Supply chain delays and contracts

This Issue This is a part of the Supply chain feature

By and - , Build 184

With supply chain issues dogging the industry, it is important to understand what the standard construction contracts say about delays.

THE RESULTS OF THE 2020 Russell McVeagh construction survey highlighted an industry concern of supply chain disruption to come, in light of the continuing effects of COVID-19 internationally.

This concern has proved to be well founded. The past few months have seen an upsurge in delays in the supply of construction materials throughout New Zealand, compounded by significant congestion at the ports.

Key terms

It is important for those involved in construction projects to understand which standard form contractual terms may be relevant to supply chain issues and how parties could address such issues when they arise.

The clauses referred to here are those found in NZS 3910:2013 Conditions of contract for building and civil engineering construction, but comparable clauses also appear in other New Zealand standard contracts.

Extensions of time

Where the supply of materials is delayed, a contractor may seek an extension of time. To do so, a number of qualifying events might be relied on:

  • The delay was not reasonably foreseeable (cl 10.3.1(f )). This is the most obvious claim a contractor might make. The extent to which this clause applies will depend upon the exact reason for the delay and what was foreseeable when the contract was tendered for. For example, if the cause of delay is said to relate to COVID-19 and tendering for the contract occurred during 2020, it will be important to be clear on exactly what was (or should have been) understood about COVID-19 and its likely ramifications at that time. There are resources available online that may be helpful in assessing this, including the World Health Organization’s interactive timeline of key events and the New Zealand Government’s timeline of New Zealand specific events. When establishing what was reasonably foreseeable, it can also be useful to draw from the law of negligence, where reasonable foreseeability is a key concept in determining which of the costs arising from an act of negligence should be paid for by a defendant. In that context, a foreseeable risk is a real risk, meaning ‘one which would occur to the mind of a reasonable man in the position of the [defendant] and which he would not brush aside as farfetched’. See Overseas Tankship (UK) Ltd v The Miller Steamship Co Pty Ltd (The Wagon Mound (No 2) [1967] 1 AC 617 (PC)). In our context, the parties to the contract might therefore ask, ‘Is this a risk a competent contractor might have priced for?’ If so, clause 10.3.1(f ) is unlikely to apply. If it is established that cl 10.3.1(f ) does apply, the contractor would be entitled to time but not to time-related costs (cl 10.3.6).
  • The net effect of any variation (cl 10.3.1(a)). There are a number of ways this clause might be relied upon. For example, if the goods were ordered to perform extra work ordered by the principal, the delay might be said to be part of the net effect of the principal's variation. If they were ordered following the late issue by the engineer or principal of any instruction documents or drawings, a similar argument might be made (cl 2.7.7). In some circumstances, where the delay relates to a nominated subcontractor supplier, this may also lead to it being considered as the net effect of a variation (cl 4.2.6). A contractor has an additional incentive for asserting that cl 10.3.1(a) should apply – if it is established, the contractor would be entitled to both time and to time-related costs (cl 10.3.6).

Other possibilities

There are other clauses that might be said to apply depending on the precise facts. For example, in some cases, the delay might be said to be due to a default of the principal (cl 10.3.1(g)) or the result of a new statute, regulation or bylaw (cl 5.11.10). Manufacturing delays or delays due to port backlog, however, are unlikely to trigger these provisions.

In all cases, the parties’ ability to reduce the impact of the delay should be carefully considered. Have sufficient investigations been made as to whether there could be an alternative source for the materials? Is there another more readily available material that the parties can agree is suitable for substitution? If the engineer considers that the delays could have been avoided by taking such steps, they may take the view that an extension of time is not one to which the contractor is fairly entitled (cl 10.3.1).

Where there is no applicable clause under which a contractor can seek an extension of time, it will simply fall to the contractor to bear the burden of the delay.

A further risk to note is the possibility of contractual frustration. If the delay in supply is considerable and the relevant materials are critical to performance of the contract, a party might claim that the contract has become impossible of performance and therefore frustrated – unable to proceed – under cl 14.1. Alleging frustration and seeking to terminate a contract are significant steps and should not be taken without first seeking legal advice.

Tendering practice now

The possibility of supply chain delays is one of many risks that parties should now always consider at the time of tendering for a new project. Parties may wish to explicitly discuss and agree upon a process to be followed in the event of specified delays.

One possibility is adding a substitution clause to their contract by which the parties agree, in the event materials are unavailable or their supply considerably delayed through no fault of either party, certain substitutions will be permissible.

Download the PDF

More articles about these topics

Articles are correct at the time of publication but may have since become outdated.

Advertisement

Advertisement