Chris Kirby-Turner is a partner in the construction & engineering team at Thomson Snell & Passmore LLP
It’s common knowledge that construction is facing a sustained period of exceptional price volatility. As a result, it is not uncommon for a party to reach a level of contractual risk that they are unable to bear.
“Wrongful suspension of works or attempts to terminate a contract constitute a serious breach of contract”
Rather than simply “going legal”, a real-world approach is often essential to unlock an impasse. But in a world of increasing costs, how can you avoid making things worse?
Resetting your contractual obligations
It may be possible to reset your obligations to reach a pragmatic and practical solution and avoid costly legal disputes. But you need to take steps to protect your position and minimise financial risk. At the same time, you will need to negotiate on a without-prejudice basis, genuinely seeking to resolve matters.
Options include a renegotiation of key pricing elements. You may then be able to reach a “line-in-the-sand” agreement to deal with key events and their financial consequences (particularly delay matters).
For projects nearer completion, it may be best to agree a conditional settlement that is subject to specific outstanding matters being dealt with.
However, there are risks with this approach. You must continue to comply with obligations under the existing contract and separate negotiations should take place on a without-prejudice basis. In particular, parties must remember the importance of strict compliance with interim payment mechanisms. If not, you risk leaving the door open to a technical, “slam dunk” or “smash-and-grab” adjudication.
Don’t breach the contract
This is critical. People often forget the need to consider the precise requirements of their contract. You may take steps to suspend works or activate termination provisions under the contract. If so, seek legal advice to avoid committing any breach of contract. The stakes of getting suspension or termination wrong are high. Wrongful suspension of works or attempts to terminate a contract constitute a serious breach of contract, which could be turned to the advantage of the other party.
Parties will have negotiated a price that reflects the allocation of risk between them. It may therefore be difficult for one of those parties to think about giving up its contractual entitlements. However, in volatile times, the reality may be that a negotiated outcome is the only way to effectively mitigate the situation. The alternative could force a party into insolvency, which ultimately helps no one.
When dealing with a party under such pressure, give careful consideration to vulnerabilities on other projects. There may be little benefit in agreeing to pay extra money, particularly if that money will only prop up other jobs or perpetuate the company’s troubles.
Keep the dialogue going
Early and continued dialogue between parties, along with appropriate professional advice, is essential. From there, you can develop a suitable strategy that will document and comply with rights and obligations under the contract, and undertake without-prejudice negotiations to find a real-world solution.
This will help avoid being wrong-footed by ongoing contractual obligations. A myriad of outcomes are achievable by negotiation, many of which could not be imposed by an adjudicator, judge or arbitrator if matters were to escalate to a formal dispute.
There will often be scope to come up with a more effective outcome than one that risks insolvency. But any agreement must be carefully negotiated and drafted, particularly where works are ongoing.