Contract Practice Flashcards
1
Q
What are the principles of Contract Law?
A
- Offer
- Acceptance
- Consideration
- Capacity
- Intent
2
Q
What is meant by an offer?
A
- A promise made by one party which matures into a Contract when accepted by the other party
- An invitation to treat does not turn into a contract; it merely is a stage in negotiations, inviting the other party to make an offer
3
Q
What is meant by acceptance?
A
- Acceptance must be unconditional (e.g. a signature on a contract of employment)
- Negotiations are counter-offers, not acceptance
- Silence is not acceptance, unless it is clear acceptance was intended (as substantiated by that party’s conduct)
4
Q
What is meant by consideration?
A
- Parties must exchange something of value for a contract to be binding
- For example, selling their house for £1 is valid consideration. Selling your house for nothing is not.
5
Q
What is meant by capacity?
A
- All parties must have the ability to understand the terms of and any obligations under the contract.
- Consent to the contract must be freely given (force, fraud, misrepresentation, inebriation renders the contract void)
- People under 18, under the influence of drugs or those suffering from mental health conditions generally lack the capacity to enter into contracts.
6
Q
What is meant by intent?
A
- Not all agreements between parties are contracts. It must be clear the parties intended to enter into a legally binding contract
- The person who wants the agreement to be a contract must prove the parties actually intended to enter into a legally binding contract
7
Q
What is a letter of intent?
A
- A letter from an employer to a Contractor indicating intention to enter into a formal written Contract for works described
- LOI’s are used to begin work before formal contract is executed
8
Q
What are the three typical ways a LOI will operate?
A
- Comfort Letter
- Recognition of Contract
- Consent to Spend
9
Q
What is a comfort letter?
A
A comfort letter is a non-binding statement of the future intention of both parties
10
Q
What do Comfort Letters recognising the existence of Contract do?
A
- Also referred to as a letter of acceptance, it is used by some forms of Contract (e.g. FIDIC) to formally execute the Contract. Generally such a letter will be issued following the agreement of the Contract and marks the completion of negotiations.
- In some cases it can act as an Interim Contract on its own terms, which will govern the relationship between parties unless and until a formal written Contract is executed ?????
11
Q
What is an LOI with consent to spend?
A
- Sometimes referred to as an “if” Contract
- Allows work to proceed up to a certain value whilst Contract is being finalised
- Creates a legally binding Contract between parties which pre-dates the principal Contract but will be superseded once principle Contract is executed
12
Q
What is the HGCRA 1997?
A
- Housing Grants, Contruction and Regeneration Act 1997
- Applies to all Contracts for “Construction Operations” (incl consultants)
- Intended to ensure payments are made promptly throughout the supply chain and that disputes and resolved swiftly
13
Q
What rights does the HGCRA give construction professionals?
A
- Right to be paid in interim, periodic or stage payments
- Right to be informed of the amount due, or any amounts to be withheld
- Right to suspend performance for non-payment
- The right to adjudication
14
Q
What were the changes in the HGCRA 2009?
A
- Includes all Contracts, including those not in writing
- Withholding notice replaced with pay less notice, altering how the sum to be paid is built up.
15
Q
List some the Forms of Contract in the JCT suite
A
- JCT Design and Build 2016
- JCT Standard Building Contract 2016
- JCT Intermediate Building Contract 2016
- JCT Minor Works Contract 2016
- JCT Measured Contract 2016
16
Q
What are some of the other forms of Contract aside from JCT?
A
- NEC3 ECC
- FIDIC Red Book (Conditions of Contract for Construction)
- FIDIC Yellow Book (Conditions for Plant & Design-Build)
- FIDIC Silver Book (Conditions of Contract for EPC Turnkey Projects)
17
Q
What is assignment?
A
- The benefit of a contract is transferred from one party to another, but the burden of the contract remains with the original party
- Contrast of Novation
18
Q
What is novation?
A
- The process whereby both the benefit and the burden of a Contract are transferred from one party to another.
- Requires consent from all parties, usually parties enter into tripartite novation agreement.
19
Q
What is a collateral warranty?
A
A way of forming a direct contractual link between two parties with otherwise wouldn’t have a link, such as between a sub-contractor and a client.
20
Q
What is a performance bond?
A
A means of insuring the client against the Contractor failing to fulfil their contractual obligation
21
Q
Why might you get a performance bond for a smaller Contractor?
A
They are more at risk of going insolvent. Less well established, probably are more dependent on credit and good cash flow.
22
Q
How much is a typical performance bond worth?
A
10% of Contract Sum
23
Q
Who issues performance bonds?
