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9/6/2014

Topics Covered (EW)


The following topics will be taught by me: - Dispute Resolution

Contract Practice

- Contractor's Claim

- insurances
- Termination
- lnsoivency
- Bonds & Guarantees

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Conditions of Contract
Agreement & Schedule of Conditions of Building
Contract for use in the Hong Kong Special

Due to complexity of construction projects, it is essential


to set out atl the details of the work in a properform of
contract. and state each party's duties, obligations, and
rights. Failure to do this may cause difcutlies and
possibty lead to arbitration or court proceedings.

For these reasons, it is now common practice to use


standard form of contract in the building industry.

Administration Region - Standard Form oi Building


Contract, Private Edition - With Quantities
A building contract may be formed by oral or written
agreement and the terms make up the contract itself.

Reason for Use of a Standard


Form
Using a standard document avoids the waste of time that
would result from having to individually draftthe many
terms necessary for each new contract

The parties to the contract become familiar with, and


therefore gain a greater understanding of the document,
though the practice of using it for each successive
contract.
The pat-ties to the contract are clearly made aware of
their duties, obligations and rights. as they are all written
in one well referenced documents. Theterms have been
carefully worded so as to avoid any vagueness or
ambiguity, and are referred to by clause name and

In the event of disputes, standard forms of building


contract provide a means of settlement, without the need
to refer the matter to a court of taw. An arbitration
agreement clause in the document attows the parties to

refer their disputes to the decision ofa n arbitrator.

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Contract Clauses Covered


Cover the following clauses

Clause 28 - Notice of claims for additional

- Clause 20 Injury to persons and property


and indemnity to Employer

payment
Clause 33 Surety Bond
Clause 35 - Determination by Employer

Clause 21 - Insurance against injury to

persons or property
Clause 22 Insurance of the Work

Clause 24 Damages for Non-

completion
Clause 25 - Extension of Time
Clause 27 ~ Direct loss and/expense
expense

Clause 36 Detemiination by Contractor

Clause 37 Detennination by Employer or


Contractor
Clause 38 Fluctuations
Clause 41 - Settlement of disputes
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Insurances
An insurance contract is an agreement
whereby one party, the insurer, in return
for a consideration, the premium,
undertakes to pay to the other, the insured,
a sum of money or its equivalent, upon the
occurrence of a specified event which is

- it is a contract of the utmost good faith as the


insured is required to provide details of the
interest to be protected.

, implied duty upon the insured to disclose all

knovim facts when applying for an insurance


policy.

against the insureds financial interest.

- In the event oi non-disclosure, the insurer may


avoid laibility.
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Terminology
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Cover - extent of protection that insurance provides to


the insured.
Limit of indemnity - compensation for loss, i.e. maximum

amount to be paid by insurer for loss.


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Premium - money paid by the insured to the insurer for


undertaking faoiicy. Calculated based on the sum
insured, the Emit of indemnity, cover, exceptions and

~ Peqiod of insurance the period of time during which the insurance


policy is effective. Norma ly 2 weeks alter practical completion for
CAR and cover the 12 months defects liability period for third party
and workrnens compensation insurances.
- First Party and third party insurance the former is the one
voluntarily insures one's own lite, or property , against loss, injury or
damage. third party insurance policies are those which insure
against ones potential liability in law to pay damages to another.
- Joint lnsured issued in joint name, i.e. employer (the Principle),
main contractor, sub-contractors, suppliers of any tiers ~ joint
insured. A cross liability clause must be included in the policy.

other conditions of the policy.

Excess - Specied amount to be deducted from any


claims payment.
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Building Contract Insurances

Liability Insurance
- Liability insurance coverthe insureds legal liability to

Liability insurance &

third parties, that is, liability to any person who is not a

party to the insurance contract.

Materials damage insurance

- Employer's liability policy - cover the liabiiity of an


employer to his employees for bodily injury or disease
arising out of and in the course of their employment.

- Public liability policy this policy provides an indemnity


against injury claims by the pubiic (other than
employees), and property damage claims.
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Material Damage insurance


Covers loss and damage to property in

Taken out in respect of the following: -

which may arise through ownership,


possession or contract.

- The works

which the insured has an insurable interest

- Buildings and contents of owned and


occupied premises
~ Main contractor's plant & equipment

Does not cover the insureds legal liability


for injury to persons or damage to third

party property in which he has no


insurable interest.

