Contract Practice Flashcards
What is a contract?
An agreement between 2 or more parties which is intended to be legally enforceable.
What types of Contract are there?
Lump sum / target / reimbursement / remeasurement
Why are they required / relevant for the construction industry?
- Requirement for effective risk management / allocation.
- Long term nature of projects.
- Complexity of projects.
- Define roles, responsibilities and how parties interact.
What is a Letter of Intent?
A document from an employer to a contractor (or from a main contractor to a subcontractor) indicating the employer’s intention to enter into a formal written contract for works described in the letter, and asking the contractor to begin those works before the formal contract is executed.
What elements must be in place in order for a legally binding contract to be created.
certainty as to key terms;
consideration (the ‘price’ paid under the contract in return for performance by the other party of its obligations; and
a mutual intention to enter into a binding legal contract.
What is Quantum Meruit?
Quantum meruit is a judicial policy that allows a party to recover losses in the absence of an agreement or binding contract.
- By allowing the recovery of the value of labour and materials, quantum meruit prevents the Unjust Enrichment of the other party.
- In the absence of an agreement or formal contract, a party that has provided a good / service may be unable to recover losses in court if the transaction goes wrong.
What are the different ways in which a contract can be made?
- Oral – Construction Act applies to oral as well as written.
- Under hand – Contracts that are simply signed, although not always, by each party to the contract.
- Under deed – A more formal document than a contract under hand. In most cases it is optional to execute document as a deed.
How is a contract converted from under hand to under deed?
The contract should state somewhere (e.g. in the first line) that it is a deed;
The appropriate signature blocks for deeds should be used.
What is the main legal difference between under hand and under deed?
There is no need for ‘consideration’ in a contract made as a deed (signed by both parties).
The limitation period (the time limit for commencing legal proceedings) is 6 years from the breach of contract in the case of contracts under hand, and 12 years from the breach of contract in the case of deeds.
What are the key elements of a contract executed under hand?
- Only an expression of approval/agreement is required.
- Assent does not have to be in written form. If written a signature is not necessary. If written and signed (no witness required), delivery is not required.
- For the validity of an informal contract, written is necessary only when at least one of the parties has expressed an intention not to be bound without one. In such a case, the agreement must be put in writing, and that writing must be presented to this party for an expression of assent.
- Limitation period is 6 years from when the cause of action occurred (breach of contract).
- Effective on execution.
What are the key elements of a contract executed under deed?
- Can be executed in three ways:
1. by the signature of a single director in the presence of a witness;
2. affixing its common seal in the presence of two directors or a director and secretary;
3. by the signature of two directors, or a director and secretary. - Limitation period is 12 years from when the cause of action occurred (breach of contract).
- Must be clear on contract that is to be a deed.
- Effective once signed copy of agreement is physically delivered to representative of other party.
What are the key requirements for a contract to be made binding?
- Offer by one party
- Acceptance by the other party
- Consideration of the offer
- Intent to form a contract
- Legality of contract
- Capacity to make an agreement
What are common contract documents?
a) Conditions of contract and any amendments to standard forms
b) Preliminaries
c) Contract sum analysis
d) Drawings
e) Specifications
f) Existing building information
g) Any contractor’s proposals for CDP work
Who needs to understand the contract?
- All parties mentioned in the contract including the Employer, design team, consultants, Contractor and those involved who are not mentioned.
What project elements to consider when deciding on the most appropriate a form of contract?
- Time / Cost / Quality objectives.
- Experience of client.
- Level of client design input.
- Level of risk the client is willing to take.
- Level of administration.
What forms of contract are there?
1) JCT (Joint Contracts Tribunal)
2) NEC3 (New Engineering Contract)
3) ICE 7 (Institute of Civil Engineers)
4) GC Works (PACE – Property Advisors to the Civil Estate)
5) FIDIC (International Engineers Federation)
Name the main types of JCT contract
a) Minor works
b) Intermediate
c) Standard building contract
d) Major Projects
e) Design and Build
f) Prime cost contract
g) Measured Term contract
h) Construction Management Agreement
i) Management Contract
j) Framework Agreement
What standard forms of JCT contracts are you aware of?
