October 26, 2022

Contractual considerations during economic uncertainty

News Article

As the value of the pound fluctuates and inflation rises in the UK, you may be wondering how you should adapt your contracts to work through this difficult time.

Alternatively, you may want to review the clauses in contracts to see how they might be beneficial during this time. Adam Davis, a Director with Palmers and Head of our Construction Law department, outlines the main points to consider when drawing up revised contract terms:

Termination clauses should be considered in times of financial struggle.

They can allow a customer and both parties in some cases, to terminate a contract at convenience as long as there is the necessary notice given.

Therefore, during this uncertain time, you should pay even more attention to your contracts to ensure you are not breaching any of the provisions made within the clause.

Instances of termination provisions could be failing to deliver information to meet the other’s obligations, failure to pay any amount due or experiencing a change in the control of the company.

Breaching these provisions would result in the other party being able to terminate the contract and this could cause different cash flow issues for your business.

Fluctuation Provisions can provide a mechanism for an uplift in the cost of materials and/or labour.  Many of the standard form contracts include standard provisions for price fluctuations and a mechanism for them to be calculated.  However, in order for these provisions to apply, the contract needs to specifically include them.

Employers will often not want these provisions to apply because, it increases uncertainty as to price, as an alternative, a contractor could include in its tender/quotation/estimate Prime Cost Sum (“PC Sum”).

This is an allowance included in the contract for a particular item, once it has been supplied, then the contract can remove the PC Sum and include the true cost of the same.  This is often a good way to assist in managing fluctuations in prices which is more prevalent at this time.

Payment Provisions during periods of economic uncertainty it is even more important to ensure that the payment provisions within a contract are not unnecessarily lengthy, if they are it could cause pressures on cash flow.

In addition, there has been discussions in government about outlawing the practice of retention payments, whether the banning of such a practice comes about remains to be seen, however, there have been increasing calls for the practice to be banned, similar to how conditional payment provisions have been banned.

The smaller the level of retention the better for a contractor, the standard at present is no more than 3% of the contract sum with 50% being release at practical completion and the remainder being released after a fixed period after practical completion (often referred to as the rectification period).  However, ideally there would be no retention in a contract.

It must be remembered that any retention sum forms a part of the contract sum and can only be retained by an Employer in very limited circumstances and remains a sum due and owing under a contract.

In addition, the TCC have held that a failure to provide certificates releasing retention does not mean that those sums are not due and owing, a court will look at whether factually those sums are due.

Force majeure can cover businesses in the face of unprecedented events such as natural disasters.

However, the standard force majeure clause does not cover the economic difficulties that a country may be facing.

But you can check if your contracts do have any reference to this type of issue so that you are fully prepared for what may come.

You should continually review contracts during any unusual situations so that you are well-informed on the protections you have in place during difficult times.

For more information and advice on amending your construction contracts, please get in touch with us.