Contracts are complex, they are a part of everyday life as well as a mechanism for commerce.
Insurance, holidays, credit agreements and loans, purchasing property and undertaking building work, all require us to enter into contracts of some kind or other.
Some are mandatory; property and the purchase of land are governed by statute-backed standard forms of contract; large insurance and credit companies, banks, have their own terms and conditions and opting out is generally not an option. Whilst they may be complex they are usually underpinned by government control; ‘watchdogs’, ‘ombudsmen’ and the judiciary and a significant volume of case law can be relied upon in the event of a dispute.
The power of social media and the possibility of widespread (God forbid viral) condemnation should also not be underestimated.
I’d like to look though at the more typical construction and engineering contracts that those of us in the industry are faced with and how they might be assessed.
The starting point is, what are they?
Well, there is a school of thought that says contracts are simply an allocation of risk, but in my view, they are more than that.
They also address key elements of any project, describing rights, duties, obligations etc. and typically cover the following, or variations thereto;
· The basic nature of the contract; lump sum, re measurable, cost reimbursable
· Securities; bonds, retentions, insurances, basis of payment
· General Conditions, who does what, when.
· Time; start date, finish date, duration, programme requirements
· Variations; extensions of time provisions, what can be varied, how and its means of remuneration
· Payment, generally prescribed by statute now.
Through all of that there are common threads to consider when reviewing the risk that signing a contract entails.
The wording is important, paramount!
There are often open-ended warranties and or guarantees required. These ought to be limited in terms of both cost and time. In most western jurisdictions, contracts have an actionable life of 6 years from the date of signing (Tortious actions aside) but some of these types of securities can survive termination and extend beyond the envisaged life of the contract.
Not infrequently, contracts impose obligations to not only manage but be contractually liable for the performance of third parties.
Not reasonable in my view. Without the ability to direct and control the parties, being liable for their failure constitutes inappropriate risk transfer.
Typical force majeure provisions are generally acceptable and clients ought to be comfortable being liable for their own risks, such as timely payments, free-issue materials, nominated sub-contractors or suppliers. Attempts to shift these risks should be either rejected or priced.
Be wary of the detail of the words; avoid or seek to amend anything that is imperative e.g. ‘must’ or ‘shall’.
Optional obligations such as ‘may’ are acceptable.
Similarly, ‘ensure’ can have serious consequences if the obligation cannot be met. The giving of (or requiring of others) consents or approvals, if they are to be embraced, must be prescribed by set time limits and qualified such they shall not be unreasonably withheld.
Being obliged to undertake reasonable endeavours is fine, ‘best endeavours’ has been construed to mean the expenditure of money, should it be necessary! One to be avoided.
By the same token, it is unreasonable to expect every possible non-compliance to have a sanction; for a long while the standard form of contract in NZ, for major building and civils works, simply had one clause that said a programme shall be provided within a set period of time after contract signing. No sanction should that fail to occur. That has been remedied now and the provision of the programme is now linked to the first payment under the contract being due. No programme, no payment!
It’s also dangerous to assume standard forms don’t have flaws in them and it’s also wise to assume that one size does not fit all. Construction projects are unique and what worked for one, may not work for another.
A form that shall not be named prescribed one and only one release of retention. All well and good if you’re the guy that does the final clean but the subbie who put the piles in might be waiting years for that money to be released.
These inadvertent cul de sacs can sometimes appear and a simple mapping of obligations vs timeline can reveal them, better sooner rather than later.
My final piece of advice would be to get a good lawyer to advise on any contract of significance but I’d temper that with, ‘get an experienced good one’. In the same way surgeons specialise, so too do lawyers and some will, unfortunately, take on tasks that are not really equipped to deal with.
It’s not all doom and gloom though.
Like insurance, most contracts only really come into their own when matters go awry and then you’ll be glad you had them. . . .or not.
Joe Colgan Dip. EM I.Eng. MICE PMP
Director, Closebook Properties