Contract Practice

Question 1

What is a construction contract?

Answer 1

It is an agreement between two parties to carry out works
It must be:
- An offer
- An acceptance
- Consideration
- Intention to create legal relations

Question 2

What are the documents that make up an NEC Contract

Answer 2

Form of agreement
- Conditions of contract
- Contract Data
- Work information
- Site information
- Prices, activity schedules, BoQ

Question 3

What are the differences between collateral warranties and third party rights?

Answer 3

• Collateral warranties are agreements with a third party for a duty of care to be extended by one of the the contracting parties
• Third party rights Y(UK)3 invokes the Contracts Act 1999, which allows people that are not party to a contract to enforce a term of contract

Question 4

What are liquidated damages?

Answer 4

• A genuine pre-estimate of the the likely loss incurred by the Employer should the completion date not be hit

Question 5

What is a performance bond?

Answer 5

• It is a guarantee from a bondsman that the contractual obligations of the Contractor are fulfilled
• If called upon the bond will be provide financial compensation up to a stated value
• They are the most common form of bonds used in the construction industry and the standard value is 10% of the contract value

Question 6

What is the Defects Liability period?

Answer 6

• The defects liability period is set out in CD Pt1, usually the Defects Date is 52 weeks after completion of the works
• If the Contractor fails to do so they may be in breach of contract
• In this solution others may be employed to rectify the defects and the cost will be deducted from the retention

Question 7

What is a Parent Company Guarantee?

Answer 7

• NEC X4
• It is an arrangement where the contractual performance of one company or cooperate group is underwritten by other members of the cooperate group

Question 8

What is retention?

Answer 8

• Clause X16
• Provides an incentive for the Contractor to rectify the defects within the defects liability period
• Half of the retention is released upon completion
• Second half released 4 weeks after the defects certificate issued

Question 9

What is the arguments against bonds?

Answer 9

• They shouldn’t be required if the tender process is completed effectively
• Brings unnecessary premiums are added to the contract sum

Question 10

When might bonds be appropriate?

Answer 10

• If the Contractors is new and unproven
• In a difficult economical climate

Question 11

What are the pro’s and con’s of parent company guarantees?

Answer 11

• Not as secure as bonds because of the financial risk between the parent company and subsidiary
• They do not need to be paid for, they can be unlimited and they can make the parent company responsible for performance as well as financial guarantee

Question 12

What recovery would a third party have if you prevented them access

Answer 12

• The Contractor would not pay delay cost directly with a third party as they are not in contract with them
• The Client would apply CL 25.2 if they have received additional costs from a third party as the Contractor would not be providing the services they are to provide in line with the works information

Question 13

What is limititation of liability?

Answer 13

• Limitation of liability caps the amount of liability one party can recover from the other
• Secondary Option Clause X18

Question 14

What is the fitness for purpose obligation?

Answer 14

• The obligation that goods or services must be capable of being used for its intended purpose
• For example the NEC states that the Contractor must provide the works in line with the works information
• The JCT states the Contractor must use reasonable skill and care

Question 15

What is a Deed of Variation

Answer 15

• A Deed of Variation is a legal document that varies or changes one or more clauses of a former contractual agreement
• I would seek guidance from my companies legal team and commercial director before giving any advise on a Deed of Variation

Question 16

What is the difference between the schedule of cost components and the shorter schedule of cost components?

Answer 16

• The Schedule of Cost Components is used to assess payment and CEs under NEC Options C, D and E contract
• The shorter schedule of cost components is used to assess CEs under an NEC Option A & B

Question 17

What is the difference between an on demand bond and a conditional bond?

Answer 17

• A demand bond is an unconditional bond to pay once a proper demand has been made
• A conditional bond, or performance guarantee, requires certain conditions to be met before a payment is made

Question 18

What is the order of priority within NEC contracts? How would you deal with a Ambiguity within the contract?

Answer 18

There is no order of priority within an NEC contract. If ambiguities are present within the contract there is a clause to deal with these.

Question 19

What is included within the fee?

Answer 19

Typical examples are head office overheads, profit, insurance premiums and insurance excesses.