Contract Practice

Question 1

What are the two methods of contact execution?

Answer 1

1. Under hand (a ‘simple contract’ that is just signed by the parties).
2. Under seal (signed by the parties, witnessed and most importantly made clear that they are executed as a deed).

Question 2

What is the difference between these methods of execution?

Answer 2

Limitation periods are different. Under hand offers 6 years from cause of action and under seal (deed) offers 12 years. Timescales come from the Limitation Act 1980.

Question 3

What is the limitation period?

Answer 3

The limitation of action is a statutory remedy which prevents a claimant from bringing proceedings after the expiration of said time limit. The Latent Damage Act highlights the timescales for the limitation period. Collateral warranties are a key consideration for how the contract is executed.

Question 4

Are you aware of any case law associated with the limitation period?

Answer 4

Oxford Architects v Cheltenham Ladies College 2006

The claimant college engaged the defendant architects in relation to a new block. The appointment stated that no action should be commenced after 6 years from the date of practical completion. Practical completion was certified on 25 November 1998, and on 24 November 2004 the college served an arbitration notice in relation to a number of defects. The arbitrator held that none of the heads of claim were statute-barred and the architects appealed.

The court found that where the issues that gave rise to the heads of claim had occurred before practical completion and been known about at the time, time for limitation purposes started to run on the date when the breaches occurred. It followed that if the breaches happened before practical completion, they were statute-barred.

Question 5

What other contracts are there under the JCT suite?

Answer 5

1. Design and build
2. Minor works
3. Intermediate
4. Standard building contract
5. Prime cost
6. W/Quants, W/Out Quants
7. w/CDP, W/Out CDP

Question 6

Are you aware of any other contracts outside of the JCT suite?

Answer 6

1. NEC4 (New engineering contract)
2. FIDIC (International Federation of Consulting Engineers)
3. ACA (Association of Consultant Architects)

Question 7

What are the most typical amendments you have seen when preparing a contract?

Answer 7

1. Passing to the contractor the responsibility for errors, ambiguities, and inadequacies in the ERs.
2. Adding/omitting relevant events or matters.
3. Change to the payment timescales.
4. Third party rights.

Question 8

What is included in the Employer’s Requirements?

Answer 8

1. Set out the client’s requirements for the project (size, function, etc).
2. Level of details depends on design completed to date.
3. Includes status of planning permission if applicable.
4. Outline design, structure and spec of info provided.

Question 9

What is a performance bond?

Answer 9

1. Typically provided by banks or insurance companies.
2. They give the employer a guarantee of payment up to a stated amount should they suffer a loss as a result of the contractor’s breach of his contractual obligations.
3. Typically 10% of the contract value.
4. Premium for taking out the bond is added to the contract sum.

Question 10

How can the employer call for payment?

Answer 10

The employer has the prove that the contractor has defaulted in their obligations under the main contract and that loss has been suffered.

Question 11

What are alternatives to using a performance bond?

Answer 11

1. Parent Company Guarantees.
2. Reducing % of PB from the typical 10% to 7% with remaining in escrow for example.
3. Increasing retention (consider contractors cashflow).
4. Collateral warranties from key subcontractors/consultants including step in provisions.
5. Latent defects insurance.

Question 12

What are the benefits of using a performance bond?

Answer 12

1. Offer an extra layer of financial security for the employer.
2. Reduced risk of project failure.
3. Encourages best practice through incentivizing the contractor to adhere to best practices.

Question 13

What are the drawbacks of using a performance bond?

Answer 13

1. Contractors must pay a premium for performance bonds which is typically passed onto employer.
2. Time consuming – could delay project start dates.
3. Some contractors may struggle to obtain PBs due to history of claims or financial difficulties.

Question 14

What are collateral warranties?

Answer 14

1. Create contractual relationships between main parties of a contract with an external third party.
2. Would not exist with 3rd party due to privity of contract.

Question 15

What are/is the purpose of collateral warranties?