A
Banks/Insurance Companies
24
Q
What are the two variations of performance bonds?
A
- Conditional: Client has to prove that Contractor has not performed
- On Demand: No pre-conditions needed to be met. Not often used, seen as too harsh.
25
How long would you recommend a performance bond should stay in place?
Until the end of the Defects Liability Period.
26
Name 7 insurances that you may come across in a construction Contract.
- Contract Works Insurance
- Employer's Liability Insurance
- Public Liability Insurance
- Professional Indemnity Insurance
- Terrorism Insurance
- Flood Insurance
- Legal Indemnity Insurance
27
What is Contact Works Insurance?
- Contractors all-risk insurance
- Covers all risk associated with construction project
- Cover unforeseen loss or damage to building works, machinery, public liability
28
What is Employer's Liability Insurance?
Covers compensation if employees are injured or become ill because of the work they do.
All firms that employ staff are leally required to hold Employers Liability Insurance.
29
What is public liability insurance?
Provides cover against personal injury or death, loss or damage to property of third parties e.g. the general public or sub-contractors
30
What is professional indemnity insurance?
Provides cover for negligence on part of service provider. Will ensure service provider will not be bankrupted by successful claim, and recompense to client to re-mediate consequences of negligence.
Essential for providers of professional services
31
What is legal indemnity insurance?
Provides recompense in the event that the policy holder incurs capital loss or expense dealing with a range of possible legal issues.
Examples can be unforeseen rights of way issues over land that has been purchased, incurring costs to rectify.
32
What is an advance payment?
When a Contract Sum is paid in advance of the exchange (prior to work being done/goods supplied)
33
Why may a contractor request advance payment?
If there are significant start up/procurement costs, e.g. expensive items with long lead times
34
How might the client protect themselves when paying a Contractor in advance?
Secure a payment bond from the Contractor
35
What are the implications for paying for goods that the sub-contractor has ordered but have not yet been delivered to site?
Puts the client at risk in the case that the supplier/sub-contractor goes insolvent, as they may never receive the materials.
36
Materials for the project have been sourced and delivered to site. Does the client pay for those materials?
Yes unless stated otherwise in the Contract. Payment is made regardless of whether Contractor has paid supplier.
37
What is "retention of ownership" in regards to materials?
- This is a clause that allows the supplier to hold ownership of materials until payment.
- Good for supplier as it encourages payment, improves cashflow
- Bad for the client as if items are not affixed, as client may pay Main Contractor but Main Contractor may not pay supplier. Supplier could reclaim those items.
38
What is meant by "fluctuations"?
- A mechanism to deal with inflation, particularly useful in long lasting projects.
- Accounts for the inflation of labour costs, transport, materials (escalation), overheads.
39
How are fluctuations calculated?
- Using nationally published price indices
- Payment is based on cashflow projections of material, then quarterly percentage assessments of inflation are added to projection
40
Are all projects subject to fluctuations?
No, only projects whereby it is stated within the Contract that fluctuations will be accounted for.
41
What is retention?
Retention is a percentage (often 5%) of the amount certified as due to the contractor on an interim certificate, that is deducted from the amount due and retained by the client.
42
What are the 3 types of retention considered under JCT?
A. Changes to statutory contributions, levies and taxes
B. Changes to labour, materials and statutory costs
C. Changes to statutory contributions, levies and taxes calculated by formula.
43
When does retention get released?
Half released at practical completion, half released upon certification of making good defects
44
Who keeps the interest on the retention money?
The client
45
What happens with the retention money the client keeps?
The Contract may state that the retention money is kept in a separate bank account.
46
What issues do sub-contractors have with regard to retention?
- Causes cashflow problems
- Release of retention can be delayed for reasons out of their control, e.g. defects liability period not ending due to other parties not remedying defects
- construction supply chain payment charter proposed abolishing retention by 2025
47
What is a retention bond?
- Instead of holding back money, client receives bond valued at the same amount as would otherwise be retained.
- This allows contractor to keep money, helping cashflow, but also protects the client as they can cash in on the bond if required
48
What are change procedures?
A process that ensures potential changes to the deliverables of a project or the sequence of work in a project, are recorded, evaluated, authorised and managed
49
When should change procedures be introduced?
Change procedures may be tendered:
- After design freeze
- After tender documentation is released
- After project is tendered
- After the Contractor is appointed
50
What should change procedures ensure are defined?
- Reason for the change
- Who is requesting the change
- Consequences of change (time/cost/H&S/quality/who bears the cost)
- Risks associated with change
- Proposals to mitigate consequences
- Alternatives to the proposed change
- Time by which change must be instructed
51
What is a variation?