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insurance of buildings and contents

insurance of the Works

of owned and occupied premises

Contractors All Risks Policy

- Cover matters in and arising from existing


premises where alteration or extension
work is involved.

Fire and Special Perils Policy

Note - (CAR is for material damage policy


and thus consequential loss is not covered
unless it is expressly extended to cover
this)
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- Clause 22C.1 requires the employer to


arrange this insurance
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Insurance of main contractor's


ptant and equipment

Indemnity and Insurance Clauses


The HK Standard Form has one indemnity
clause and two insurances clauses.

Applies to both the main contractor's own


plant and that hired.

Clause 20 species the limit of the main


contractors indemnity, making it clear exactly
what he is to assume resportsibiiity for.

May be arranged as an extension of a


Contractor's Atl Risk policy or provided for
under a separate Contractor's Plant policy.

Clause 21 is the tiability insurance clause, and


clause 22 is the material damage insurance
clause.

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Clause 21 Insurance against

Ctause 22 Insurance of the


Works

Injury to Persons and Property


Personal injury or death and injury or damage to

Contractor's All Risk poltcy

Employee's Compensation Insurance & Third Party


Liabitity Insurance.

Either taken out by the Employer (22B) or the Contractor


(22A); Specied perils insurance to the existing building

property

by the Employer (226)

In the joint names of the Contractor, his subcontractors


and their respective sub-contractors of all tiers.

Full reinstatement value of the Works and all other costs


setout in clauses 22.2 and 22.3.

Include a cross tiabitity ctause

Also in the joint names of the employer, the contractor,


his sub-contractors and their respective sob-contractors
ofall tiers and suppliers.

Insurers and terms to be approved


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Bond
A surety bond is a form of guarantee.

Conditional and Demand (Unconditional) Sends - refer to whether


or not payment of the bond amount will he paid with or without proof
of the contractors default.

An undertaking by a third party, usually a bank or an


Insurance company, to pay an agreed sum of money by

way ofcompensation ifa party to a contract tails to ulll


their obligations.

Conditional bond will onty be paid upon actual proof of defautt, such
as an arbitration or court ruling and payment will only cover the
proven loss sustained by the emp!0yer up to the bond amount.

The issue of a bond does not rely so much on the


disclosure of facts, as the purchasers ability to provide
the necessary coltateral to cover the amount of the bond.

Demand bond required no greet of default, and the employer will


receive payntent of the tutl and amount upon presentation of a
written sta ement to the bondsman stating that the contractor has
failed to perform.

In Hong Kong, mostly are demand bond.

Collateral, indemnity agreement or counter guarantee


may be required by the surety.

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Type of bonds

Guarantee
Parent Company Guarantee a contract by the
parent company either agreeing to perform the
contract on the default of the main contractor, or
agreeing to answer by way of securing for the
liability of the contractor to the employer.

Bid ltencler bond


Advancement payment bond

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Maintenance bond
tn theory, the employer may be required to
exhaust its remedies against the contractor
before it can proceed against the guarantee
against the guarantee.

Performance bond (most commonly used in


Hong Kong); bond amount usually 10% of the
contract sum.

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From the tendering point of view, if the employer


intends to seek a parent company guarantee or
performance bond, it should clearly set out this
requirement in the tender documents.

in practice, this problem is often avoided by

providing that the employer may proceed

against the guarantor as principal,

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Collateral Warranties are contracts between

parties who have traditionally not contracted with

each other.

The word collateral connotes side-by-side or


parallel. The word warranty connotes
assurance or guarantee.
The intention ts to Erovide a direct right of action

notwithstanding that it has faited to exhaust its


remedies against the contractor.

in contract for any reach of the terms of the

warranty.
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Cotlateral warranties are required for a number


of reasons: -

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Even if the contractor were

responsible for the subcontractors


work, to address risks arising
from liquidation or insolvency;

To provide the direct contractuat link which


the courts increasingly required to nd
liability;

In the event that the employer cannot sue


the contractor because he is not responsible
for some portion of the subcontractors work;
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Coltateral Warranties are routine in the


United Kingdom and Hong Kong.
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Fluctuation
Fluctuation may be dened as adjusting the

contract sum tor subsequent increase of


decrease in wage rates andlor materials during
the contract period; depending on the contract
being used.

Contractors Claim

The HK Standard Form 2005 edition allows for

increases or decreases in wage rates only, by


the provisions of clause 28 Fluctuations.
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Delays
Clause 38.1 requires this to be stated in the
Appendix if the contract sum is to be adjusted for
uctuation.
It is common practice in Hon% Kong not to
include the ctause as par oft e contract.

