Contract Practice Flashcards
What are the principles of Contract Law?
- Offer
- Acceptance
- Consideration
- Capacity
- Intent
What is meant by an offer?
- 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
What is meant by acceptance?
- 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)
What is meant by consideration?
- 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.
What is meant by capacity?
- 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.
What is meant by intent?
- 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
What is a letter of intent?
- 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
What are the three typical ways a LOI will operate?
- Comfort Letter
- Recognition of Contract
- Consent to Spend
What is a comfort letter?
A comfort letter is a non-binding statement of the future intention of both parties
What do Comfort Letters recognising the existence of Contract do?
- 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 ?????
What is an LOI with consent to spend?
- 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
What is the HGCRA 1997?
- 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
What rights does the HGCRA give construction professionals?
- 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
What were the changes in the HGCRA 2009?
- 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.
List some the Forms of Contract in the JCT suite
- JCT Design and Build 2016
- JCT Standard Building Contract 2016
- JCT Intermediate Building Contract 2016
- JCT Minor Works Contract 2016
- JCT Measured Contract 2016
What are some of the other forms of Contract aside from JCT?
- 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)
What is assignment?
- 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
What is novation?
- 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.
What is a collateral warranty?
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.
What is a performance bond?
A means of insuring the client against the Contractor failing to fulfil their contractual obligation
Why might you get a performance bond for a smaller Contractor?
They are more at risk of going insolvent. Less well established, probably are more dependent on credit and good cash flow.
How much is a typical performance bond worth?
10% of Contract Sum
Who issues performance bonds?
Banks/Insurance Companies
What are the two variations of performance bonds?
- 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.
How long would you recommend a performance bond should stay in place?
Until the end of the Defects Liability Period.
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
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
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.
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
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
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.
What is an advance payment?
When a Contract Sum is paid in advance of the exchange (prior to work being done/goods supplied)
Why may a contractor request advance payment?
If there are significant start up/procurement costs, e.g. expensive items with long lead times
How might the client protect themselves when paying a Contractor in advance?
Secure a payment bond from the Contractor
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.
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.
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.
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.
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
Are all projects subject to fluctuations?
No, only projects whereby it is stated within the Contract that fluctuations will be accounted for.
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.
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.
When does retention get released?
Half released at practical completion, half released upon certification of making good defects
Who keeps the interest on the retention money?
The client
What happens with the retention money the client keeps?
The Contract may state that the retention money is kept in a separate bank account.
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
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
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