An alteration to the original scope of works in a construction contract.
This may be an omission, substitution or addition of works.
52
Why do variations occur?
- Client changes mind (design development or Contract Documents not stipulating what the client originally wanted in sufficient detail)
- Geological anomolies
- Statutory changes
- Technological advances (changing client requirements)
53
What are express terms in a Contract?
Express terms are those that have been explicitly agreed by both parties and can be oral or in writing.
54
Does a Contractor have to carry out variations?
If there are no express terms, Contractor does not legally have to carry out variation.
Contractor can continue to carry out works as per agreed at tender.
55
How are variations valued?
- Contract rates
- If Contract rates are not available (for example in a D&B Contract that was tendered with limited design info), the PQS and Contractor's QS will negotiate to what is deemed reasonable and fair. Market tesing, BCIS data and in-house data can be used by the PQS to review Contractor submissions.
56
Why do variations cause conflict?
- Conflict over the value of the change
- Over whether the change is a client cost or Contractor risk
- Often conflict occurs where there are gaps in the specification. Contractor may argue it is therefore a change, but Client is not bound to pay for things that a reasonable contractor must have understood to be done
Example: specification may not state every screw used to fix a radiator to the wall, but within the spec for a radiator, pattressing etc, a Contractor would reasonably be expected to assume the inclusion of the screws.
57
What is an extension of time?
Where the Client allows the Construction Period to be extended due to delays that are not the fault of the Contractor.
58
How does the Contractor acquire an extention of time (EoT)?
- Gives CA/EA written notice identifying the relevant event that caused the delay
- Proposes adjusted completion date
59
What counts as a relevant event that can result in an EOT?
- Variations
- Weather
- Terrorism
- Force Majeure
- Strikes
- Nominated sub-contractor delays
60
If the Contractor can foresee a delay caused by a relevant event, what should they do?
They are required to prevent or mitigate the delay even if it is not their fault.
If they cannot avoid the delay, they can request an EoT.
61
How should a Contractor prepare for a claim of EoT?
- Provide good quality information
- Demonstrate link between breach and delay
- Demonstrate delay against progress of the works, not programme
62
What are liquidated damages?
Pre-determined damages set at the time the Contract is entered in to, based on the actual loss the client is likely to incur if the Contractor fails to meet the completion date.
63
What are claims of loss and expense?
The Contractor can claim for direct loss and/or expense as a result of relevant matter the client is responsible for.
64
Give some examples of when a Contractor may be entitled to Loss and Expense?
- Failure to give Contractor site possession/access
- Delays in instruction
- Discrepancies in Contract Documents
- Failure to supply goods/materials
65
What costs can be claimed under Loss and Expense?
Varies between contracts, for example overheads may be excluded.
66
What are the various methods of dispute resolution?
- Mediation
- Adjudication
- Arbitration
- Litigation
67
What are the alternative dispute resolution (ADR) methods generally found in Contracts?
- Mediation
- Adjudication
- Arbitration
68
What is adjudication?
- Contractual or statutory procedure for swift interim dispute resolution
- Provided by a third party adjudicator selected by parties in dispute
- Purely based on documentary submissions
- Adjudicators can take initiative in ascertaining facts and law
- Decisions are binding unless and until revised by arbitration or litigation
69
What are the timelines for adjudication?
- Notice of intention to adjudicate must be submitted by one party to the other
- Adjudicator appointed within 7 days of notice
- Decision made within 28 days of appointment (can be extended to 42)
- Adjudication is confidential and a statutory right
70
What is arbitration?
- A procedure in which both sides agree to let an impartial third party decide the case
- May be a lawyer or expert in the field of dispute, or in some cases an arbitration panel
- Arbitrators "award" is legally binding and can be enforced through the courts.
- No appeal
- Arbitrators have powers to ascertain facts as opposed to just review submissions
71
What is mediation?
- Where a third party mediator is appointed to assist in the negotiation of a resolution to a dispute
- Different types of mediation, e.g. evaluative, facilitative, settlement
72
What is litigation?
```
The process of engaging in or contesting legal action in court as means of resolving a dispute.
Pros
- Highest quality
- Judges can compel parties to comply
- Defined rights of appeal in cases where errors of fact or law are made
Cons
- Expensive
- Longer time period to obtain judgement
- Public
```
73
What are the three main types of sub-contractor?
- Domestic sub-contractor
- Nominated sub-contractor
- Named sub-contractor
74
What is a domestic sub-contractor?
A sub-contractor selected and appointed by the Main Contractor
75
What is a nominated sub-contractor?
