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#018 Contract Practice (PART 1) ๐Ÿ“’

Updated: Oct 18, 2021

Hi ๐Ÿ‘‹


In this post, I'm reviewing Level 1 of the Contract Practice competency. This is a pretty straightforward competency in the sense that is a lot of information that is available for you to digest. I will try and drop some good resources for this competency in this post.

DISCLAIMER: The following is not an exhaustive set of notes, but it's an attempt to help those who, like me at the beginning, did not know where to start! Please feel free to let me know if I have said anything incorrect or out of date!


So what is Contract Practice all about?


The RICS describes this competency in the following way:


This competency covers the various forms of contract used in the construction industry, including all of the main standard forms of contract and a thorough understanding of contract law, legislation and the specific forms that they have used.

Level 1 is all about the following:


Demonstrate knowledge and understanding of the various forms of contract used in the construction industry and/or your area of business.

For this competency, you will have to learn a bit about the Law. When I studied Law at university there was a whole module dedicated to Contract Law, so this competency was perhaps a lot easier for me to get to grips with than others.


Basic contract law and legislation


If you know nothing about how the English legal system works I would suggest you read the following to get an overview of how everything is structured. You should know how laws are created, how this is interpreted by judges and how rulings impact day-to-day commercial activity.


Start with this link - it's pretty comprehensive.


Common Law & Civil Law

One aspect that I must mention here is the difference between common law and civil law.

In a common law system, the concept of judicial precedent is more prevalent. this means that judges take an active role in shaping the law because the decisions they make are then used as a precedent for future cases. In a system like this, it is up to judges to rely on precedents set by previous courts to interpret those laws and apply them to individual cases. Examples of countries with this system include the UK and the USA.


In contrast, civil law systems place more emphasis on the actual codified law rather than the interpretation by judges. In this system, the role of the judge is to establish the facts of the case and apply the remedies found in the law. Examples of countries with this system include France and Germany.


Victoria Cromwell provides a good summary of the difference in this article.


The 5 elements of a binding contract

For a contract to be enforceable by a court, 5 elements must be established. I will go through each of the elements below:

  1. Offer: An offer must be made by one party to another for the provision of goods or services. In the construction context, an offer is made when contractors tender for a project.

  2. Acceptance: The offer made by Part A must be accepted by Party B. In the construction context, this is when the client accepts the tenderer's offer and signs the contract.

  3. Sidenote: a contract does NOT need to be written, verbal contracts do exist and are enforceable.

  4. Consideration: Something of value must be exchanged between the parties i.e. money. It does not need to be money but something must be exchanged. Obviously, in a construction context, this will be the monies paid by the client to the contractor in exchange for the construction of the built asset.

  5. Intention / Capacity: The person(s) contracting must have the intention to enter into the contract and they must have capacity. By capacity, we mean that the parties must be of age (i.e. over 18) and should not suffer from any mental impairment.

  6. Legality: The contract being entered into must not break the law. This is an obvious one as the courts will not enforce a contract that requires the parties to do something illegal.

Key legislation


There are several laws which you should know briefly about due to their implications on construction contracts.


The Construction Acts

  1. Housing Grants, Construction and Regeneration Act 1996 (which was amended by):

  2. Part 8 of the Local Democracy, Economic Development & Construction Act 2009

  3. The above acts were introduced as a consequence of the Latham and Egan reports which highlighted several issues with the UK construction industry. Specifically, they highlighted:

  4. The adversarial nature (and the prevalence of litigation)

  5. Unfair payment terms stifling the supply chain

  6. To combat the amount of litigation, adjudication was introduced as a measure to avoid clients with deep pockets bullying contractors in a dispute scenario. This meant that adjudication was the first point of call. Normally, in the event of a dispute arbitration and litigation were the main outcomes, but the use of these two routes would mean the contract would have to come to an end, whereas with adjudication, the dispute could potentially be settled whilst the contract is still running.

  7. To combat the unfair payment terms, the 1996 Act provides parties with an entitlement to periodic payments throughout the contract works, where the work is to last 45 days or more. If the contract does not provide an adequate mechanism for calculation of the amount and timing of payments (i.e. providing for a due date and a final date for payment) then a scheme imposed by the 1996 Act will apply - check this link to read more about it.

  8. The 1996 Act also made "Pay When Paid" clauses illegal. These were clauses that mean that sub-contractors would only get paid when the main contractors would get paid by their clients.

  9. The 2009 Act made the above apply to both written and verbal contracts.

  10. The 2009 Act also requires the certifier to inform the contractor if and why any monies are being deducted. This is important information for a contractor as they will need to monitor their cashflow.


