
We are back – this time with the second and last half of this must-listen-to two-part series. The uncertainty within the Construction Sector is top of mind for many at the moment. In this episode, Aspect Legal’s Jelena Milanovic continues to discuss construction contracts in the context of Covid-19, She then drills into what a Force majeure clause is and what should they include, along with other clauses relating to the extension of time and delays and changes in the law.
Episode Highlights:
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- General impacts of COVID-19 on the construction industry
- Force majeure: What are they and What should they include?
- Extensions of time and delay
- Change in law clauses
- Final takeaways
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Transcript below!
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Joanna:
Brilliant. Okay, wonderful. So we’ve talked about pricing, what I really like to talk about next is force majeure. Because I think this is a really misunderstood concept. And actually, I feel like many people in the industry and far outside of the industry, you know, perhaps don’t even really understand what it means and how it’s meant to apply. So can you talk about the force majeure clause and is the relevance of force majeure clauses within the building construction industry? And how do they usually appear in the contracts?
Jelena:
I mean, force majeure clauses were one of those things that were always in contracts, but no one really paid very much attention to them. Because, you know, they talked about things like wars and things like that, you know, as if that will have to happen, right? But then COVID-19 happened and suddenly everyone was scrambling through their contracts trying to see do we have a force majeure clause and what does it say? So they’ve really come to the forefront and everyone’s talking about them. But, you know, a force majeure clause really sets out a set of circumstances that are usually unforeseen circumstances or unexpected things that allow you to sort of pause your obligations under your contract for a period of time, while that force majeure event is on foot, so sometimes they’re really prescriptive, and they set out exactly what a force majeure event is. And sometimes they’re much broader, they just refer to, you know, certain events and things that are generally not within, you know, a party’s reasonable control. So they can be worded in any number of ways. And, you know, certainly, it’s probably more beneficial to, you know, the party who’s providing the building services under the contract for it to be as broad as it can be, rather than necessarily very, very prescriptive. But some of the things they should be capturing, at the very least is, you know, natural disasters, epidemics and pandemics, and you know, their effects as well. Because what we’ve been seeing is that, you know, COVID-19, for example, might have some immediate things that might prevent you from completing your project. But then, now, there are all these domino sorts of effects that have carried on that you might want to try and stick under a force majeure clause, if you can’t, like, you know, this supply chain issues, labour shortages and things like that.
Joanna:
So and I guess, stepping back, you know, perhaps if we explain to the listeners because I find that this is, you know, as you say, force majeure clause has rarely had much focus until the last couple of years. And I found it fascinating because when we just had that moment in time, in that March, April period, where everything shut down a couple of years ago, when COVID first hit, we got all of these calls suddenly, hold on, explain this force majeure to me because, like, you know, these almost never seen clause before suddenly, you know, sprang to prominence and people wanted to know if they could enforce supply under their contracts, could they not enforced, were they going to be relieved of obligations in relation to the timeframe under the force majeure clause or not. So let’s talk thought about what it means. So we’ve got a force majeure clause that sits in a contract that says if we have an event that falls within the definition of force majeure, and that event happens, then you’re generally you’re relieved of having to provide that supply or services for a set period of time and the force majeure clause will specify what that period of time is, what the obligations are for both of the parties afterwards, sometimes they’ll be very short. Sometimes there’ll be you know, involved. Is there anything else that you want to add, Jelena to that sort of discussion and force majeure as a whole, in relation to the meaning of it, and its application of it in the building and construction industry?
Jelena:
I suppose one of the things is, you know, don’t assume that you know, if something happens that there is a force majeure protection, it’s really one of those sorts of creatures of contract. So you have to have a force majeure clause in your contract to be able to rely on a force majeure event. And the other thing is don’t assume that if you do have a force majeure clause that it’ll just, you know, suddenly apply, there’s a force majeure event, there’s usually some sort of trigger that you have to make to try to have the force majeure clause applying, it’s usually, you know, some sort of notice that you have to comply within a particular period of time that’s specified under the contract. So they’re probably the two things that people carry on as well.
Joanna:
And the other thing that I find is just the definition itself. Quite often I find people feel that force majeure must have its own absolute definition. And the reality is, as you said before, it’s within the contract, it’s whatever the contract defines. So you know, I find that that’s something that people don’t really necessarily think about before and when you’re setting contracts up the importance of you thinking through well, what might be an event that I want to be defined as force majeure. What might be these events that are outside of my control, that I might then say, I want to ensure that if these things happened, I’m relieved of my obligation to supply for the period of time that I can’t because of this event happening, you know, and usually I find the approaches in contracts are cut and paste without actually thinking through well, what is the practical application of what we’ve actually got in here?