A sub-contractor selected by the client to carry out an element of works
76
How is a nominated sub-contractor appointed?
- The client negotiates a price with the nominated sub-contractor, then instructs the main contractor to appoint them for those works
- The Contractor will include the sub-contractors price as a PC Sum (prime cost sum) in the Contract Sum for the main contract, to which they add OH&P & attendance
77
Why would the client nominate a sub-contractor?
- If the works involves long delivery times
- If specialist design input is required for the package
- Where the client orders a preferred item (perhaps that they wish to have complete design control over) such as specialist plant/equipment
78
What is a named sub-contractor?
A named sub-contractor is a sub-contractor that has been short-listed by the client as an acceptable sub-contractor in the tender documents for the main construction contract.
In the Contract Sum, a provisional allowance is made for the subcontract package in question. After the Contract is awarded, the package is tendered to the list of named sub-contractors and the PSUM is replaced by the actual cost + on costs.
79
What are the advantages of naming sub-contractors?
- allows the client to influence the sub-contractor selection whilst leaving responsibility for their performance to the main Contractor
- Alternative to nominated sub-contractors, which are not included as a provision in JCT contracts
80
What is sectional completion?
When a project has different completion dates for different sections of the works.
This is common in large projects.
81
What are the contractual implications of sectional completion?
- Liquidated damages must be specific to each section
- Retention/retention release must be specific to each section
- EoT clarifications required, i.e. if EoT is required on section 2 will it impact section 3?
- Sectional completion must be specified in EXPRESSED TERMS in the Contract
82
What happens with regards to commissioning and O&M manuals at the end of a sectional completion?
These items may be left outstanding until practical completion of the whole site.
83
What are the key considerations for sectional completion?
- Logistics
- Protection of completion sections
- Insurance for all sections at all times
- H&S measures dealing with the risk of construction adjacent to occupied areas
84
What is partial possession?
Handing over part of the site before official completion.
85
Why would partial possession of the site be given?
- If the client wishes to occupy part of the site
- When there is no sectional completion in the Contract
- When part of the site is deemed to have achieved practical completion
86
What are the implications for retention, LDs and DLP when partial possession of the site is given?
- Half retention for that section of works is released
- The Defects Liability Period (DLP) begins for that part of the site
- Liquidated Damages are reduced proportionally.
87
What's the difference between partial possession and sectional completion?
This differs from sectional completion as it is not planned, and therefore no provisions for sectional completion are in the Contract.
88
Why might the Contractor not wish to allow partial possession?
- If it disrupts the works
- If it disrupts access routes
- If it incurs additional costs
The contractor is not obliged to allow partial possession.
89
What is meant by Contractor's Design Portion?
- Associated with JCT Contracts
- It is an agreement for the Contractor to design specific parts of the works
- The Contractor may in-turn sub-contract this portion out
90
What is the difference between Design & Build and a Standard Building Contract with CDP?
In D&B the Contractor is appointed to design the whole works, whereas CDP relates to a specific part of the works.
91
How is CDP incorporated into the Contract?
- There is a provision for CDP in the JCT SBC.
- A separate sub-contractor design agreement is available for when the main contractor wishes to allocate part of all of the CDP to a sub-contractor.
- In JCT Intermediate Building Contract has separate Contractor's Design Agreement as well as Sub-Contractor Design Agreement.
92
If the Main Contractor sub-contracts out the CDP, what responsibilities remain with the MC?
- Coordinating design and construction between the specialist sub-contractor and the main works
- Ensuring sub-contractor design complies with building regulations
93
How are the requirements for the CDP communicated to the Contractor?
- Requirements will be set out in the ERs (Employers Requirements) in the Tender Documents
- Contractor will respond in the CPs (Contractor Proposals)
- Design consultants will judge how far design is taken before handing it over to the Contractor (level of detail in ERs for CDP)
94
What is determination?
Determination relates to ending a Contractor's employment under the Contract. The Contract remains in place, as do the rights of both parties.
95
Why do Contracts provide for determination of the Contractor's obligations?
For the eventuality that there is a breach of Contract by the Contractor or Client. For example:
- The Contractor may no longer be performing diligently and regularly with the works
96
What is termination of a Contract?
Ending of a Contract.
This occurs when there is a repudiatory breach (fundamental breach of Contract) such as the Contractor indicating they no longer intend to accept their obligations under the Contract.
The Contract is terminated and the innocent party can sue for damages.
97
What is a Final Account?
The final account is the conclusion of the contract sum
(including all necessary adjustments) and signifies the
agreed amount that the employer will pay the contractor.
98
When is the final payment made?
Generally after DLP, subject to all defects being made good.