Unfair Contract Terms Act 1977

This act imposes limits on the extent to which the liability for breach o contract, negligence or other breaches of duty can be avoided using contractual provisions such as exclusion clauses.


Latent Damages Act 1986 and the Limitation Act 1980

The Latent Damages Act was brought in primarily to help purchasers of properties who discovered latent defects (i.e. defects that arenโ€™t immediately apparent and which cannot be discovered by reasonable inspection) in their properties after the limitation periods contained in their relevant contracts had lapsed.


These limitation periods are provided by the 1980 Act.


If your contract is a simple contract, the limitation period will be six years from the breach of this contract. If your contract is a deed, it will be twelve years. The former is known as signing a contract "under-hand" whilst the latter is known as signing a contract "under-deed".


Defective Premises Act 1972

This Act imposes duties on a person taking on work for, or in connection with, the provision of a dwelling to the person acquiring the dwelling and any subsequent purchasers to see that the work they take on is in a workmanlike manner with proper materials so that it will be fit for habitation.


The above is not an exhaustive list of legal instruments, but some that you should be aware of. In an assessment setting, an assessor may ask: "Can you give me some examples of legislation that impact construction contracts?".


The various standard forms of contract and sub-contract


The construction industry has several standard contract forms. These are contract templates that have been drafted by construction professionals and lawyers to accommodate the key requirements of construction projects.


Examples of standard forms of contract include:

  • Joint Contracts Tribunal (JCT) Suite

  • New Engineering Contract (NEC)

  • FIDIC Suites

  • Infrastructure Conditions of Contract (ICC)

Bespoke contract forms can be used but they can be costly to draft and administer. The world has become accustomed to the various standard forms, and from a contractor's perspective, an element of risk pricing may be introduced if client's start to deviate from established norms and come up with their own form of contract. Many large infrastructure authorities occasionally introduce their own form of contract in the UK because they run so many construction projects. However, many of these 'bespoke' contracts borrow clauses and mechanisms from the established contract suites.


How to choose a contract

  1. Choose our procurement route

  2. Decide what contract you will use (either based on client or consultant experience)

  3. Decide your pricing option: lump sum, remeasurable or reimbursable

  4. Identify mechanisms the client wants to use

  5. Narrow your contract choices down (for JCT you narrow down because the different contracts have different applicable options, whereas with the NEC the mechanisms are essentially add-ons to the base contract)

  6. Choose the contract which satisfies most / if not all the client's mechanistic requirements

  7. Where specific clauses are absent, get a lawyer to draft them in


When the different forms would be used


There are different types of standard forms, so how do you decide which one to use. From the list above, the uninformed might think that that the NEC contracts can only be used for engineering projects - this isn't the case at all.

It all comes down to two things:

  1. Mechanisms required in the contract; and

  2. Client preference

We'll go into point number in 1. the section below. If a client has experience of using a specific contract suite, it would be preferable to use a contract in that suite because it is familiar. Each of the suites listed above has many individual contracts to cater to procurement routes and pricing documents. An example of this is the JCT suite which I have broken down below.


JCT vs NEC

There is always a debate about whether the JCT is a better suite than the NEC. Here is a link to a good comparison between the two. I have observed certain trends in my short career as a QS so far. Public sector organisations seem to favour the NEC over the JCT. This is the case probably because of four main reasons:

  1. Early Warning Notices: Under the NEC, the contractor is obliged to notify the client of any impending event which may have time and cost implications. Non-notification will result in the contractor taking a loss i.e. they won't be able to claim anything. Under the JCT, the contractor is not really obliged to do anything, which is why some say that the NEC forces the contractor to be more proactive.

  2. Risk Meetings: In the JCT suite, risk meetings are not mandatory. Whereas in the NEC, whenever there is an event that triggers an early warning notice, there would be a risk mitigation meeting and the parties would be forced to collaborate and mitigate the risk.

  3. Compensation Event / Quotations: NEC Compensation Events (CEs) are no different to Relevant Matters / Events of the JCT. CEs refer to events/actions which are not the fault of the contractor and affect the cost of the work or the time needed to complete it. the advantage for the NEC comes from the "quotation" element. In the aftermath of a change, the contractor will go for an extension of time and provide a loss/expense quote. This gives the client time and cost certainty very quickly. If you compare this to the JCT, there is no time and cost certainty concerning changes, and in many instances, variations can be disputed up until the Final Account. The JCT tries to deal with this via a schedule 2 variation quotation, you can read about this here on page 7.

