Geoff Parish as at 29th July 2018
CA CONS 6812 – Ex1 + ANSWERS – Construction Ks are different TOSHIBA:
Contract Administration CONS 6812 - Exercise No.1 + ANSWERS
This Topic is Construction contracts are different – Tuesday 24th July 2018
Q1. Briefly summarise each of 5 main differences between construction contracts and most other
manufacturing contracts?
Payments are made in increments as the product is made rather than when the product is handed
over which raises insurance considerations because if the product is partly complete and burns to
the ground and has been partly paid for, the contractor may not have the ability to replace the work
done without being entitled to be paid for it again; 2.. The product is typically attached to the land
[real property] and in law the product becomes land, title to which is in the hands of whoever owns
the land whereas title to a manufactured product [personal property] passes to the owner
whenever the contract of sale and purchase deems it to pass e.g. when final payment is made [see
also 5.. re unforeseen ground conditions]; 3.. Design may be performed by one party under a
contract with the client and by another party under a separate contract with the client to construct
[the ‘traditional’ contract] resulting in split responsibility for defects whereas a manufacturer of a
product is totally liable for defects [similar to a ’design and build’ contract in construction work]; 4..
Design may be changed as work proceeds, typically because it is a ‘one off’ project and work often
starts even before the design is finalised; and 5.. Time for completing the work is usually a condition
of the contract and risk of delay [e.g. caused by inclement weather, changes to the design,
unforeseen ground conditions and so on] is allocated between the client and the contractor [similar
to ship building and building off shore drilling rigs but most manufactured products are bought ‘off
the shelf’].
Q2. What is the main reason for building suppliers writing retention of title clauses into their supply
contracts with builders?
Insolvency – of either the person who bought the goods or the Principal who will pay the purchaser
for them because they will be incorporated into whatever is being constructed. Title is ownership
and possession is a separate issue. Because a person has possession that person does not necessarily
have title, much like renting a car on holiday for example. Under 19 Property passes when intended
to pass Sale of Goods Act 1908 Reprint 1/9/2017 and a retention of title clause in the sale and
purchase of goods says title will only pass to the purchaser when the supplier is paid in full.
Under the Nemo dat quod non habet principle in Common Law countries, literally meaning no-one
can give what they don’t have, you cannot pass better title than you have simply by passing
possession down a ‘chain’, so whoever has possession of the goods, the supplier still owns them
until, and unless the supplier receives full payment for them.
The goods are personal property [personalty – movable, tangible property] but as soon as they are
attached to the land [via whatever is being built] they morph into real property [realty] and legally
they are now part of land which usually someone else owns and has title to. Physically, windows for
example, they are still windows but in law they are now land. So unless they are incorporated into
the construction work, even though the Principal may have paid the main contractor for the
windows when they were brought onto site, the supplier still has title in them, and if the contractor
declares itself insolvent, the supplier can reclaim the windows.
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Geoff Parish as at 29th July 2018
CA CONS 6812 – Ex1 + ANSWERS – Construction Ks are different TOSHIBA:
The fact that the Contractor now owes the Principal for the value of the windows is a separate issue
and not the window supplier’s problem. Except – having to prove ownership. But that’s another
story.
Q3. How is personal property different from real property?
You can move personal property from A to B and it retains its title. Real property is immovable but
you can dig up land, put it on a truck, so it is then personal property and you can take it away.
Technically you could argue that in law you can’t convert real property into personal property, but
common sense suggests that you can. Incidentally some things in the ground may belong to the
Crown [the government in effect] such as certain minerals, artefacts and other stuff. There is
legislation to deal with this – it need to concern us at the moment.
Q4. What is the main problem for building suppliers with writing retention of title clauses into their
supply contracts when the materials are to be incorporated into construction work?
As described above, when personal property morphs into real property.
Q5 What is the difference between having possession in personal property and having title to
personal property?
You can use it when you possess it but without title in it you are not permitted to sell it, and if you
did, the new possessor would not get title to it because of the Nemo dat rule.
Q6. How is it possible to register an interest in personal property of significant value, for example
because you have lent money to a building contractor to buy a crane?
Whoever advances money to someone to buy a piece of plant and wants the plant to be security for
the loan [so for example, if you aren’t paid for the crane you can repossess it and sell it to get at
least some of your money back] can register their interest in it under the Personal Property
Securities Act 1999. If you want more information on how the Act works in practice see:
https://www.chapmantripp.com/publication%20pdfs/PPSA.pdf
Q7. Why is it important to the building owner for construction work to be insured against loss and
damage when it is being performed under a traditional contract and paid for monthly by the
building owner as work proceeds?
The Contractor is usually paid for the work it does at it proceeds so if the Contractor has finished half
the job it will have received approximately half of the price for the job, and it will have paid most if
not all of the money it received to subcontractors, suppliers, and staff etc.
If the work is damaged or destroyed by fire for example the Contractor must clear the wreckage and
start rebuilding, but it is only entitled to claim payment for whatever it has not previously been paid
for, the Principal is only obliged to pay once for completed work. Suppose the total contract price is
ten million dollars and the Contractor has been paid five million dollars before the fire destroyed the
work. The Contractor now has to pay five million dollars to get the work back to the state that it was
in before it was destroyed by fire. Most Contractors would be unable to find the money to be able to
do that, and if the Contractor is a Limited Company it will usually say it is insolvent and be liquidated.
If insurance cover is in place [effectively paid for by the Principal in the Contract Price] the risk of loss
or damage to the Contract Works in progress is largely eliminated.
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Geoff Parish as at 29th July 2018
CA CONS 6812 – Ex1 + ANSWERS – Construction Ks are different TOSHIBA:
Q8. What are the main causes of loss or damage to construction work in progress?
Damage from fire or water are the two most likely risks covered in an insurance policy [‘policy’ is an
alternative word for ‘contract’]
Q9. What is the difference between a contractor’s liability for faulty construction work designed by
the building owner’s architect under a traditional contract compared to the contractor’s liability
performing work for the building owner under a design and build contract?
Under the traditional contract if the work is defective through design and the Contractor correctly
followed the design, the Contractor is not liable for the consequences. Exceptions are: [1] the
Contractor deviated from the design; or [2] the design error was so ‘obvious’ that the Contractor
should have done something about having it corrected. If the Contractor enters into a contract with
the building owner under a design and build contract then the standard of care becomes one of
fitness for purpose, whereby any defect is the Contractor’s responsibility to sort out and correct.
Q10. What are the main issues that cause delay to construction work [excluding poor performance
by the contractor and its subcontractors]?
Giving the Principal the power to unilaterally changed design of the Contract Works while they are in
progress is in my opinion the most likely cause of delay i.e. Variations. This goes back to the failure of
the designers who don’t complete the design in sufficient detail before the work starts on site. But
there are several reasons why design might have to be adjusted while work is in progress.
Poor documentation causes delay by ambiguity, contradictions, omissions and lack of detail.
Whether the above, which covers poor design or changing design, is a bigger cause of delay than the
Contractor’s poor performance was not asked for by the question, but I think that together they are
the main causes of delay. There are other causes however.
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Geoff Parish as at 29th July 2018
CA CONS 6812 – Ex1 + ANSWERS – Construction Ks are different TOSHIBA:
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