- JCT SBC 11 With Quantities
- JCT SBC 11 Without Quantities
- JCT SBC 11 With Approximate Quantities i.e. Remeasurement
- JCT Prime Cost Building Contract i.e. Cost Plus
When would you use JCT Minor Works?
- Projects that are short in duration, small and simple
- Guidance is for a value up to £150,000
- It is a short, easy to follow contract
- It is a lump sum form; design should be completed prior to execution
- Not as comprehensive as others – limited claims provisions, no fluctuations
When would you use JCT Intermediate Contract?
- Recommended for project that do not exceed one year’s duration or up to £750,000
- For projects that are simple in content, require only basic skills and trades and where services are not complex and where the works are already designed
When would you use JCT Standard with quantities?
- Work has been designed prior to contract;
- Employer provides drawings and bills of quantities to specify quantity and quality of work;
- It is a lump sum form of contract;
- The contractor’s risk is limited to price only;
- The employer takes the risk of errors in the bill.
When would you use JCT Standard without quantities?
- Work has been designed prior to contract;
- Quality of work and degree of complexity is not such to require bills of quantities;
- Contract documents to include drawings (description of work) and with specification or activity schedule;
- It is a lump sum form of contract;
- The contractor’s risk includes both price and quantity.
When would you use JCT Standard with approximate quantities?
- Work has not been fully designed prior to contract;
- Employer provides drawings and approximate bills of quantities;
- This is a re-measurement form of contract – Contract price is based on a tender figure which is converted to a final sum on re-measurement and valuation of all work;
- There is no contract sum;
- Construction is wished to commence prior to the design being completed
When would you use JCT Major Works?
- Projects that are significant in both size and quantity
- Generally for clients that have their own in house contractual procedures
When would you use JCT DB?
- Contractor is responsible for design and construction;
- Similar in complexity to the standard building contracts;
- Employer provides detailed documents to outline their requirements;
- It is a lump sum form of contract;
- The Contactor’s proposals form the basis of the contract;
- There is no mention of an architect or QS – mentions EA.
When would you use the prime cost contract?
- Broadly based on the provisions of standard building contract;
- The contractor is paid the cost of carrying out the work plus a fee to cover OH&P;
- Might be used for emergency work or if another contractor is appointed to complete the works after an insolvency;
- The employer bears the majority of the financial risk;
- The total cost is not known until completion.
When would you use a JCT Measured Term Contract?
- Where the employer requires maintenance / minor works to be undertaken on a regular basis over a defined period of time on a defined list of properties;
- Contract agreed on a schedule of rates for carrying out certain types of work;
- Can be let on a fixed or fluctuating price basis;
- Contains a break provision for terminating the contract early.
When would you use JCT Construction Management Agreement?
- When the construction management procurement route is chosen;
- When the employer wants an early start on site;
- Construction Management Trade Contract also used as the standard form for the agreements between employer and trade contractors.
What are some typical Contract amendments?
- Payment terms / durations;
- ER’s take precedent when CP’s conflict with ER’s;
What are CDP’s?
Contractor’s Design Portion – This is an optional extra for complex items requiring contractor design, for which proposals should be submitted at tender – more common in large projects. Used in SBC.
What are Contractor’s Proposals?
Contractor’s design proposals produced in response to Employer’s Requirements (ER’s). Used in D&B.
What is the role of a Contract Administrator?
A person appointed by the employer to administer the terms of the Contract on the employer’s behalf. The CA is required to act independently without reference to the requirements of the employer.
What is the role of an Employer’s Agent?
A person that undertakes all duties on the employer’s behalf. An error in the delivery of the EA’s service could lead to employer being responsible. The EA has no duty to act fairly between the parties and has no duties to anyone but the employer.
Can you tell me some more about NEC3 contracts?
- PM appointed to administer contract – to act in “spirit of mutual trust and cooperation”.
- Recommended by Latham and OGC.
- Plain English, deliberately “non legal”.
- High level of project management required – contract admin process is on a flow chart.
