be adjusted to take into account agreed EoT

Question 32

What does it mean when ‘time is at large’

Answer 32

There is no fixed completion date

The contractor must only complete the works in a reasonable time

Question 33

What is practical completion?

Answer 33

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 claim LDs

The employer takes back possession of the works and is responsible for arranging insurances

Question 34

What is sectional completion?

Answer 34

The completion and handover of the works to the employer in agreed stages.

Question 35

Do the works have to be totally completed before practical or sectional completion is achieved?

Answer 35

Practical completion is a vague concept

No JCT definition

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

Question 36

What is partial possession?

Answer 36

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 PC or SC

Question 37

What is the difference between Partial Possession and Sectional Completion?

Answer 37

Sectional completion is a contractual obligation to hand over the section at the stated date, partial possession relies on the contractor’s consent.

Question 38

What does the architect have to do at partial possession?

Answer 38

Issue a written statement to the contractor showing the relevant part and stating the relevant date

Question 39

What is the rectification period?

Answer 39

The contractor has an obligation to make good any defects, shrinkages or other faults that arise during this period of time

Question 40

How long is the rectification period?

Answer 40

It depends on the forms of contract in place, but usually 12 months so building can be observed in all seasons

Question 41

What is a non-completion certificate?

Answer 41

This is issued by the architect/CA/EA to certify that the works or works section have not been completed by the relevant completion date

Question 42

What are the consequences of a non-completion certificate?

Answer 42

The employer has the right to withhold liquidated damages, as long as a withholding notice has been given.

Question 43

What are the different certificates under JCT forms of contract?

Answer 43

Interim certificates

Practical completion or sectional completion certificates

Non completion certificates

Certification of making good

Final certificate

Question 44

What are the three ways that benefits can be transferred under JCT contracts?

Answer 44

Collateral warranties

Third party rights

Assignment

Question 45

What are collateral warranties?

Answer 45

They create contractual relationships between the main parties of a contract with an external third party

The contractual relationship would not exist with the third party due to privity of contract

Question 46

Why are collateral warranties used?

Answer 46

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 that due to privity of contract would not otherwise have them

Question 47

Who might want a collateral warranty?

Answer 47

Any third party with a financial investment in a project but not party to the main contract

Funding institutions, future tenants, or purchasers may use CWs

The empower may want a CW 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

Question 48

What are the common clauses / terms in Collateral Warranties?

Answer 48

The obligations of the collateral warranties should mirror that of the main agreement

Therefore if a party is in breach of the main agreement they would also be in breach of the warranty

Common terms include:
- Limitation of liability
- Reasonable skill and care or fitness for purpose
- Requirements of PI insurance
- Assignment rights
- Novation rights

Question 49

Name some standard forms of collateral warranty that may be used

Answer 49

CWa/F-JCT standard form of collateral warranty for a funder

CWa/P&T-JCT standard form of collateral warranty for a future purchaser or tenant

Question 50

What is assignment?

Answer 50

Where the rights and benefits of one contractual party are transferred to a third party

Question 51

What is the standard commercial position regarding assignment?

Answer 51

It is standard to allow assignment of rights twice without consent

The assignment should be notified in writing to the other party

Question 52

What is novation and how does this differ from assignment?

Answer 52

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 burdens cannot be assigned.

Question 53

What is the key issue after a design team has been novated?

Answer 53

Whether the new party has the right to take action against the novated party for breaches that occurred before the novation.

Question 54

How does novation affect the employer’s rights?

Answer 54

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 the novated party

Question 55

What is a limitation clause?

Answer 55

These are clauses that limit a party’s liability for potential losses.

Examples of limitation clauses include:
- Limitation to a fixed sum
- Limitation to the extent of PI insurance
- Exclusion of consequential loss
- Limitation to loss that can be recovered from a third party
- Limitation to responsibility or a net contribution clause

Question 56

What is available to protect clients from sub-contractors failing?

Answer 56

Collateral warranties can be used as a direct link between the employer and subcontractor

In the event that the subcontractor fails to carry out their obligations, the employer can have a contractual remedy to sue the subcontractor for breach of contract

They could also use a performance bond

Question 57

What are step in rights and why do they exist?