99
What certificate is issued at the end of the DLP, if all defects are made good in the JCT 2016 Contract suite?
Certificate of Making Good Defects
100
What certificate is issued at practical completion in the JCT 2016 Contract suite?
Certificate of Practical Completion
101
What happens after the Certificate of Making Good is issued?
The client pays the remainder of the retention money minus any kept back for defects that were not rectified.
In some cases, the Contractor may owe the Client money.
102
In the JCT D&B 2016 Contract, which clause refers to Final Account procedures?
Clause 4.24 Final Statement and Final Payment
Clause 4.8 Relevant statement and Final Payment Notice
Clause 4.9 Interim and final payments - final date and amount
103
Why may the Final Account be different to that agreed in the Contract Sum?
- Variations
- Fluctuations
- PSUMs
- Prime cost sums
- LADs
- Loss and Expense claims
- Contra claims
104
The Final Account is often an adversarial procedure. What can be done to mitigate this?
- Agree adjustments as project progresses
105
What happens after the PQS and Contractor agree the Final Account?
Employers Agent/Contract Administrator will issue final payment certificate
106
What happens if after completion of contract, latent defects emerge?
Client may claim for damages for breach of contract or negligence
107
What happens on practical completion?
- CA/EA certifies PC when all works have been completed
- Half retention is released
- End of Contractor's liability for LDs
- DLP begins
- Various documents may be released to client such as O&M manual, H&S file.
- Client takes possession
108
When is practical completion?
No absolute definition of practical completion in JCT but generally a project is deemed PC when works are complete and there are no outstanding defects (aside from snagging or minor items) so the building can be used.
109
When does the Contractor's obligation to insure the works come to an end?
At PC
110
What is a rolling Final Account?
Rolling final accounts will ensure that all instructions and cost effects to a project are agreed and up-to-date at the point of the latest financial report
111
In the JCT 2016 D&B Contract, what are the provisions set for interim payments?
Clause 4.7
1 - Interim Payments made by Employer to Contractor as per section 4 and [payment method]
2 - Due date will be 7 days after relevant Interim Valuation Date
3 - If the Interim Payment Application is received after the Interim Valuation date, the Due Date shall we 7 days from whenever the Application is received
4 - Interim Payment Application shall be accompanied by further info as may be specified in ERs
5 - No later than 5 Days after the Due Date the Employer shall give Payment Notice to Contractor
Clause 4.9
1 - Final Date for Payment 14 days from due date
2 - Employer must pay sum on Payment Notice on or before Final Date for Payment
3 - If Payment Notice is not given, Employer must pay what Contractor has stated in interim application
4 - In case of final payment, the Employer shall pay the sum stated as due in Final Payment Notice. If FPN not given, balance stated in relevant statement on of before final date of payment is paid.
5 - No later than 5 days before Final Date for Payment shall Pay Less Notice be given to Contractor
112
What are LADs?
Liquidated and Ascertained Damages are pre-determined damages set at the time that a contract is entered into, based on a calculation of the actual loss the client is likely to incur if the contractor fails to meet the completion date.
They are generally calculated weekly or daily, and are NOT A PENALTY. They must be based on actual loss from things such as rent, income.
113
What are unliquidated damages?
Unliquidated damages are damages, the exact amount of which has not been pre-agreed, and are typically determined by the courts.
A client can claim for unliquidated damages even if LADs are specified in the Contract, if the actual loss incurred is much more than originally expected.
114
How long does the Defects Liability Period?
Generally lasts 6 - 12 months from PC.
115
Who manages the DLP?
The CA acts as the bridge between the Client and Contractor.
Client reports to the CA who decides whether the issue is a defect or maintenance issue.
If it is seen to be a defect, the CA will instruct the Contractor
116
Who's responsibility is it to identify and rectify defects?
The Contractor
117
What happens at the end of the DLP with regards to the outstanding defects?
The CA prepares a schedule of defects not rectified, and agreed a date with the Contractor by which they will be rectified. If the Contractor does not rectify them, the cost to rectify them shall be taken out of the retention.
118
What clauses relate to Defects in JCT DB 2016?
Clause 2.35 Schedules of defects and instructions
Clause 2.36 Notice of Completion of Making Good
119
What are Alternative A and Alternative B in JCT 2016?
Different methods of calculating sums due
Alternative A - staged payments: Stages + Changes - Listed Items * any fluctuations
Alternative B - periodic payments: work executed to date + site materials (if they are protected) - Listed Items
120
What are different methods of calculating sums due at payment?
- Staged payments
- Milestone payments
- Payments following an activity schedule
- Periodic payments (Work done to date)