- Early warning system that delay could occur.
- PM accepts/rejects contractors programme.
What are the forms of contract under NEC3?
- Engineering & Construction Contract (ECC) – between an Employer and a Contractor.
- Professional Services Contract (PSC) – engaging consultants.
- Adjudicator’s Contract.
- Engineering & Construction Short Contract (ECSC) – for “simple” work (not necessarily low value).
- Term Services Contract (TSC) – for the provision of a service.
- Framework Contract.
- Supply Contract – procurement of goods (including design thereof).
What are the option clauses under NEC3?
- Option A - Priced Contract with Activity Schedule.
- Option B - Priced Contract with Bill of Quantities.
- Option C - Target Contract with Activity Schedule.
- Option D - Target Contract with Bill of Quantities.
- Option E - Cost Reimbursable Contract
- Option F - Management Contract.
When to use an Option A: Priced contract with activity schedule?
- Contractor provides the works described in contract for sum of money.
- The contract provides for certain risks to be carried by the Employer which will result in the lump sum being adjusted if the compensation events occur.
- The activity schedule is normally written by the Contractor since he is the one who knows what activities will be carried out. Each activity is priced as a lump sum by the Contractor which is the amount paid when task is completed.
- In pricing an activity, the Contractor takes responsibility / risk for estimating quantities and resources.
When to use an Option B: Priced Contract with Bill of Quantities?
- Employer provides bill of quantities which is priced by Contractor.
- Contract price is the sum of prices for all items in the bill which may include lump sums for certain items.
- Upon completion if it is found by re-measurement that the estimated quantity is not correct, it is corrected and payment is made to the Contractor to reflect the actual work carried out.
- Under this option, unlike Option A, the Employer takes the risk of the correctness of the quantities.
- Normally used where the risk of change in quantities is relatively high. It is not appropriate for design and build contracts since the Contractor is responsible who designs and prepares the detailed design and plans.
When to use an Option C: Target Contract with Activity Schedule?
- Contractor tenders a target price using an activity schedule.
- Each activity is priced as a lump sum and a Fee is also tendered as a percentage for subcontract work and for the Contractor’s own direct work.
- Initial target price is the sum of the activity prices and the fee.
- During the course of the contract, the target price is adjusted to cater for compensation events that are set out in the contract.
- Payment is made on the basis of actual costs with an incentive mechanism for the Contractor to minimise costs. Savings and over-runs are shared between the parties.
- Sharing of risk in the target cost approach is likely to reduce the occurrence of disputes.
When to use an Option D: Target Contract with Bill of Quantities
- Similar to Option C except that the target price is established by means of a bill of quantities rather than an activity schedule.
- During the course of the contract, the target price is adjusted to allow for changes of quantities as well as for compensation events.
- Employer carries a rather greater risk than is the case with Option C.
When to use an Option E: Cost Reimbursable Contract
- Contractor takes a very small risk since he is paid his actual cost plus the Fee with only a small number of constraints to protect the Employer from inefficient working or incompetence by the Contractor.
- Used when the work to be carried out cannot be defined at the outset and the risks are high.
- It may also be used for emergency work.
When to use an Option F: Management Contract
- Suitable for management contracts in which all or most of the work is done by subcontractors, and the Contractor manages the procurement and the work undertaken by the sub contractors.
- Payment is made to Contractor for cost of the sub-contracts plus a management fee.
- The Employer carries most of the risk.
General Advantages of NEC
- Contract is well-supported with additional materials, including detailed flow-charts and guidance notes;
- Clear, simple and easy to use, and is written in the present tense in plain English;
- Focuses on ‘real time’ management of project rather than looking back on what parties should have done;
- Flexibility due to NEC contract options available:
- 9 sections of core clauses;
- 6 main options;
- 2 dispute resolution options;
- 17 secondary options;
- This flexible approach is intended to avoid the need for lots of bespoke amendments, reduce the need for lengthy negotiation and also reduce the potential for disputes.