Answer 57

They typically permit founders to step into another parties shoes, usually the employer

They provide funders protection in the event the employer defaults on its loans

The funder can then take ownership of the development and sell it off if required

A key problem is that the main cause will often result from the developer not being able to sell the development resulting in them being in arrears

The funder will stand less of a chance of selling the asset than an experienced developer

Question 58

What is reasonable skill and care?

Answer 58

The ordinary skill and care expected of an ordinary competent man carrying out the particular service

Question 59

What is fitness for purpose?

Answer 59

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

Question 60

What is a bond?

Answer 60

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

Question 61

What form must a bond be in?

Answer 61

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

Question 62

What is a retention bond?

Answer 62

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 contractor’s cash flow

Question 63

What are the key differences between sectional completion and partial possession?

Answer 63

Scope: Sectional completion is planned with distinct sections in the contract, whereas PP is more flexible and often initiated due to the clients needs

Timing: SC is pre-defined, while PP can occur spontaneously if the client wants early access to a portion

Contractual Effect: SC divides project obligations by section, whereas PP may require additional negotiation on obligations and liabilities.

Question 64

What criteria do you use to assess practical completion?

Answer 64

Typically assessed against the contract requirements and project scope. Criteria includes:
- Completion of major works and functional systems
- Compliance with building regs
- Adequacy of safety for occupation
- Resolution of critical defects, leaving only minor, non-essential issues.

Question 65

What is the significance of a PC certificate and who issues it?

Answer 65

The PC Cert formally marks the completion of the project and is usually issued by the contract administrator or PM.

It signals the start of the defects liability period, the handover of responsibility from the contractor to the client, and the release of certain retention funds.

Question 66

How would you handle a dispute over whether PC has been achieved?

Answer 66

First, review the contract requirements to ensure clarity on what constitutes PC.

Then, conduct a detailed inspection to assess compliance with these requirements.

Communication with both the client and the contractor to discuss findings is key.

Question 67

What is the defects liability period, and how does it relate to practical completion?

Answer 67

The defects liability period if a specified period after practical completion during which the contractor is responsible for rectifying any defects identified by the client. This period usually starts upon the issue of the PC certificate and varies depending on the contract.

Question 68

Can PC be certified if there are outstanding works?

Answer 68

Minor outstanding works or “snagging” items do not prevent PC, as long as these items do not impair the buildings usability or safety. However, significant or critical works must be complete before practical completion can be certified.

Question 69

What documentation is required to support practical completion?

Answer 69

May include inspection reports, snagging lists, certificates of compliance with building regulations, health and safety documentation and warranties or guarantees.

It is important the documentation is thorough and provides a clear record.

Question 70

When would you use a retention bond?

Answer 70

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.

Question 71

What is a parent company guarantee?

Answer 71

An arrangement where the contractual performance of one company in a corporate group is underwritten by the other members of that group.

This means that it must complete the works itself if it can or pay the financial equivalent.

Question 72

What does a performance bond do?

Answer 72

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.

Question 73

What is the standard value of a performance bond?

Answer 73

10% of the contract value, the premium for taking out the bond is added to the contract sum

Question 74

How can the employer call for payment under a performance bond?

Answer 74

They have to prove that the contractor has defaulted in their obligations under the main contract and that loss has been suffered.

Question 75

What is the purpose of a tender bond?

Answer 75

This covers the party inviting the tender if the lowest tenderer refuses to enter into a contract with them.

This can be important if the inviting party is in turn tendering for work on the basis of that tender

It should also prevent idle tendering as there is an incentive to submit a price.

Question 76

What is a Notional Final Account?

Answer 76

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.

Question 77

What is the purpose of a materials off-site bond?

Answer 77

It covers the employer against loss or damage to materials already paid for through interim valuations before the materials are delivered to site.

Question 78

What are the arguments against requesting bonds?

Answer 78

They shouldn’t really be needed if the tenderer selection process is operated effectively as only reliable and capable contractors are then selected

Unnecessary premiums are added to the contract sum, which are unlikely to be called upon.

If the developer is a serial developer this may add a lot of money to their project costs.

Question 79

Where might bonds be appropriate?

Answer 79

If the contractor is new and unproven.

To protect the interests of a ‘one off’ developer.