Answer 15

1. Used due to ‘privity of contract’.
   a. Rights & obligations under a contract can only be enforced by a party to that contract.
   b. CWs therefore give remedies to 3rd parties that would not otherwise happen.

Question 16

Who may want a CW?

Answer 16

1. Any 3rd party with financial investment but not a party to the main contract.
2. Funding institutions, future tenants or purchasers.
3. Employer – if MC goes into liquidation, they would have no contractual link for redress in case of defective workmanship.

Question 17

What are the common clauses / terms in CWs?

Answer 17

1. Obligations should mirror that of the main contract.
   a. If a party breaches the main agreement, they also breach the warranty.
2. Common terms include:
   a. Limitation of liability
   b. Reasonable skill & care or fitness for purpose
   c. Requirements for PI insurance
   d. Assignment rights
   e. Novation rights

Question 18

Name some standard forms of collateral warranties?

Answer 18

1. CWa/F = Standard form for a funder.
2. CWa/P&T = Standard form for a future purchaser or tenant.

Question 19

What are third party rights?

Answer 19

1. The Contract (Rights of Third Parties) Act 1999 (the Act) creates an exception to the privity of contract rule. Allows a 3rd party to enforce the terms of the contract, even though it is not a party to it.
2. Alternative to but same effect of collateral warranties (creating direct right of action).
3. The right created is to enforce certain terms of the contract, not the whole contract.

Question 20

When would third party rights apply?

Answer 20

1. The contract must expressly state a 3rd party has specific rights.
2. Often, they are excluded in the particulars.
3. Provided by way of Notice from Employer to the contractor, stating the parties are entitled to reply on specific conditions in the contract.

Question 21

What is the difference between third party rights and collateral warranties?

Answer 21

1. Third party rights
   a. Adjudication does not apply.
   b. Do not need to be signed by beneficiary.
   c. Only specific terms of the contract, not the whole contract.
2. Collateral warranties
   a. Need to be signed by beneficiary.
   b. The whole contract conditions transferred across.
   c. Comfort of receiving a physical, signed document.

Question 22

What is the Housing Grants, Construction and Regeneration Act 1996? What are the key changes?

Answer 22

1. Known as ‘The Construction Act’.
2. If a project is deemed a construction project, headline provisions are:

a. Parties have the right to receive interim, periodic, or stage payments.
b. Parties have the right to know the sums due or sums withheld.
c. Parties have the right to suspend performance for non-payment.
d. Parties have the right to adjudicate at any time.
e. Disallows the ‘pay when paid’ clause.

Question 23

Why is the Housing Grants, Construction and Regeneration Act 1996 important?

Answer 23

Aims to improve payments within the construction industry and to provide for a quicker and less costly dispute resolution procedure, namely adjudication

Question 24

What is the NEC4 contract?

Answer 24

New Engineering Contract – commonly used on engineering and construction projects.

Question 25

Key differences between JCT and NEC4?

Answer 25

1. NEC
   a. Concise and written in plain English.
   b. Used optional clauses reducing need to amend compared to JCT.
   c. The PM is presented with options to deal with problems when apparent.
   d. Use Early Warning / Risk Register to encourage proactive approach.
   e. Compensation Events = Deal with issues effecting both Cost & Money.
   f. Compensation Events cost based on actual costs.
   g. Utilises a rolling final account based on quotations prior to commitment.
   h. Project Manager (QA + EA)
   i. Programme is a contract document
   j. No provision for nomination of sub-contractors.
   k. Defects correction is based on impact of defect. Better than JCT.
   l. Retention and LADs are optional clauses.
2. JCT
   a. Written in ‘lawyer’ language, not so easy to understand.
   b. JCT is more reactive with no early warning procedure.
   c. Variations = Deal with money. Loss and Expense = Deal with Time.
   d. Agreement of cost can be left to final account.
   e. Costs built up from bill rates (CSA).
   f. EA + QS
   g. Programme is not a contract document.
   h. Defects period based on 1 time period.

