CREATIVE CONTRACT CLAUSES – GOOD BUSINESS OR BAD MANAGEMENT?

Increasingly, we see respondents adopting “creative” contract clauses to impede or avoid managing legislated payment and contract management processes.  The problem is that every clause in a contract assigns rights and responsibilities on one or both parties.  They absorb valuable resources, distract both parties from the job at hand, and if not carefully managed lead to expensive and exhausting disputes.

It is a far better business strategy to establish a compliance policy and to efficiently manage payment processes within a policy framework.

Some of the more creative contract clauses are:

Pre-estimating payment claims. 

Often an informal arrangement, outside the contract, or agreed at a post-tender meeting.  It is unnecessary and it leads to compressing the time available for claimants to prepare progress claims and quantity surveyors and others to evaluate progress payments to as little as 5 days.  It leads to errors, ulcers, uncertainty in relation to reference and payment claim dates and, ultimately, disputes.

Our research indicates that a complying payment policy for major managing contracts can add 21 business days (over 4 weeks) to the time available to negotiate and agree a progress payment.  Why do managing contractors come up with crazy pre-estimating arrangements when a better result can be achieved in good time?

I accept that managing contractor arrangements imply or at least contemplate back-to-back payment arrangements that are not well catered for under security of payment acts.  It may be that more reasonable terms, like the one suggested in the Slideshare may be more effective, though not necessarily watertight.

There are other, more effective ways to encourage contractors and subcontractors to meet a “claim-by” date, as well as a reference date.

Excessive supporting documentation

Some contracts request excessive supporting information with a payment claim.  This can be a rod for the recipient’s back as well as the claimant.  The respondent would be required to carefully analyse supporting information with every claim to meet its payment schedule obligations.  However, if a respondent waived the requirement along the way, it may be difficult to rely on it in the event of a disputed claim.

It is better to only insist on documentation that is necessary to assess the payment claim.  This might include statutory declarations in relation to payment of wages, a completed schedule of claimed items, including variations and other claims.

With reasonable, achievable requirements respondents can establish a manageable, effective, regular payment schedule process.

Extended payment terms and attempting to circumvent the “reference date” concept.

Here is a real example of a clumsy attempt to manage or circumvent the Qld Act.

“The Contractor shall pay the Subcontract Sum to the Subcontractor in accordance with this section.

The Subcontractor is entitled to submit to the Contractor a single valid Progress Payment Claim each Month until the Date of Practical Completion on the day specified in Annexure B to Schedule 1, or the Business Day immediately prior to that day if the day specified is not a Business Day, and at the Date of Practical Completion.

If, in any Month until the Date of Practical Completion, the Subcontractor submits a Progress Payment Claim on a day other than the day specified in Annexure B to Schedule 1, or the Business Day immediately prior to that day if the day specified is not a Business Day, then the Progress Payment Claim shall be deemed to be submitted:

3.1.3.1  if the Progress Payment Claim is submitted by the Subcontractor on a day prior to the day specified in Annexure B to Schedule 1, or the Business Day immediately prior to that day if the day specified is not a Business Day, on the day specified in Annexure B to Schedule 1 in that Month; or 

3.1.3.2  if the Progress Payment Claim is submitted by the Subcontractor on a day after the day specified in Annexure B to Schedule 1, or the Business Day immediately prior to that day if the day specified is not a Business Day, on the day specified in Annexure B to Schedule 1 in the next Month. 

The Contractor shall pay to the Subcontractor, within 25 Business Days after the submission of a valid Progress Payment Claim, the amount, if any, that the Contractor determines is due to the Subcontractor under the Subcontract in relation to that particular Progress Payment Claim (“Progress Payment”).

Except for a Progress Payment made on a Progress Payment Claim submitted by the Subcontractor to the Contractor at the Date of Practical Completion, a Progress Payment made by the Contractor to the Subcontractor is made on account only.

If the Subcontractor fails to refer a dispute in relation to a Progress Payment made on a Progress Payment Claim submitted by the Subcontractor to the Contractor at the Date of Practical Completion for dispute resolution in accordance with Section 16 within 10 Business Days after the Contractor makes the Progress Payment, the Subcontractor shall be deemed to have accepted the Progress Payment in full and final satisfaction of that Progress Payment Claim and the Subcontractor shall lose any right, and shall not be entitled, after that time to:

dispute the Progress Payment pursuant to Section 16 or otherwise at law, except to the extent that the provisions of the Building and Construction Industry Payments Act 2004 (“BCIP Act”) may apply, or in equity

3.1.6.2  recover, under the Subcontract or otherwise at law or in equity, any unclaimed amount or any unclaimed loss, cost, damage or expense to the Subcontractor arising out of, or in connection with, the Subcontract and the Works. 

3.1.6.3  The relevant section of an ITP must be closed out by the Site Project Manager and Subcontractor prior to the processing of payment. (See attached Annexure M)”

Clauses 3.1.3.1 and 3.1.3.2  attempt to regulate the reference date under the BCIPA.  The first clause attempts to deal with an early payment claim.  The Act is perfectly clear that a payment claim can only be made for work done in a payment period, after the reference date.  A respondent is better to simply reject an early payment claim under the Act.  Claiming early also puts applicants in a vulnerable position.

The second clause attempts to delay payment of a claim made after the reference date.  The Act is quite clear that a claim can be made any time after the reference date (for up to 12 months).  This clause is also likely to run foul of the maximum payment terms for subcontractors under the  Act, by extending the terms to 25 business days plus the number of days between the payment claim and the next reference date.  It will in almost every case exceed the maximum, thereby invoking the default option, that is, 10 business days after the payment claim.

The result here is that all the respondents good intentions to manage it’s cash flow are likely to be overruled.

The fifth paragraph attempts to override a subcontractors right to serve a payment claim under security of payment legislation.  I’m not sure how it would play out in an adjudication, but you can be sure that it will cost money to go through the legal hoops if the  respondent decided to rely on this clause to defend or overturn an adjudication.

A simple, manageable, complying payment process is much more effective than “wriggle-out” clauses.

Forcing down the responsibility to manage the contract on a subordinate contractor

It is common practice to force down the responsibility for managing subcontracts on to subcontractors.  There are apparent benefits to this.  The main contractor can cut costs by passing on contract management and project management costs.  It can also save the cost of claims that fall outside notice provisions, time bars and other contractual hurdles associated with this practice.

Typical examples are:

  • Requiring subcontractors to take responsibility for the coordination of documents;
  • Requiring subcontractors to take responsibility for identifying delays;
  • Subcontractors taking responsibility for the cost of delays that are out of their control;
  • Requiring subcontractors to take responsibility for identifying variations.

Subcontractors must share some responsibility for identifying issues, but it is dangerous to take on responsibilities that are impossible or difficult to manage.

The disadvantage of these practices is that they create disputes, cause uncertainty and disrupt sustainable, orderly business.

Creative contract clauses are not a substitute for good contract management processes.  Complying payment processes and good contract management, properly resourced, will save time, money and build good business relations.

 

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