By Simon Forsterling | Nexus Law Group Principal – Sydney
One of the things that I most enjoy about my job, is reading construction contracts. They provide an immediate insight into the way that the drafting party is likely to approach the job.
Having worked previously as a quarry manager and as an in-house lawyer I’ve read a couple of thousand of construction contracts over the past ten or so years and learnt a thing or two of what to look out for.
By the time you’ve got through these tips, I’d be surprised if you weren’t itching to fill in all of the gaps by reading the contract cover to cover.
I’d like to hear what your experiences are with contract review, or if you have any questions. Please feel free drop me a line at [email protected].
Here are my 6 tips to share with you to keep in mind when reviewing a construction contract:
1. Do it when your brain is at its best
Set aside time to review the contract properly.
The first contract I ever read was at 3pm, after lunch, in a hot office and on the back of an early morning start. Not a good idea.
Now, my contract review work is done in the early morning, knowing my brain works best first thing, and before there are likely to be any distractions.
Don’t put off the contract review until Friday evening after a glass of red as it will take so much longer than when you’re fresh. A time of day when you’re focused and able to review properly will help to get the deal finalised with minimum fuss.
2. Work back to front
Check out what all of the annexures and attachments at the back of the contract contain first.
What you’re really doing is getting an overview of all of the documents that form the contract. Chances are, you may already be familiar with them. Straight away, you might have a level of comfort with half of what was originally a pretty daunting 300 page contract, based on this first step alone.
3. Look at key definitions
Check the definitions in the contract.
Looking at the definitions of familiar terms like “qualifying cause of delay” (causes that you can claim additional time for) and “latent conditions” (site conditions that you should be able to claim additional time and cost for) might help give a flavour of the risk allocation in the contract.
Under unamended AS4000 for instance, “qualifying cause of delay” is reasonably open ended, and the contractor will be able to claim an extension of time for most causes, provided they’re beyond the control of the contractor. If qualifying causes of delay are limited to breach by the principal and variations, then the bulk of the risk of delay to the project will rest with the contractor.
Similarly, you’d usually expect latent conditions to be any conditions that could not reasonably have been expected by a competent contractor. If they are defined as, for example, “rock encountered in sewer trenches below 1.5m”, the contractor will bear most of the risk for site conditions.
A quick review of these two definitions gives you a good feel for what the risk allocation in the contract is generally likely to be.
4. Check time to submit notices
Check the contract clause requirements for how much time the parties will have to submit notices to claim extensions of time, variations and latent conditions.
If the timeframes are “promptly” or “within 28 days”, then chances are the contractor is unlikely to become time-barred from making an otherwise genuine claim. Conversely, if timeframes are “two business days”, then there is a high chance that claims for additional time and cost will be contestable.
5. Word search the document for “indem”
Identify all of the indemnities in the contract.
This must be the most frequently performed contract check by insurers and lawyers alike.
After all of the indemnities in the contract are highlighted, you’ll have a good feel for the costs that the principal is able to push back on the contractor if things turn nasty.
Looking a fraction further on in each indemnity clause, you’ll be able to see whether the scope of the indemnity is reduced for any contribution to the loss by the other parties. If you’re the contractor, there should be a red flag for any indemnities for loss that is caused by others.
6. Don’t skim the annexures
Check the annexure and the related contract clauses carefully.
Just completing the annexures, or reviewing them without cross-referencing the related clause, can lead to nonsensical contract provisions. I’ve seen Project Managers for large projects getting this wrong. They’ve focussed on completing the annexures, filling them out based on the simple adjacent description, and without looking at the relevant clause.
By way of example, in relation to “qualifying cause of delay” for which extension of time can be claimed, the adjacent wording in the annexure might be “extension of time – additional causes”. To find out whether this means causes that do or don’t give rise to a right to claim extension of time, you’d need to look back at the relevant clause.
It’s really easy to make the mistake of reading what you expect to see, rather than what’s actually written, when skimming through the annexures.
If you have any questions, contact Simon Forsterling at [email protected]
This article first appeared on LinkedIn.
This publication is © Nexus Law Group and is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.