Jelena:
Yeah, definitely. And it has consequences, right? Because a lot of the time a force majeure clause will give an entitlement to terminate the contract if it goes on for long enough. So you really want to think about what are those force majeure events that I want to include? And what are the consequences, are the consequences just being able to sort of putting a pause on the contract until that force majeure event sorts itself out or, you know, will the parties, one or both have a right to terminate at the end if it goes on for long enough?
Joanna:
Yeah. And then and I guess, on the flip side of all of this, we’re talking about how you should set up your contracts, you know, from the beginning now to ensure that you’re properly protected, but this is also equally applies to contracts that might be on food. You know, it’s important that I guess for you to understand, if someone is using a force majeure clause in a supply relationship with you, it might be that they’re not necessarily interpreting the clause in the right way. So don’t just accept, you know, the notices under the clause. If you haven’t taken proper advice and aren’t sure that you understand that, you know, the way the force majeure clause is being enacted, is actually in accordance with the contract.
Jelena:
Yeah, definitely. I mean, you know, for a lot of the time, you know, builders, for example, subcontractors as a kind of like the meat in the sandwich, right, they’ve got this pressure, this upward pressure from their clients, but they’re also relying on all of these suppliers and they’re relying on all of these subcontractors to deliver their obligations under the contract. So I suppose another point that comes out of that is, you know, if you are having, firstly, you are having someone that’s trying to rely on a force majeure clause on you to make sure that, you know, you’re looking at your contract upstream and seeing if you can sort of making similar sort of reliances there because it might affect your obligations to your clients. But also when you’re setting up new contracts, you make sure that these clauses all sort of flow down and back to back. So you’re not in a situation where you’re stuck because you’ve got, for example, a supplier that’s trying to, you know, rely on a force majeure clause, and you’ve got nothing to rely upon when you’re, you know, administering your contract with your client. So, you know, it’s probably something that people might start looking at again, now with the flights that are happening.
Joanna:
Yeah, absolutely. All right. So we’ve talked about pricing, we’ve talked about force majeure. What I think where I’d like to move to next is an extension of time and delay, because that sort of fits in well, with all of the areas that we’ve been talking about before. Where does this, where are the issues in contracts here and what should we be thinking about including in contracts to deal with that issue?
Jelena:
Extension of Time clauses are so important because in projects you know, time is everything. Time is of the essence as they say, and a lot of the time, if you don’t complete in time, you know, you’re going to be potentially liable for liquidated damages. And, you know, they’re they can ratchet up every single day that you’re late. So making sure that you’ve got a clause in there that allows you to extend that end date for completion sufficiently, is really important. So I think the key issue here is making sure that the events for which you can claim an extension of time are really broad enough to cover the risks to you and your project.
Joanna:
Brilliant, yeah. Okay, so we need to ensure that the extension of time clauses are broad enough, what else do we need to be thinking about?
Jelena:
So one of the things that, you know, catch people out a lot is some of the really strict compliance requirements in order to rely on an extension of time claim. So, you know, you can set up the extension time plan really nicely, and they can allow for all of these sorts of delays, and you think you’re covered. But, you know, in the everyday business of trying to administer a project and run a business, what we find is people usually can’t comply with really strict notice provisions. So in a lot of these contracts, there is this multi-tiered notice provisions where you’re having to provide a notice of the delay when it happens, and then every couple of days afterwards, and provide all sorts of supporting material, such as, you know, providing all sorts of supporting material and providing it on a really regular basis. So when you’re entering into your contract, you know, really think about it in my day to day practice, will I be able to comply with this clause? Will my project managers are able to, you know, issue a notice within 24 hours of a delay occurring or will I really kind of need a little bit more time than that? So that’s really important. And then, you know, if you are in a contract already, just being aware of what those provisions are, and making sure that the rest of your team are aware of those because, you know, a lot of the time the contract will say things like, if you don’t comply with the notice provisions, then your entitlement to the extension of time is waived. So you don’t have a right to an extension of time, even though in substance, it’s probably a really valid claim.
Joanna:
Okay, now, we’ve covered everything with Extension of Time and delay, are there more things that we should be considering here?