Delay in the completion of the works is one of


the most common cause of dispute between
the two parties, and of subsequent claims.
Delays may be considered under three
headings: 1. Delay caused by the Main Contractor

Ba_se_cl on the Index ofwage Rates for the


Building Industry publishe each month by the
Census and Statistics Department of the
Government of Hong Kong.

2. Delay caused by the Empioyer

3. Delay caused by neither party to the contract


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Delay caused by the Main


Contractor
These are usualiy due to bad management in executing the works,
such as insufcient labour on site, late ordering of materiats,
ir}st.rfcie|'tt or unsuitable plant, inappropriate construction method
e c.
The Main Contractor is to proceed reguiarly and diligentlywith the
works. ll the Main Contractor tails to complete the works by either

the Date of Completion or any extended period or time that has been
Framed, then the Main Contractor shalt pay or aliowthe employer
iqualed and ascertained damages.
it delays caused by the Main Contractor are of a serious nature, the
employer may dstem-line the employment ot the Main Contractor
under the contract.

It the delay is caused by a domestic subcontractor, then this is treated as a delay caused
by the Main Contractor. However, if the delay is
caused by a nominated sub-contractor and the
Main Contractor has done all he can to prevent
the delay, this is treated as a delay caused by
neither party to the contract. Therefore, the
Main Contractor will be entitled under Clause
25.t(m) to be granted an extension of time and
the employer cannot claim liquidated damages
for the period of delay caused.
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Delay Caused by the Employer


Where delay ct this nature occur, the architect
has an obligation to issue an architect's

For example

instruction awarding an extension of time.

1. Architect's instruction
2. Late issue of drawing, instruction, details or level

Furthermore, if delays from these causes involve

3. Delay on the part cfartists, tradesmen or others


engaged by the employer to carry out work which

the main contractor in direct toss anditor expense

forwhich he would not othenivise be reimbursed,


he wlli be entitled to recover such direct loss
and/or expense by submitting a claim under
clause 27 Direct Loss andfor Expense.

delays the main contractor.

4. Delay caused by the architect requiring completed


work to be opened up or materials tested, provided
such work or materiats are found to be in

accordance vdth the contract.

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Delays caused by Neither Party to
the Contract

Extension of Time

These may be summarized as ztorce majeure (something caused


by nature totally unconnected with man, or war, or epidemics, or
Iegislatnge interference); inclement \'.~eati'ier; insurance matters (such
as re, ghting, explosion); strikes affecting the works; delay on the

tf faiture to complete the works by the original


date tor completion is caused by a delay which
is outside the control of either party or a delay
which is the architect's or emp oyefs fault then
the main contractor may, under ctause 25 -

For any of these matters the architect has an obligation to grant an


extension oi time to the main contractor.

The original date for completion woutd then be


revised to take into account the detay), so

There are occasions when delays arise due to circumstances over


which netther party to the contract have any control.

part of nominated sub-contractorsor nominated suppliers; and


unforeseeabte shortages in materials and labour.

Extension of Time, app y for an extension of time

relieving the main contractor from lia ility for


liquidated damages based on the original date

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for comptetion.

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if the delay is the fault of neither party, the main


contractor is entitted to an extension of time, but
is not entitled to receive any payment for direct
loss and/or expense that he may have incurred
due to the cause ofthe delay.

The only entitlement for monetary compensation


from the employer is for direct loss andlor
expense suffered by the main contractor as a
direct consequence of the cause.

However, if the delay is the fault of the employer

List of events entitling main contractor to be


granted extension of time by the architect are
listed under Clause 25.1(3)(a) to (v)

or the architect, the main contractor is entitled to

submit a claim, under Clause 27, for direct loss

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and expense in connection with the cause of the

delay.

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Procedure for Claiming an


Extension of Time
The main contractor must take the initiai action

Second notice as soon as practicable but in any

by giving notice of delay to the architect as soon

beyond the Completion Date becoming apparent.

case within 28 days ofgivlng the 1st notice,


giving further substantiation and particulars of
the delay to enable the architect to make a
decision under clause 25.3.1.

The first notice shall Enctude estimated length of


delay, circumstance and cause of delay,
entitlement and listed event stated.