In a difficult economic climate, where the risk of insolvency is higher and PCGs are risky.

Question 80

What are the pros and cons of Parent Company Guarantees?

Answer 80

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.

Question 81

What is an ‘on demand’ bond?

Answer 81

One which is paid straight away upon the default occurring and request for payment.

There is no requirement to satisfy any review or specific condition to demonstrate the default.

Whereas with conditional bonds, the employer must satisfy the surety that the default has occurred and the bond must identify what this condition is. It may also require litigation or arbitration resulting in delays and costs.

Question 82

What is a Highway Bond?

Answer 82

A developer who undertakes speculative housing developments will frequently be required to enter into an agreement with a Local Authority for the adoption of roads and sewers.

If for any reason the Developer fails to complete the adoption of the roads and sewers to the required standards then the Local Authority will complete this on their behalf and call on the bond to claim back costs.

Question 83

What provisions are available for ensuring the contractor carries out works properly?

Answer 83

To provide assurance that the contractor will perform these obligations, a Parent Company Guarantee (PCG) or a Performance Bond may be required.

A PCG can only be used where the contractor is a subsidiary to another company.

The parent company guarantees the performance and will become liable if it does not performance.

Alternatively, a performance bond can be provided by the assurers and is used to protect the client in the event the contractor does not perform in the event that specific performance requirements are not met.

Question 84

What is the difference between insurance and indemnity?

Answer 84

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.

Question 85

What is insurance?

Answer 85

A transfer of defined risk to an insurance company in exchange of a premium.

Question 86

What are the two main types of insurance?

Answer 86

Liability and loss insurance.

Question 87

What is liability insurance?

Answer 87

Financial cover for the legal liabilities that the insured party owes to others.

Question 88

What is loss insurance?

Answer 88

Financial cover for losses that fall directly on the insured party.

Question 89

What is subrogation?

Answer 89

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.

Question 90

What does joint names mean?

Answer 90

Where the employer and contractor are insured under the same policy.

It stops the insurer having the right of subrogation against the other party if they caused the loss.

Question 91

Is an LOI that includes a spend limit any use to a contractor?

Answer 91

It is only useful to the contractor if the LOI is legally binding?

In order for an LOI to be legally binding it must have the basis of a simple contract (offer, acceptance & consideration) & both parties must intend to create legal relations.

Without either of these 4 criteria the LOI is worthless.

Question 92

When are LOIs used?

Answer 92

Letters of Intent are used when an early start on site is required.

They can be used to instruct initial design or survey works to 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.

Question 93

Are LOIs legally binding?

Answer 93

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 letter of intent will have no contractual effect and quantum merit will be applied.

Question 94

What are the main differences between JCT and NEC contracts - Purpose & Use?

Answer 94

JCT - primarily used for building works within the UK. JCT are considered the standard for the UK construction industry.

NEC - initially developed for engineering projects, NEC are used internationally and are known for their flexibility and collaborative approach.

Question 95

What are the main differences between JCT and NEC contracts - Language & Structure?

Answer 95

JCT - written in legalistic language which can be more complex and harder to interpret for those not familiar with legal terminology.

NEC - Use plain English, making them easier to understand and more accessible to a wider audience.

Question 96

What are the main differences between JCT and NEC contracts - Risk Allocation?

Answer 96

JCT - tend to allocate risk more traditionally, often placing more risk with the contractor.

NEC - Promote a more balanced risk allocation, encouraging collaboration and proactive risk management.

Question 97

What are the main differences between JCT and NEC contracts - Cost Management?

Answer 97

JCT - typically use a fixed price lump sum approach, which can provide cost certainty but may lead to disputes over variations.

NEC - Offer various options, including target cost contracts, which can provide more flexibility and encourage cost savings.

Question 98

What are the main differences between JCT and NEC contracts - Programme & Time Management?

Answer 98

JCT - More traditional in their approach to dispute resolution, often leading to formal legal proceedings.

NEC - Emphasise early warning and collaborative resolution of issues, aiming to prevent disputes from escalating.

Question 99

What are the main differences between JCT and NEC contracts - Flexibility & Adaptability?

Answer 99

JCT - Generally less flexible, with a more rigid structure.

NEC - Designed to be highly flexible and adaptable to different types of projects and procurement routes.