Jelena:
I think the other thing to probably keep in mind is delay costs. Yeah, so if there’s a delay, are you entitled to time? Or are you also may be entitled to costs? And that just the way to think about risk and how risk should be apportioned for a delay. So for certain delays, you know, will you be entitled to your overhead costs, for example, that are associated with continuing to run your business and keeping staff on while you’re delayed. And that might be to do with, particularly with delays that are caused by, you know, the principle of the client, you know, their breaches or their failure to get their act together and allow you to perform the contract. So, you know, we’ve found with COVID-19, some of those sorts of delays, usually, you know, principals aren’t that willing to give you time and money. They’re usually kind of just willing to give you time, but delay cost is maybe something to keep in mind for those sorts of delays that are really, you know, the responsibility of the principal or your client that they can control.
Joanna:
Yeah, brilliant. Okay, wonderful. So we’ve talked about pricing, we’ve talked about force majeure, we’ve talked about extinction of time and delay. What else, is there anything else that we should be thinking about in terms of setting ourselves up so far for protection in these, you know, difficult times?
Jelena:
The other one, I would just briefly mention is changing law clauses. So they were another one of these clauses that are often just thrown into contracts that no one really paid much attention to until COVID-19. But what we’re seeing is that legislation and governments can really affect your project. And they can affect, you know, your costs. So having an appropriately worded clause in there allows you to claim costs if there is some unforeseen change in the law.
Joanna:
And so what do these clauses look like? Let’s talk about what they usually say, what, what, what our listeners should be looking out for, and then what they should be thinking about in the application of the clauses. So what do they usually say?
Jelena:
They usually talk about, you know, unforeseen things. So changes in the law that couldn’t have been reasonably anticipated at the time that you entered into the contract. And they usually talk about, you know, that you’ve been entitled to claim your reasonable costs that result from those changes in legislation. We had people, you know, relying on those sorts of clauses as a result of some of the changes that occurred during the COVID lockdowns, for example, and people are trying to get creative and rely on them.
Joanna:
So what should our listeners then be doing? You know, now that they’re aware of that as a potential issue? What can they do in their contracts? What should they be looking out for? And making sure is it’s added in?
Jelena:
So just making sure that you know, there is a change in law clause there and one that allows you to, that’s broad enough that allows you to claim back costs, if there is some sort of the change in, in legislation later on because, you know, a lot of people say, well, you know, COVID is kind of over, but it’s not really, there could be a lot of other things that come into play. Now, we’re at this stage where we’re deciding that we’re living with COVID.
Joanna:
Fabulous. Okay, wonderful. Well, look, there are so many things there that I think practical things that our listeners can take away in the building construction industry for how to protect themselves, in what is an uncertain period right now, that will not, I think, end up in great certainty in the very near future, you know, this is a period of time that will go on for a while. And I guess it’s about taking the learnings and making sure you’re implementing them into your contracts, getting the right advice, you know if you’re not sure how best to implement these into contracts as a whole? Do you have any parting words for any of our listeners who are in the industry?
Jelena:
Yeah, definitely. I think you know, too often, people just sort of accepting the contract that’s been given to them on a sort of taking it or leave it basis. But I think especially now, after the last couple of years, you shouldn’t be afraid to read your contract and speak up if it doesn’t reflect, you know, your risk appetite. And if it doesn’t reflect what you really see is the deal that’s been done between the parties, because, you know, everything’s, everything’s great while everything’s going great. But if, if, if things do turn pear-shaped, then everyone will pull out the contract. And we’ve seen that more in the last couple of years than we have ever before. So that’s really the key thing. Don’t be afraid to try and negotiate because people are really expecting it now.
Joanna:
I think it’s a really good point. And, you know, every now and again, I have clients who will say to us, well, I don’t want to litigate anyway, what does it matter? I’m not gonna sue anyone under this clause, but that’s not the point. The point is having strength in your contract so that you’re in power of negotiation if you’re in a situation where you need to enact some of these clauses, and you know, some of the things you’ve talked about Jelena are just really sensible anyway, in terms of reviewing whether we’re using fixed price, what other ways can we look at doing this? You know, and just even understanding some of those unusual cases, like force majeure that we all feel a little bit more knowledgeable about now.
Jelena:
Unfortunately so yeah.
Joanna:
That’s right. That’s right. That’s right. Well, look, I just want to say a huge thank you for coming on to the show, today, Jelena, and a huge call out, you know, to you for your expertise in this subject and to our listeners, if you would like some advice in relation to setting up these contracts for yourself or understanding clauses that are in contracts that you’re really committed to or indeed dealing with issues that may have come up along the way. You can reach Jelena at Aspect Legal by booking yourself a time to speak with our legal team and just mention that you’re after our specialist advice in the building and construction industry, Jelena. I just want to say a huge thank you for coming on to the show today.
Jelena:
No worries. It was my pleasure.
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