Did you know that parties who sign a contract are deemed to have read it, understood it and agreed to its terms?
An awareness of contractual ‘red flags’ helps limit risk during the course of a project because it means you can identify potential problem clauses and try to negotiate better terms before signing, and ensures you’re aware of (and therefore able to manage) any remaining risks. But what exactly should you be looking for?
Here are five of the 14 ‘red flag’ issues our Projects, Infrastructure and Construction Team is looking out for when reviewing a construction contract.
For more information on our fixed fee ‘red flag’ reviews, or if you’re interested in a training session for your team, contact any of our construction partners.
Liquidated Damages
If the contract you’re reviewing requires you to complete the works by a specific date, make sure to check if the contract contains a liquidated damages clause. Does it specify:
- The amount of liquidated damages, and the rate at which they will accrue (e.g., daily or weekly).
- Whether liquidated damages are the other party’s sole remedy for delay – if not, you might be liable for other loss and damage (e.g., head contract liquidated damages) in the event of delay.
- Whether liquidated damages are ‘capped’ at a maximum amount or whether the amount you might have to pay is unlimited.
Note: if your contract doesn’t expressly deal with liquidated damages, you may still be liable for general damages in the event of delay.
Delays and Extensions of Time
The ability to claim an extension of time (EOT) can limit your risk in the event of a delay. What do the terms say about:
- The causes and events which will entitle you to claim an EOT. Keep an eye out for defined terms like ‘qualifying cause’, ‘excusable delay’ and/or ‘extension event’.
- The notice requirements you will need to comply with, including when and how notices must be given, and what information must be included.
- Whether the EOT clause, or another clause, limits or bars your entitlement if a notice is given late (and if so, whether you think it will be possible to gather the information and give the notice by the due date).
- Whether an EOT is your only entitlement for delay, or whether you may be entitled to claim delay costs.
Delay Costs/Damages
If you’re entitled to claim an EOT then you may also be entitled to recover the costs you incurred as a result of the delay. Things to consider when reviewing a delay damages clause include:
- What sorts of delays will entitle you to delay costs? Will you be entitled to delay costs if the other party has been negligent or breached the contract?
- Whether your entitlement is limited to a claim for direct costs, or are you entitled to claim consequential losses?
- What the notice requirements are - when and how must notices be given? What information must be included?
- Whether your entitlement will be limited or barred if a notice is given late – and if so, whether it will be possible to gather the information and give the notice by the due date.
Variations
Variations are a major cause of disputes, so it’s important to consider:
- How ‘variation’ is defined and what sorts of changes will be covered (e.g., does it cover negative variations?).
- When the obligation to perform a variation ends - can you be directed to carry out additional work after completion?
- How and by whom variations (including negative variations) will be priced. Is that person required to act reasonably?
- What the notice requirements are - when and how must notices be given? What information must be included?
- Whether your entitlement will be limited or barred if a notice is given late – and if so, whether it will be possible to gather the information and give the notice by the due date.
Payment Claims
Non-compliance with contractual rules for payment claims may not impact your separate statutory right to payment, but disputes about compliance can substantially delay your cashflow. An awareness of your contractual and statutory rights is key. Keep an eye out for things like:
- Conditions you may be required to comply with before you will be entitled to make a claim, or be paid an amount (sometimes called “conditions precedent”)?
- What sort of information needs to be included, and what documents need to be provided, for a payment claim to be valid under the contract?
- When a response must be given, and when payment will be due (note: this may be different for statutory payment claims!).
- Whether interest will accrue on overdue payments and if so – whether the interest rate is reasonable.
Written by Briony Whyte.