Unit 11: Contract Administration: Ending the Contract and - - PowerPoint PPT Presentation

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...last week (or things you should now understand)

• Claims for loss and/or expense
• Claim submission procedure
• Claim assessment procedure
• “Heads of Claims”

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Unit 11: Contract Administration: Ending the Contract and Subcontractors

D39PZ: Procurement and Contracts

Image: Endemoniada on flickr. Some rights reserved.

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• 1. Ending a construction contract

2.

Remedies

3.

Subcontractors and suppliers

4.

Transferring rights and obligations to another party

5.

Third party rights and collateral warranties

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(1) Frustration/impossbility

• Frustration arises when a party is unable to fulfil its
• bligations under the Contract, but is not in breach
• Frustration occurs without the liability of either party
• Circumstances change, preventing the project from being

completed

• Frustration typically occurs in two ways:
• Supervening illegality
• legislation may outlaw the Works
• Supervening impossibility:
• the site may no longer exist (landslip, flooding).

Ending a construction contract

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(2) Termination

• Section 8 of SBC/Q governs Termination
• Defines the processes that parties must follow to

“determine” the Contract - i.e. bring it to an end

• Termination does not completely end the Contract
• After termination:
• Principal obligations can no longer be enforced

e.g. Contractor no longer obliged to complete the Works; Employer no longer obliged to pay for the Works.

• Remaining obligations continue to have effect

e.g. Dispute resolution methods continue to exist

Ending a construction contract

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Termination by the Employer

• The Employer can terminate the Contract if:

(i) the Contractor defaults (cl. 8.4);

• “Specified defaults” are defined by cls. 8.4.1.1 to 8.4.1.5
• Employer must provide notice of intent to terminate Contractor due

to default (cl. 8.4.2)

• Contractor has 14 days to correct the default
• If not done, Employer can terminate within 21 days (cl. 8.4.2).
• Employer must send a final notice that Contract is determined

(ii) the Contractor becomes insolvent (cl. 8.5)

• The Contractor is automatically terminated if it applies for

bankruptcy, liquidation or receivership

• The Contractor must notify the Employer if this occurs (cl. 8.5.2)
• The Employer must still notify the Contractor that the Contract has

been determined (cl. 8.5.1)

• The Contractor can be reinstated if terms can be agreed with the

liquidator (cl. 8.3.2) (iii) the Contractor commits acts of corruption (cl. 8.6)

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Termination by the Employer

• Consequences of termination under cl. 8.4, 8.5 and 8.6:
• The Employer may employ another Contractor to complete the

Works (cl. 8.7.1)

• The new Contractor can use all tools and plant left on site (if the

Employer did not request their removal under cl. 8.7.2.1)

• Any unwanted equipment left on site by the insolvent Contractor

can be sold by the Employer

• The Employer must give any profit to the insolvent Contractor
• The original Contractor’s subcontracts may be assigned to the

Employer

• An insolvent Contractor is not entitled to further payment until the

Works are completed.

• The Employer’s direct loss and expense incurred as a consequence of

appointing a replacement Contractor will be deducted from any payment due (cl. 8.7.4.1)

• If these costs exceed the payment due, the insolvent Contractor will owe

the difference to the Employer (cl. 8.7.5)

• Cl. 8.8 governs the payment of any outstanding sums if the Employer

does not continue with the Works after terminating the insolvent Contractor

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Termination by the Contractor

• The Contractor can terminate the Contract if:

(i) the Employer defaults (cl. 8.9); or

• The Contractor can determine its own employment under the

Contract if:

• the Employer causes certain “specified defaults” (cl. 8.9.1); or
• certain “specified suspension events” arise (cl. 8.9.2).
• The Contractor’s notification procedure mirrors the Employer's

(cls. 8.9.1; 8.9.2; 8.9.3).

(ii) the Employer becomes insolvent (cl. 8.10)

• The Contractor can determine the Contract if the Employer

become insolvent.

• Cl. 8.10 defines the Contractor’s procedure, and mirrors cl. 8.5,

which the Employer must follow to determine the Contractor.

• The definition of “insolvency” provided by cl. 8.1 dictates when

the Employer or the Contractor can determine the Contract

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Termination by Employer or Contractor

• Cl. 8.11 governs determination of the Contract by either

party

• Cl. 8.11.1 defines the events that can cause either party to

determine the Contract

• These are events that frustrate the Contract.
• Neither party is liable for causing them

e.g. supervening illegality or supervening impossibility make it impossible to complete the Works.

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Ending a construction contract

Remedies

Subcontractors and suppliers Transferring rights and obligations to another party Third party rights and collateral warranties

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(1) Rescission

• In certain circumstances, a material breach of contract by
• ne party may entitle the other party (the innocent party)

to terminate the contract

• If the breach constitutes a repudiation of the contract, the

innocent party has a choice

• They can accept the repudiation and rescind the contract or
• alternatively they may elect to ignore the repudiation and

continue with the performance of the contract

Remedies

A remedy is the device provided by the Contract to compensate an innocent party for the loss or expense it incurs as a consequence of the other party’s breach.