  4. Programme: In the JCT, the programme is generally not a contractual document, the contractor is not obliged to provide an updated version periodically. In this suite, the only commitment the contractor makes is the start and finish date. The programme is part of the contract in the NEC, and regular programme updates must be provided and accepted by the Project Manager. There is a greater degree of control and scrutiny, so much so that the PM may query why certain activities are delayed or lagging.

Contract documentation


When a contract is signed, there may be many ancillary documents associated with that main contract document. This is more often the case than not in the construction industry.

For construction contracts, there will be additional documentation that is required for the contract to be executed. This comes in the form of design information i.e. reports and construction drawings.


To complicate matters further, the contract documentation will differ depending on the procurement methodology.


In the table below I will go through some of the contracts in the JCT suite and identify some of the potential other documents.



Basic contractual mechanisms and procedures at various stages of the contract


As mentioned in the section above, one of the determinants of choosing a contract is understanding what mechanisms you require. In the JCT, some mechanisms in the SBC won't be available in the Intermediate contract or the basic Minor Works form like Retention Bonds.


Let's go through some of the most important mechanisms and tools here. Remember, in the NEC contract some of those may be just add-ons and are not contract specific.


Retention

Retention is a percentage (often 5%) of the amount certifies as due to the contractor on an interim certificate, that is deducted from the amount due and retained by the client. The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract.


Performance Bond

A performance bond is commonly used in the construction industry as a means of protecting a client against the risk of a contractor failing to fulfil contractual obligations to the client. Bonds are typically set at 10% of the contract value. The funds provided from this can enable the client to overcome difficulties that have been caused by the non-performance of the contractor e.g. finding a new contractor to complete the works. The cost of the bond gives the client a good guide as to the creditworthiness and reputation of the contractor in the bond market, which will view each contractor differently in respect of its history, management and financial health.


Parent Company Guarantee

A parent company guarantee (PCG) is a form of security that may be required by clients to protect them in the event of default on a contract by a contractor that is controlled by a parent company. Typically, such a default might be caused by the insolvency of the contractor. This mechanism tries to ensure that the Parent Company fills in the void left by the main contractor and impose a duty on them to complete the contract as per the contract terms. There is some risk to the guarantee depending on the financial state of the parent company, for example, if the contractor is unable to perform their obligations because the entire group has become insolvent.


Fluctuations

Fluctuation provisions in construction contracts provide a mechanism for dealing with the effects of inflation. On smaller projects, the contractor will be expected to take inflation into account when calculating their price. On larger projects, the contractor may be asked to tender based on current prices, with a provision in the contract to reimburse them for price changes over the duration of the project.


Sectional Completion and Partial Possession

Sectional completion refers to a provision with construction contracts allowing different completion dates for different sections of the works. This is common on large projects that are completed in sections allowing the client to take possession of the completed parts whilst construction continues on others.


Partial Possession is similar to the above, the only difference being when the decision to take possession is made. Section completion is determined pre-contract, whereas Partial possession takes place during the contract.


Third-party rights including the relevant legislation and the use of collateral warranties.


The law has this principle called the "Doctrine of Privity" which states that contracts are only binding on the parties to a contract and that no third party can enforce that contract or be sued under it. This can be problematic in the construction context because of the main contractor and subcontractor relationship. As you know, clients will enter into a contract with the main contractor. That main contractor will assume all responsibility for the work, but it's very unlikely that they themselves will undertake all the works. They will sub-contract some of the work to other parties.


The problem here is: in the event of the main contractor default how can the client (who is not expressly part of the contract) enforce the contract between the main contractor and the sub-contractor? This will be incredibly important for critical packages like the piling or MEP where faults should be rectified as soon as possible.


There are two solutions to this: the collateral warranty and the Contracts (Rights of Third Parties) Act 1999. Collateral Warranties are ancillary contracts that establish that the contract between the main contractor and sub-contractor was for the client's benefit. Therefore, the client should be enabled to enforce the contract to ensure compliance to the relevant design and quality standards.


The client's other option is to utilise the Third Parties Act. The difference between this method and collateral warranties is that the former only enables the client to enforce a term of a contract, not the whole contract itself. This is probably useful if you're only interested in a term concerning quality aspects, however, if you want the whole contract enforced it may be problematic.


That's it for this post folks.


If you have any queries on the above drop a comment and I will get back to you!

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Hello folks ๐Ÿ‘‹ Iโ€™ve taken a bit of a break this summer. Iโ€™ve just come back from a 2 week holiday, iโ€™m feeling refreshed and iโ€™m ready to finish this year on a high. Im in the final stages of my APC a

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