Contract Practice & Contract Administration Flashcards
What is a contract?
A legally binding promise (written or oral) by one party to fulfil an obligation to another party in return for consideration.
What elements are needed to form a contract?
Offer, Consideration, Acceptance, Intention to create legal relationships, Capacity.
What does Offer mean?
An expression of willingness to contract on specified terms. With the intention that it is to be binding once accepted.
What does Consideration mean?
The price given in exchange for goods or service or a promise to do (or not to do) something in return. The price is usually money but can be anything that has value.
What does Acceptance mean?
The meeting of the minds of the parties. Nothing left to be negotiated and it must mirror the offer.
What does intention to create legal relationships mean?
Both parties must have a clear, mutual understanding that they intend their agreement to be legally enforceable.
What does capacity mean?
Whether the person is in the right mental state and has the legal competence to commit to a legally binding document.
Please fine express terms?
Express terms are the terms in the agreement which are expressly agreed between the parties. Ideally, they will be written down in a contract, but if a verbal contract they will be the terms discussed and agreed between the parties.
Please define what is meant by implied terms?
A contractual term that has not been expressly agreed between the parties but has been implied into the contract either by common law or by statue. An example is the Sale and Supply of Goods and Services Act (1994), where a Fitness for Purpose obligation is implied on a Design & Build contract.
What is tort?
A tort is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act.
How do statutory provisions and contract provisions differ?
Statutory provisions are set out by law and must be complied with. Contract provisions relate to the contract in question and therefore only apply to a specific project.
What is your opinion of oral contracts?
While they are legally binding, the difficulty lies in proving the specific terms and conditions of the agreement. A written contract is always preferred.
What is a breach of contract?
A breach of contract occurs when one party in a binding agreement fails to deliver according to the terms of the agreement. A breach of contract can happen in both written and oral contracts.
What is the Local Democracy, Economic Development and Construction Act 2009?
It is an act which amended the Housing Grants Construction Regeneration Act 1996. The act changed the way construction contracts are entered into and introduced an amended regime for payment and adjudication.
What are the key provisions under the Act?
Contracts
- The LDEDC changed the requirement for construction contracts to be in writing; therefore, contracts that are in writing or oral are now covered. This will allow parties to go to adjudication even if their involvement is not formally recognised in writing.
Payments
- Under the HGCRA a construction contract must have an ‘adequate mechanism’ for determining what payments are due and when they become payable.
- Pay-when-certified clauses can no longer be used to prevent paying a subcontractor on the basis that a certificate in the main contract is yet to be issued.
Payment notices: contractual requirements
- The construction contract must specify the payer or the payee.
- Payment notice to be issued not later than 5 days after the due date and paid before the final date for payment.
- Payment must specify the sum the payer or payee considers to be due at the payment due date and the basis on which the sum was calculated. A payment notice must be issued, even if the amount of the payment is nil.
Payment notices: payee’s notice in default of payer’s notice
- If the payer is required by contract to issue a payment notice and fails to serve that notice in the required form or within the set timeframe, the payee is entitled to issue a default payment notice.
- A default payment notice obliges the payer to pay the amount due and allows the payee their statutory right to suspend performance for non-payment.
Suspension of performance for non-payment
- The LDEDC Act clarifies the contractor’s right to suspend carrying out the work in the event of non-payment.
o To validly suspend performance of its obligations by reason of non-payment, a default payment notice must be issued and there must have been a failure to pay. The party in default is liable to pay to the payee a reasonable amount by way of costs and expenses incurred by exercising the suspension of all or part of the work.
What is a letter of intent?
It is a general term for a document that expresses an intention to enter into a formal contract with a Contractor at a later date. It typically asks the contractor to commence works before the written contract for the works is executed.
What are the advantages of a letter of intent?
Allows work to commence before the main contract is agreed and signed.
What are the disadvantages of letters of intent?
May lead to complacency and deincentivises both parties from signing the main contract. A letter of intent is usually less robust than the main contract. The client’s negotiation strength is usually reduced.
What is contained within a letter of intent?