Question 26

What is the equivalent contract for NEC4 in JCT suites?

Answer 26

NEC Option B offers a fixed price lump sum contract, but Options C and D are target cost contracts. Option A is fixed price lump sum contract with activity schedule.

Question 27

What is FIDIC?

Answer 27

International Federation of Consulting Engineers – used on engineering and construction projects.

Question 28

What items can be found within the JCT contract particulars?

Answer 28

1. Contract Sum
2. ERs references
3. Insurances
4. Start date
5. PC date
6. Advanced Payment
7. IVD etc

Question 29

What are liquidated damages?

Answer 29

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

Question 30

What needs to be in place before LADs can be deducted?

Answer 30

1. A non-completion certificate.
2. A withholding notice (2.29 notice).

Question 31

Why did Morville Street have a 24-month defect rectification period?

Answer 31

Due to the homes warranty provided / latent defects insurance requirements.

Question 32

What is the usual rectification period for JCT contracts?

Answer 32

1. D&B + Intermediate + Standard – 6 months.
2. Minor Works – 3 months.

Question 33

Why would the defect rectification period be amended to 12 months?

Answer 33

To cater for the building going through all the seasons.

Question 34

Can you expand on the contractual timescales for payment on the Octagon project?

Answer 34

1. Due Date = 7 days after IVD.
2. Payment Notice = 5 days after Due Date.
3. Final date for payment = 16 days after Due Date.
4. Pay Less = 5 days before final date for payment.

Question 35

What are conditions precedent?

Answer 35

Conditions precedent are clauses that state that if a certain action is not taken within a specified timeframe, the party will not be entitled to something. For example, a condition precedent might state that a party has seven days to claim loss and expense after an event, or they will not be awarded time or money.

Question 36

What is the Employer’s Agent?

Answer 36

1. An agent acting on behalf of the Client as the CA.
2. Must act impartially.
3. Lead consultant (architect) or cost consultant.
4. Pre-contract roles:
   a. Coordinating tender
   b. Coordinating novation
   c. Collating contract documents
5. Post-contract roles:
   a. Issuing instructions
   b. Design submittals
   c. Managing change control
   d. Reviewing progress of works + preparing reports
   e. Validating / certifying payments
   f. Certifying SC or PC
   g. Issuing MG of defects certificate
   h. Agreeing the final account

Question 37

What are some of the notices a CA/EA would issue?

Answer 37

1. CA / EA
   a. Interim Certificate / Payment Notice
   b. Practical Completion / Sectional Completion Certificate
   c. Non-Completion Certificate / Notice
   d. Certificate of Making Good / Notice of Completion of Making Good
   e. Final Certificate / Final Payment Notice

Question 38

What is the role of an Employer’s Agent?

Answer 38

1. To act impartially.
2. Provide advice.
3. Warn employer of contract breaches.
4. Proactively resolve issues.
5. Manage valuations and payments.
6. Do not divulge confidential information.

Question 39

What is the difference between an Employer’s Agent and a Contract Administrator?

Answer 39

Type of JCT contract (EA is D&B only).

Question 40

What are the valuation timescales within a JCT D&B contract?

Answer 40

1. IVD = 1 month
2. DD = + 7 days
3. PN = + 5 days from DD
4. FDFP = +14 days from DD
5. PLN = -5 days from FDFP

Question 41

Who issues a Practical Completion statement?

Answer 41

Employers Agent or Contract Administrator

Question 42

What is Practical Completion?

Answer 42

1. Works are substantially complete with minor defects only.
2. Employer is able to gain beneficial occupancy of the development.
3. Half retention released.
4. Employer surrenders the right to apply liquidated damages.
5. The employer takes back possession of the works and is responsible for insuring it.

Question 43

Do the works have to be 100% complete to certify PC?

Answer 43

PC is vague in the JCT as not defined. Reliant on the opinion of EA. Minor defects should remain only and not be conditional to XX.

Question 44

What is sectional completion?

Answer 44

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