Contractual Terms Flashcards
In what situations would you find the use of a Letter of Intent?
Situations where works are to commence on site prior to the final agreement of the contract. They should be used with caution, very risky
What things should be agreed prior to the issuing of a Letter of Intent?
- Schedule of Works
- Costs associated (and a monetary caps within LOI)
- Contract terms generally
- Programme
- Levels of insurance and CDM provision required
- Warranties
- Copyright
- Agreement for termination, dispute resolution options and contractors costs
(should also ascertain that the contract will e formally executed)
Can a Letter of Intent be legally binding?
Yes, but it depends on the wording of the letter. They should always be used with caution, and generally avoided. If a situation arises where it is necessary to use a Letter of Intent, it is outwith the scope of our PII to issue the letter, and it must be drafted and issued by the client’s solicitor
What common problem arises when a Letter of Intent is used?
The contractor may refuse to sign the main contract once the works covered under a Letter of Intent is carried out and paid for. Generally the obligations under the contract will be more onerous than those under the letter
What is a Collateral Warranty?
Collateral warranties are agreements which are associated with a primary contract. They provide for a duty of care to be extended by one of the contracting parties to third party who is not party to the original contract. Collateral warranties create a direct contractual relationship where they would not otherwise exist
Give three examples of a situation where a collateral warranty may be required
- Where an architect for a development owes a duty of care to the occupier for any defects that arise
- It can be a requirement under a construction contract for the main contractor to obtain collateral warranties from its sub-contractors to benefit the employer
- Where a funding party is provided with step in rights should the employer become insolvent
What is the recent change that has occurred in Scots Law relating to third party rights under a contract?
The introduction of the Contract (Third Party Rights) (Scotland) Act 2017, which became effective in Feb 2018. Previously third party rights had been dealt with via a common law mechanism, which was considered to be too inflexible to be commercially sensible.
What change may be required in contract drafting due to the introduction of the Contracts (Third Party Rights) (Scotland) Act 2017?
It will be required to include a form of words that expressly excludes third party rights under a contract unless specifically required.
Why are collateral warranties still commonly used in Scotland despite the introduction of the Contracts (Third Party Rights) (Scotland) Act 2017?
Partly due to familiarity, as the Act is relatively new. Additionally, under the act there is provision for the modification or revocation of the third party right by the contracting parties at any time before the third party acts under the contact. This is unlikely to be acceptable to many third parties, and therefore a collateral warranty may be used to prevent that mechanism
What is assignation?
Assignation (the Scottish version of Assignment) is the transfer of benefits arising under a contract, but not the burdens, i.e. the right to payment but not the obligation to pay.
The Law of Property Act 1928 does not apply in Scotland, therefore assignation can be agreed as long as there is intimation made to the other party
What is the difference between novation and assignation?
Novation allows for the transfers of all rights and obligations, whereas assignation only allows for the transfer of benefits
What is novation?
Novation is a process where contractual rights and obligations are transferred from one party to another. During novation the original contract is rescinded, and a new contract is formed where the contractual obligations are undertaken by another party.
When would novation normally take place?
In a design and build contract, where the designers are originally employed by the client, but are novated to the contractor. Consent is required for this process, and there will need to be express provision in the appointment of the design consultants that they will be novated to the contractor when appointed.
It may be necessary to provide collateral warranties for any pre-novation design services to the contractor, or novated design services to the client.
What is a price cost sum?
A supply cost only rate used when the quantity is unknown
What is a provisional sum?
An amount included within a contract sum for works that are not fully defined enough for tenders to price (NEC doesn’t allow for provisional sums)