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(2) Specific implement or damages?

• Allows the innocent party to compel the party in breach to

fulfil its obligations

• Only possible when the innocent party must be able to insist
• n the Works being completed
• It is seldom possible to prove this requirement, causing most

remedies to be in the form of damages.

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(3) Interest

• Late payment of sums is a common thing in the

construction industry

• One way in which this has been addressed is by way of

interest

• The entitlement to interest in respect of interim certificates

is dealt with by Clause 4.12.6 – in addition to the amount not properly paid – simple interest thereon for the period until the payment is made

• Clause 4.15.7 makes similar provisions in respect of sums

due under a final certificate

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(4) Interdict

• Where a legal wrong is continuing or it is reasonably

anticipated that such a wrong will be committed, innocent party is entitled to seek interdict against the wrong

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(5) Withholding payment

• Construction Act 2009 clearly defines the circumstances in

which payment due under a construction contract can be withheld.

• Before withholding payment, a party intending to do so

must give notice of this intention to withhold payment, sating:

• the amounts that will be withheld; and
• the grounds justifying each withholding
• Cl. 4.12 and 4.13 defines the process the Employer must

follow if intending to deduct from the amount due under an Interim Certificate

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(6) Suspending performance

• The Construction Act 2009 clearly gives a party the right

to suspend work if:

• payment has not been made by the final date for payment;

and

• notice explaining why payment is being withheld has not

been received

• The Contractor’s statutory right of suspension is

accommodated by cl. 4.14 in SBC/Q.

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(7) Recourse under delict (tort)

• A party can owe a duty to another in the absence of a

contract

• In construction, liability under delict is most likely to arise

due to negligence

• All other possibilities are governed by standard contracts
• A claim for recompense under delict requires:
• a duty of care to not be fulfilled; and
• the innocent party to suffer loss

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Ending a construction contract Remedies

Subcontractors and suppliers

Transferring rights and obligations to another party Third party rights and collateral warranties

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Vicarious performance

• Vicarious =

“delegated” or “taking the place of another”

• Vicarious performance = a new party other than that in the

Contract fulfilling the Contracted party’s obligations

• The contracted party remains liable/legally responsible for

the new party’s performance

• Vicarious performance is only possible for “impersonal”
• bligations (obligation which would not be considered

“ personal ”)

• Any obligations requiring specific skills of the contracted

party can not be performed vicariously

• In construction contracts, the principal of vicarious

performance is more commonly know as ‘sub-letting’

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Sub-contracting under SBC/Q

• SBC/Q provides two methods of sub-contracting (i.e.

appointing subcontractors / “sub-letting”): (1) The Contractor can select and appoint subcontractors to complete all or part of the Works (cl. 3.7)

• The Contractor must obtain the CA’s written consent before appointing

(cl. 3.7.1)

• The CA will not withhold the provision of consent (cl. 3.7.1)
• The Contractor is vicariously liable for the performance of all

subcontractors

(2) “Listed” subcontractors are chosen by the Contractor to complete a designated part of the Works from a list of at least three subcontractors provided by the Employer (cl. 3.8).

• The Contractor is free to choose any subcontractor from the list provided
• The Contractor or Employer can add to the list (cl. 3.8.2).

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Listed subcontractors: SBC/Q appointment process

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Sub-letting under SBC/Q

• From a contractual viewpoint:
• “Domestic” subcontractor = listed subcontractor.
• “Domestic subcontractor” is not defined by SBC/Q.
• “Listed subcontractor” is not defined by SBC/Q.
• All subcontractors have the same contractual standing
• Both domestic and listed subcontractors are “sub-

contractors” under SBC/Q (cl. 3.8.4).

• The Contractor is vicariously liable for their performance,

irrespective of how they were introduced to the project.

• Cl. 3.9 defines mandatory terms of sub-contractors’
• appointment. Note cl. 3.9.2.5 (re collateral warranties).

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Nominated subcontractors

• Why do JCT SBC/Q 2005 and 2011 not allow “nominated

subcontractors?”

• Nominated subcontractors and nominated suppliers were

widely used under JCT98.

“There appears to have been little use of the provisions for Nominated Sub-contractors and little appropriate use of the Nominated Supplier Provisions. The provisions of JCT98 for listing of sub-contractors have been retained and, in the JCT's view, the specifying of a supplier is a matter generally better dealt with in the Contract Bills or other Contract Documents.”

JCT (2005). Standard Building Contract: Guide (SBC/G). London: Maxwell & Sweet.

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Ending a construction contract Remedies Subcontractors and suppliers

Transferring rights and obligations to another party

Third party rights and collateral warranties

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(1) Assignation

• Under common law, a party can assign its rights to another party,

but not its obligations

• Assignment takes place when the original party transfers some or

all of the contractual rights to someone who is otherwise outside the contract

• Eg:- a contractor obtain finance by assigning the rights of payment

under a contract as collateral (security) for a loan

• Cl. 7.1 requires a party wishing to assign rights arising from

SBC/Q to obtain the written consent of the other party

• Cl. 7.2 allows the Employer to assign its rights with regard to the

Contractor's obligations to the purchaser or tenant of the Works

• This gives the purchaser the Employer’s rights to the correction of

defects, for example

Transferring rights & obligations to another party

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(2) Delectus personae

• If the agreement between the parties is based on the

particular skills or expertise of one of the parties, then no

• ne else can perform that role.
• When delectus personae applies, the Contract cannot be

assigned to a third party without those skills.

