disputes

A recent question that came to us was to provide some contract advice to a project management consultant for events arising out of COVID-19. We have a good relationship with this particular consultant so our advice was complimentary. It also provides a good example of how parties should think outside the contract and communicate in a positive way.

The Scenario

  • They entered a contract before the impacts of COVID-19 began to have an effect.
  • The contract was for alterations to a shopping mall. The Employer was intending to fund from rental income from the mall itself.
  • Works has started on site.
  • When the impact of COVID-19 started to have an effect locally, the Employer realised that his rental income could or would be severely affected.
  • He elected to suspend the Works indefinitely and gave notice of suspension to the Contractor.
  • The Contractor, having arranged for all the bonds, guarantees and insurance required by the Contactor, applied for the Advance payment after the suspension date.

The Advice

We were asked if the Employer, having suspended the Work, was still obliged to pay the advance payment. Our answer was that:

  • the Contract has not been terminated, so this does not change the Employer’s obligation to make the advance payment.

The Employer recognised that the Contractor would be entitled to an extension of time and the payment of costs associated with the suspension. But, they asked us if the Employer could request the Contractor to submit his claim for costs after lifting the suspension. Our advice was that:

  • the Contract obliges the Contractor to submit his claims within 42 days.
  • If the suspension period is ongoing, the obligation lies with the Contractor to send monthly interim claims until they ascertain the final effects.
  • The Engineer must respond to the claims and certify payment of any amounts reasonably ascertained to be due under the claims.

This was our advice based on a purely contractual perspective. However, because we could see a potential problem on the horizon for both parties, our advice did not stop there…

Thinking Outside the Contract

Let’s look at the situation from the Employer’s perspective. The Employer will possibly consider that having suspended the work, the Contractor can demobilise his resources with little cost and just maintain the guarantees, insurances, etc. at a low daily cost. The Employer could therefore expect to receive a relatively low-value claim for costs incurred.

On the other hand, the Contractor may consider that he can remove all his resources from site and claim for costs incurred due to resources standing idle during the period of suspension, which would result in a substantial claim.

This is where we see a potential problem. Our advice was that the parties must discuss the situation in an open and frank manner, with a view to reach agreement on the best actions to mitigate the situation for both parties. Items for discussion on the agenda should include:

    1. How long does the Employer intend to suspend the work? Only the Employer can answer this. He may not even be able to predict when his income stream will resume. Consequently, there may need to be plans for several eventualities.
    2. What costs is the Contractor incurring or is likely to incur? Only the Contractor can answer this. If the Contractor directly employs the project personnel, demobilisation may include redundancy and repatriation. So costs will be substantial and may be greater than keeping them idle for a limited period. The Contractor may then have to recruit new labour in order to resume the work. This could cause additional delay and costs after the suspension period had ended. What are the Employer’s priorities in this respect?

So there you have it, a good example of how a strictly contractual solution will not solve all the problems on a project and how thinking outside the contract is often good management for both parties.

Finally

Hewitt Decipher Partnership’s expert consultants have been advising on contractual matters for many years and because our consultants come from many backgrounds within the industry, we also advise our clients on how to avoid contention and provide proactive solutions to problems.

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