Chris Kirby-Turner, a partner in the Construction & Engineering team writes for South East Business, providing advice on resolving construction disputes.
With the construction sector facing a sustained period of exceptional price volatility, it is not uncommon for a party to have assumed a level of contractual risk that they become simply unable to bear. A real world approach is therefore often essential to unlock an impasse or resolve a dispute, to enable the project to move forward.
Increasingly, rather than trying to enforce obligations against a party that will not be able to withstand a claim, parties will look to re-set their obligations to reach a pragmatic and practical solution. In seeking to do so, parties need to take steps to protect their position, whilst negotiating in parallel on a “without prejudice” basis.
What options are there for a ‘re-set’ of contractual obligations?
Options may include a renegotiation or “re-set” of key pricing elements of the works or reaching a “line in the sand” agreement to deal with key events and their financial consequences (particularly delay related matters). Alternatively, if the financial pressure from other contracts are a particular concern, there may be scope to agree appropriate arrangements to ring fence sums or agree direct payment for higher risk items. For projects nearer to completion, it may be appropriate to look to agree a conditional settlement, by which the payments due under the contract are agreed on a final basis, with the release of that sum or instalments made subject to specific outstanding matters being dealt with.
It is critical for parties looking to achieve such an arrangement to ensure that they continue to comply with their obligations under the existing contract whilst separate negotiations take place on a “without prejudice” basis. In particular, parties must be particularly mindful of the importance of strict and timely compliance with the interim payment mechanisms to avoid leaving the door open to a “slam dunk” adjudication.
Take care not to commit any breach of contract
Parties must also ensure that any steps to suspend works and/or activate the termination provisions under the contract are only taken after careful consideration and appropriate advice is taken, to avoid committing any breach of contract. As always, the stakes of getting suspension or termination wrong are very high. Wrongful suspension of works or attempts to terminate a contract is in and of itself a serious breach of contract, which could be turned to the advantage of the other party, particularly where they are seeking to get out of a contract which they have no financial incentive to see through to completion.
A party seeking to rely upon the terms of the existing contract may well feel aggrieved at the thought of surrendering significant elements of its entitlement, having negotiated a price for the works which reflects the allocation of risk between the parties. However, in these volatile times, the reality may be that a negotiated outcome is the only way to effectively mitigate the situation, if the alternative is a party being forced into insolvency.
When dealing with a party under such pressure, careful consideration must also be given to their vulnerabilities on other projects – there may be nothing to be gained by agreeing to pay extra money if that money will, in reality, simply be used to prop up other jobs and/or if the party remains in a precarious financial position as a result of its liabilities on other contracts.
The importance of continued dialogue
To maximise the chances of finding a mutually beneficial solution in these circumstances, early and continued dialogue between the parties in conjunction with appropriate professional advice is essential. That can then enable a strategy to be developed and implemented by which rights and obligations under the contract are fully documented and complied with to safeguard a party’s position, alongside separate without prejudice negotiations to find a real world solution. This dual approach then enables the parties’ without prejudice discussions to explore real world solutions without being unduly distracted by concerns of being wrong footed by their ongoing contractual obligations.
A flexible and innovative approach can then be taken when resolving construction disputes in these challenging circumstances, with a myriad of outcomes achievable by negotiation that could not ultimately be imposed by an adjudicator, judge or arbitrator if matters escalate to a formal dispute. Whilst there will often be scope to come up with a far more effective and mutually beneficial outcome than one which risks putting a party under, care must be taken not to prejudice your position whilst those negotiations take place, and any agreement must be carefully negotiated and drafted to ensure its effectiveness, particularly where works are ongoing.
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