Detailed confirmation of the work to be completed.
Contract sum (if agreed).
Date for possession.
Date for completion.
Insurance provisions if required.
Method of payment.
Expiration date of the letter.
ADR method for dispute resolution.
Who issues the letter of intent?
The client
In what circumstances might a letter of intent be used?
Where the client needs to commence work before a certain date. Where materials have long lead times and early procurement would aid the programme.
Who usually signs the letter of intent?
Both the client and the contractor.
What would you say if the client asked you to draft a letter of intent?
It is a legally binding agreement like a contract, therefore, the document should be drafted by a legal or contract professional.
Are you aware of any case law relating to letters of intent?
Ampleforth Abbey Trust v Turner & Townsend 2012
The Project Manager issued an excessive amount of letters of intent, avoiding both parties to enter into a signed, written formal contract. The Contractor ended up completing significantly late, however due to the Contractor not signing a contract the client couldn’t claim liquidated damages. The client later sued the Project Manager for professional negligence.
What is a parent company guarantee?
A parent company guarantee is a form of security that may be required by clients to protect them in the event of a default on a contract by a contractor that is controlled by a parent company. Typically, such a default might be caused by insolvency of the contractor.
In what circumstances may a PCG be required?
Can be useful where a small contractor is part of a large, financially stable group of companies. The guarantee is given by the parent company to the client and in the event the contractor defaults on their obligations, the parent company is required to remedy the breach, meeting all the contractor’s obligations.
Are there any acts that govern third party rights?
Contracts Right of Third Party Act 1999
What is the overarching purpose of the Act?
The Act allows third parties to enforce terms on the contracts that they are not party to, but that benefit them in some way, or which the contract allows them to enforce. It also gives parties access to various remedies if those contract terms are breached.
What are the advantages of third-party rights?
Time - since no separate document (i.e. collateral warranty) is being entered, using the Act cuts down on the time and cost associated with warranties being drawn up, signed and circulated.
The rights being conferred by a third party rights notice can be narrowed to specify exactly which rights and/or contract terms are to be transferred
What are the disadvantages of third-party rights?
Needs careful drafting. Recent cases have shown the importance of drafting provisions which very clearly to ensure that all necessary rights are conferred on the third party.
There is limited case law on third-party rights and a lot of funders are fearful of the step-in rights ability. In contrast to collateral warranties.
Why might third-party rights be used instead of collateral warranties?
If a lot of collateral warranties are required, it can involved a lot of administration and cost. Third-party rights are easier to get in place because there is no separate document required.
What is a collateral warranty?
A collateral warranty is a formal contractual agreement which runs alongside another contractual agreement; its purpose is to create a contractual relationship between two parties where one would not otherwise exist.
Can you provide a working example of how a collateral warranty could be used?
The client places a contract with a contractor, the contractor then places several subcontracts with its suppliers to undertake the work. The client has a direct contractual relationship with the contractor, but he has no contractual relationship with any of the subcontractors.
Here the client may wish to have a direct contractual relationship with the subcontractor so that it can enforce the obligations that the subcontractor owes directly, or to create other obligations and rights between them.
What is the difference between a bond and a collateral warranty?
Bonds are contained within the contract, whereas a collateral warranty sits outside the contract as a side agreement. A bond is usually a financial commitment backed up by a third party, whereas a collateral warranty passes on contractual obligations.
Are there any alternatives to collateral warranties?
An alternative method to confer such rights is provided by the Contracts (Rights of Third Parties) Act 1999 which allows third parties to obtain benefits from contracts, which are entered into by others.
What are three ways that benefits can be transferred under a building contract?
Collateral warranties, Third party rights, Assignment.
Are you aware of any case law relating to collateral warranties?
Parkwood Leisure v Laing O’Rourke.
In light of the particular wording used in the collateral warranty, there was no doubt that it should be treated as a construction contract under Section 104 of the Housing Grants, Construction and Regeneration Act 1996.
What is assignment?
Assignment is the process where the benefit of a contract is transferred from one party to another, but the burden of the contract remains with the original party to the contract.