General Disadvantages of NEC
- Conciseness can create ambiguity and much of its terminology is untested in the courts;
- Heavy on administration, and requires good understanding of its procedures
- Requires sufficient resources from both employer and contractor to make a success.
NEC vs JCT Comparison:
- Simpler / less clauses than JCT
- Greater flexibility, less types but use of secondary choices
- Proactive solutions not reactive (but more resources to run)
- Design responsibility – better control
- Insurance arrangements – NEC end of defects/ JCT at PC
- Dispute Resolution – NEC other forms than adjudication
- NEC programmes must be updated
- Time limits set for changes
- Defects correction period (normally 2-3 weeks) contractor must “make good” in these time periods. Better at dealing with defects than JCT
What are the secondary optional clauses under NEC3?
- W1. Dispute resolution procedure.
- W2. Dispute resolution procedure (if HGCAR Act 1996 applies).
- X1. Price adjustment for inflation (used only with Options A, B, C & D).
- X2. Changes in the law.
- X3. Multiple currencies (used only with Options A & B).
- X4. Parent Company Guarantee.
- X5. Sectional Completion.
- X6. Bonus for Early Completion.
- X7. Delay Damages.
- X12. Partnering.
- X13. Performance bond.
- X14. Advanced payment to the Contractor.
- X15. Limitation of the Contractor’s liability for his design to reasonable skill and care.
- X16. Retention (not used with Option F).
- X17. Low performance damages.
- X18. Limitation of liability.
- X20. Key Performance Indicators (not used with Option X12).
- Y(UK)2. The Housing Grants, Construction and Regeneration Act 1996.
- Y (UK)3. The Contracts (Rights of Third Parties) Act 1999
What are the parties named under NEC3?
- The Employer.
- The Contractor.
59 - The Project Manager – administers the contract.
- The Supervisor – administers testing, inspection & defects.
- The Adjudicator.
- Others - people or organisations (e.g. design team and cost manager) who are not the above, or any employee, Subcontractor or supplier of the Contractor.
How is an NEC3 contract formed?
The contract is formed by combining:
- Contract Data part one (Information provided by the Employer) – including Risk Register.
- Contract Data part two (Information provided by the Contractor) – including Programme.
It also includes:
- Agreement.
- Contract Prices (Activity Schedule or Bill of Quantities).
- Works Information – future.
- Site Information – past and present.
What is included in the Contract data from the Employer & the Contractor?
Contract Data Part I (Provided by the Employer):
- Identifies the Main Option.
- Lists the chosen Secondary Options.
- Sets out project specific data, contract data and related information.
- Contract formation.
Contract Data Part 2 (Provided by the Contractor):
- Sets out the price and Fee percentage.
- Sets out other project specific information, including Programme, Contractor’s design information (where appropriate) and Key People.
- Completed Activity Schedule (where appropriate).
- Data for the Schedule of Cost Components.
- Returned as part of the tender.
What is the successful delivery of an NEC3 project reliant on?
Successful implementation depends on:
- Achieving desired cultural transition.
o proactivity, non-reactive.
o collaborative relationships.
o collective approach to problem solving.
- Flexibility – requires consideration / preparation before jumping in.
- Contract documentation – importance of the Works Information.
- Communication Protocol (included in Works Information).
- Programme - key management tool.
- Risk management – early warnings and risk register.
- Competence and training.
What are the advantages & disadvantages for standard & bespoke contracts?
Standard:
- Advantages:
o Written by legal experts
o Rights and obligations of each party are clearly set out to the required level of detail
o Risks should have been allocated equitably between the parties
o In principle, parties should be familiar with the provisions in the form – greater consistently in application and fewer unforeseen anomalies
o The time and expense of preparing a fresh document for each occasion is avoided
o Case law is built up over time – provides good source of knowledge and clarity of terms
- Disadvantages
o Familiarity is decreased as they are rarely used as printed (amendments)
o May not be appropriate to the needs of a particular project or client
o Using an inappropriate standard contract for a project will cancel out the benefits
Bespoke:
- Advantages:
1. Beneficial for major projects with novel obligations
2. Risk can be transferred in a way that completely suits the Client.
- Disadvantages:
1. Parties unfamiliar with terms
2. Can be ambiguous
3. Liable to unfairly allocate risk
What happens if there is a delay to the completion date?