Where the listed event has a continuing effect


the contractor shalt follow clause 252(3) to
serve further notice.

as practicable but in any case within 28 days of

the commencement of an event likely to cause

delay to the completion ofthe works or a Section

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The architect is under an obligation to give an extension


ottime after receipt of the contractor's 2nd notice as
soon as practicable but in any case within so days after
the receipt of the particulars submitted with the second
notice under clause 25.2.

Shatt notify the main contractor it the architect


decides not to x a tater date as a new

completion date.

Where the architect decides that not extension


of time is necessary, and the main contractor is

Timely granting extension of time is important as the

dissatised with the decision, or where the main

main contractor is not left in doubts as to the required


completion date. Also, ifthe architect fails to make a

contractor is dissatised with the period of time

decision concerning an extension of time before the


contract completion date, the employer may lose his
right to liquidated damages.

granted, the parties may refer such dispute to


the decision of an arbitrator.

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Direct Loss and/or Expenses

Loss may be dened as where the main

The contractor shall use his best endeavours to prevent


or mitigate delay to the progress ofthe Works, however
caused, and to prevent the completion of the Works
being delayed orfurther delayed beyond the Completion
Date, provided that the words best endeavours shall
not be construed to mean that the Contractor is obliged
to spend additional money. without reimbursement under

contractor will not recover what he could have

expected to as a direct result of disruption

(disturbance of regular progress), variations, or

the discovery of antiquities.

Expense may be dened as where the main

clause 26, to accelerate the carrying out of the Works to


recover delay that the Contractor did not cause;

contractor has had to increase his expected


expenditure on an item of work to produce the
same result, also as a direct result of disruption,
variation, or the discovery of antiquities.

Do all that may reasonably required to the Architect's

satisfaction to proceed with the Works.


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The main contractor may. under the HK Standard Form

Need to compty Clause 28 for notice of


claims for additional payment.

2005 edition, make a separate claim for direct loss


andlorexpense where the cause is either one of

disruption, set out in Clause 27.1(2)

See Clause 27.1 (2) for detail of qualifying events.

It should be noted that the term direct loss and/or


expense, is used in the text of each ofthe clause under
which the main contractor is entitled to submit such
claims. The word direct is used in order to make it ciear
that such claims are directly related to the cause, and
are not incidental tosses or expenses.

QS to ascertain the amount of any


additional payment for loss and/or
expense incurred by the main contractor
and shall be made as soon as practicable
but in any case within 60 days of receipt of
the build up claim and the particulars.
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Liquidated and Ascertained


Damages

Evaluation of Direct Loss and/or


Expense
Ciaim may be considered under following
headings:

Liquidated and ascertained damages is the monetary

compensation paid to the employer by the main


contractor in the event of late completion.

1. Materials/plant

."9.":'>$'~!

Labour disruption
Pretlminaries and supervision
lnaon
Head ofce and site overheads and prot
Finance charges
Loss of interest for late payment eto.

The word liquidated means that the principle to pay


monetary compensation for a breach has been

established; the word ascertained means that the


amount to be paid has been decided.

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Clause 24 - Damages for non-comptetion, permits the


employer to deduct from monies due to the main

No specic or suggested method of arriving at a sum of


money per day thatwould reect the employer's loss.

contractor, iiquidated and ascertained damages at the


rate stated in the appendix, ifthe works are not

Commonly used method is to catculate the liquidated


damages as the daily rentabte value of the property after
taking into account likely occupancy rates.

completed by the Date for Completion or within any


extended period of time as granted by the architect.
The sum is entered in the appendix as a at rated per
day, which should be a genuine pre-estimate of the loss
which the employer will suffer in the event of a delay in
completion of the contract.

HKSAR and some organizations uses a formula in order


to arrive at a more accurate assessment of loss.

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Procedure for Deducting


Liquidateci Damages
ifthe main contractor tails to complete the works by the
Date for Completion or within any extended time xed
under clause 25, then the architect (i) must issue a
certicate conrming that all claim for extensions oi time
have been addressed, and (ii) stating that the works
ought reasonabiy to have been completed.
The contractor shall, if required to do so by a notice from
the employer. pay or allow to the Employer liquidated
and ascertained damages for the period between the
completion Date and the Date of Substantial Completion.
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The Employer's notice shall not be given either before


the certicate or after the Final Certicate is issued.
The employer shall refund to the Contractor the amount
ofilquidated damages paid or allowed forthe later period
after review (i.e. iurther time extension granted as a
result of review) plus interest rate at 1% below the
judgment debt rate within 28 days of the Architect xing
the later completion Date.

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