“The principle which we call delectus personae ... applies when a person is employed to do work or to perform services requiring some degree of skill or experience. And it is therefore to be inferred that he is selected for the employment in consequence of his own personal qualifications. Such a contract is not assignable by him to a third person who may or may not be competent for the work.”

Cole v C.H. Handasyde & Co. (1910 S.C. 73-74)

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(3) Novation

• It is not possible for one party to a contract to assign the

whole contract (i.e. rights and obligations), to a third party and simply disappear

• Novation is the creation of a completely new contract to

replace the original one

• Instead of assigning rights created under the Contract, the

Contract is terminated and a new one created with the new party.

• In design and build procurement, novation allows the

Employer’s design team to be transferred to the winning Contractor.

• Novation creates problems of liability
• If the design team made a mistake when employed by the

Employer, should the Contractor be vicariously liable for it after novation has occurred?

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Ending a construction contract Remedies Subcontractors and suppliers Transferring rights and obligations to another party

Third party rights & collateral warranties

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Privity of contract

• A contract between two parties can only create rights,
• bligations and liabilities between those two parties.
• Historically, third parties can not be affected, and can not

affect, a contract to which they are not a party.

• The “privity principle” = the rights and obligations created

by a contract are only enforceable by the parties to it

• In construction, third parties often require rights as a

consequence of the Contract between two parties as they are affected by the parties’ work

• e.g. owners of adjoining buildings, underwriters, etc.

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Privity of contract

• The construction industry has historically used collateral

warranties to create a duty of care between a party to a Contract and a third party that is not part of the Contract

• Collateral warranties usually enshrine a contracted party’s

promise to do something for a third party, when that promise arises out of the agreement of the two contracted parties

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Collateral warranties

• A collateral warranty is another contract formed between
• ne of the parties to the main contract and a third party
• For example, the Contractor takes out a collateral warranty

with a third party to satisfy a condition of the main Contract with the Employer

• “Collateral” = related to and dependent on another contract
• “Warranty” = captures a promise made from one party

to another

• A collateral warranty overcomes the problems caused by

the privity principle

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Collateral warranties

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The Contracts (Rights of Third Parties) Act 1999

• Empowers third parties that are expressly given rights by

a contract between two other parties (e.g. SBC/Q between Employer and Contractor) to enforce those rights.

• Construction examples:
• The Contractor may be obliged to not disrupt an adjoining

business.

• The adjoining business is the third party. The Contractor would

be liable to it if disruption did occur.

• A third party may be given the right to damages if the actions

(or inactions) of the Employer or Contractor cause it to incur loss and/or expense.

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Collateral warranties / Third Party Rights under SBC/Q

• Part 2 of the Contract Particulars defines:
• any rights the Contractor is required to grant to third parties.
• any collateral warranties the Contractor is required to

provide.

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Third party rights under SBC/Q

• SBC/Q applies the Contracts (Rights of Third Parties) Act

1999 through cls. 7A and 7B; plus Schedule 5

• Schedule 5 defines two “third parties” and their rights:

(1) Purchasers and Tenants (Cl. 7A; Schedule 5, Part 1)

• Contractor must warrant that it has completed the Works in

accordance with the Contract.

• Contractor is liable to purchaser / tenant for:
• purchaser / tenant’s costs in fixing defects in the Works
• purchaser / tenant’s losses incurred as a consequence of the

correction of defects (Sch. 5, para. 1.1.3)

• This liability can be limited in Part 2 of the Contract Particulars

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Third party rights under SBC/Q

(2) Funders (cl. 7B; Schedule 5, Part 2)

• Contractor warrants that it has, and continues to, comply

with the Contract.

• Contractor’s liability to the funder is unlimited.

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Collateral warranties under SBC/Q

• Collateral warranties are accommodated by cls. 7C to 7E.
• SBC/Q accommodates the use of collateral warranties as an

alternative to third party rights in:

• Part 2 of the Contract Particulars
• Defines the warranties the Contractor must provide
• Cls. 7C to 7E
• Create the obligation of the Contractor to provide different

warranties to different types of organisation.

• Purchasers / Tenants or Funders
• Subcontractors can also be obliged to provide collateral

warranties

• The clauses that must apply are stated in the Contract

Particulars

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Collateral warranties under SBC/Q

• Cl. 7C: Obliges the Contractor to provide a collateral

warranty to the purchaser and/or tenant

• Cl. 7D:

Obliges the Contractor to provide a collateral warranty to a funder

• Cl. 7E: Obliges the Contractor to secure a collateral

warranty from a subcontractor to the purchaser and/or tenant, or to a funder or to the Employer

• JCT provide standard forms of Collateral Warranty

contract

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Remember to read the full Unit notes and Appendices, and complete your independent study