- Where the Contractor is responsible, a Non-Completion Notice should be issued. If the contract provides for liquidated damages then provided the employer has notified the contractor that it intends to levy LDs it can claim them from the contractor if he so wishes. Often the employer deducts the LDs from sums otherwise due to the contractor. That is ok, provided a pay less notice has been served in time.
- Where the Employer is responsible and one of the Relevant Events listed in the contract has occurred, an extension of time should be granted and a later date for the Completion Date should be fixed meaning the employer is not entitled to claim LADs. However it does not automatically mean the contractor is entitled to loss and expense. To claim loss and expense the contractor must show that a Relevant Matter has occurred. Not all Relevant Events are Relevant Matters. The contractor also has to prove the loss and expense that he has suffered.
Extensions of Time
- Grounds for an extension of time is referred to as – a ‘Relevant Event’ under JCT terminology or a ‘Compensation Event’ under the NEC contracts.
Loss and Expense
- Grounds for an entitlement to additional payment follow disruption is referred to as – a ‘Relevant Matter’ in JCT terminology or (again) a ‘compensation event’ under NEC.
What can you tell me about Relevant Events?
- Relevant Events are causes of delay described in cl. 2.26 and are divided into those attributable to the Employer and those attributable to neither the Employer nor the Contractor and number 14 in total
- Relevant events that give rise to an Extension of Time do not always induce a claim for Loss & Expense.
Can you name me some examples of Relevant Events and Relevant Matters?
- Relevant Events & Matters (cl. 2.26 & cl. 4.21):
1. Change (as a result of an instruction) - RM
2. Instruction e.g. Postponement of works / opening up of the works - RM
3. Deferment of possession
4. Discovery of Antiquities / Fossils - RM
5. Suspension by the Contractor due to non payment
6. Impediment, prevention or default by Employer - RM
7. Failure of, or delay in, statutory authority executing its works
8. Exceptionally adverse weather
9. Loss or damage by specified perils
10. Civil commotion
11. Strike / lockout
12. Government exercise of statutory power after base date that affects the works (3 day week)
13. Delay in receipt of necessary statutory permission / approval – RM
14. Force Majeure
What does ‘Exceptionally Adverse Weather’ mean and how would you go about assessing an EoT for this?
- It is not defined in the Contract but when assessing an EoT for this, the key word is ‘exceptionally’.
- The weather must be exceptionally adverse in light of the kind of weather usually encountered at that time of year in that location.
61 - Whilst any weather conditions can cause a delay, only exceptionally adverse weather gives rise to an Extension of Time.
- Meteorological reports are helpful when determining exceptional adverse weather; it is suggested that reports for the previous 10 years would be necessary to establish that the adversity was exceptional.
What effect does an Extension of Time have?
- Relieves Contractor from liability for LDs.
- Benefit to the Employer in establishing a new contract completion date and prevents time for completing the works becoming “at large”.
- EoT based upon a contractual entitlement to more time not just because the Contract needs it.
What if a Contractor was ahead of schedule through its own proficiency and innovation but was subject to a relevant event that delayed him. Would you offer an Extension of Time?
Only if this event was likely to delay completion as advised in case law (Hounslow LBC v Twickenham Garden Developments Ltd 1971).
What is ‘Time at Large’?
- Time at Large exists when the Date for Completion was not achieved and neither a Non-Completion Notice nor an Extension of Time were issued.
- The Contractor is then under no contractual obligation to complete by a specified date, only complete the works within a ‘reasonable time’.
- This can have significant financial consequences for the Client.
Do you know of any case law that addresses Time at Large?
Multiplex vs Honeywell
- Multiplex issued three programmes to sub-contractor that updated the PC date each time.
- The date passed without completion being achieved.
- Honeywell claimed time was at large due Multiplex’s non-compliance with notices and thus claimed prolongation costs and other financial relief.
- Judge ruled in Honeywell’s favour.