What is a bond?
Construction bonds are used for protection in circumstances such as non-payment, lack of performance, company default. An arrangement where a contractual duty is owed by one party to another is backed up by a third party.
Can you list five different bonds that might be used on a project?
Under NEC4 you can select x13 Performance Bond, X14 Advance Payment Bond, X16 Retention Bond. You also have Off-site material bond and Tender Bond.
What is a performance bond?
A performance bond is a form of security provided by a contractor to a client. It consists of an undertaking by a bank or insurance company to make payment to the client in circumstances where the contractor has defaulted under the contract.
When might a client want a performance bond?
If the contractor is new or unapproved, if there is concern over the contractor’s finances/commercial standing, the economy might be heading into a recession, the client simply wants to protect their commercial exposure.
What is the difference between on-demand and conditional performance bonds?
On-demand bonds – money set out in the bond is immediately available on demand without needing to satisfy any preconditions whatsoever (including establishing the contractor’s liability), unless the demand is fraudulent.
Conditional bonds – require the client to provide evidence that a contractor has not performed their obligations under the contract and that they have suffered a loss consequently.
What is the typical value of a performance bond?
Usually, 10% of the contract sum.
What is the typical cost of a performance bond?
The cost largely depends on the financial stability of the contractor and the number of previous claims (if any).
What is the risk of not having a performance bond?
In the event a contractor goes into insolvency and there is not bond in place, the client will be liable to pay all costs to deal with the insolvency. Costs include sourcing a new contractor to complete the works and any premium that will attract. The client will not be able to pursue the contractor as the company will be in the process of liquidation.
Are there any alternatives to a performance bond?
If the contractor is part of a group of companies, then the employer may wish to consider a parent company guarantee. If the smaller company breaches the contract, the parent company is obligated to step in and remedy. This is via NEC4 X4 Ultimate Holding Company Guarantee, previously named Parent Company Guarantee under NEC3.
What is a tender bond?
Requested by the client when inviting contractors to tender for a contract. A tender bond provides security against the risk of the successful bidder failing to enter the contract. It should help prevent idle tendering.
What is an off-site material bond?
Covers a client against the risk of paying the contractor for materials being manufactured off-site. If the contractor or subcontractor becomes insolvent, the client can claim on the bond for goods paid for (in the event they are not delivered to site).
What is a retention bond?
A retention bond is a type of performance bond. In the bond agreement the surety will act as a guarantor between the Contractor and Client. The surety will pay the client up to the full amount (like they would in place of cash retention) if the contractor fails to perform the obligations or remedy the defects immediately after contract completion.
What are the disadvantages of retention bonds?
The client will have to pay a premium for taking out the bond (usually through the contract sum). May reduce the contractor’s incentive to complete the work promptly and to the desired standard. Can we included via x16.
Why might a retention bond be used?
May be used in difficult market conditions to aid the contractor’s cash flow.
What is an advanced payment bond?
An advanced payment bond is required to protect and support payments to contractors by the client in advance of works being done. Some contracts require the purchase of materials in advance of the contract commencing. Lifts typically require advanced payments as the main bulk of the cost is front loaded. The installation on site is minimal cost.
What are Antiquities?
Items such as historical artefacts, pottery, coins, bones, fossils, archaeology.
What should the contractor do if they discover such objects?
Cease work and seek advice prior to proceeding. Take the necessary measures to preserve in the existing location and conditions. Inform the Project Manager.
When objects of interest are discovered, who is liable to pay for the delay and expense incurred?
This depends on how the risk is allocated within the contract. i.e. the Client may have added an additional client liability in the Contract Data. Significant delays and costs can rise, which can be a serious event for the client/and or contractor. NEC4 clause 34 allows the PM to instruct the Contractor to stop. Clause 60.1(4) is a CE if the PM gives an instruct to stop work.
What are defects?
A part of the work not in accordance with the scope.
What are patent defects?
Patent defects are those which can be discovered by reasonable inspection. Includes wall cracks, sagging gutters, broken windows, missing tiles etc.
