Check your contract machinery – it might solve your supply crisis

What good is a saw without any timber? What use is the timber without any labour? These are questions facing contractors across the country as material and labour shortages threaten to stall recovery from the Covid-19 pandemic, writes Oliver Pickford.

Faced with potential delays and increased costs, employers and contractors are no doubt asking themselves another important question: what happens next?

Materials from plasterboard through to insulation and roof tiles are in high demand. In the face of low supply, this is serious business.

Industry publications were forecasting months of supply chain disruption in June this year. Come September, one of the UK’s largest builders’ merchants warned of the “deepest supply chain crisis in decades”.

To those in industry, the causes are well known: Brexit, Covid-19 and shipping. What we don’t know, however, is how long the disruption will last. At best, it will be short-lived. However, the effects on site could be long-lasting, leading to tension between parties and putting strain on commercial relationships. Unfortunately, this means increased risk. What should be done?

Operating the contract

Construction contracts are sophisticated documents designed to allocate risk between the parties. When risks occur, such as material and labour shortages, understanding how risk has been allocated and knowing what rights are available under the contract is important.

“The contract machinery is in place for a reason. It is intended to provide certainty and inform the other party of the position under the contract.”

Parties often have a choice. They can notify the other party of a problem or keep quiet, avoid the confrontation and hope for the best. Serving a contractual notice on another party can feel impersonal, even adversarial. This could explain why many feel reluctant to do so, especially where a good commercial relationship has developed.

Nevertheless, the contract machinery is in place for a reason. It is intended to provide certainty and inform the other party of the position under the contract. Where a contract requires a notice, a failure to issue one will amount to breach of contract and may expose a party to damages.

In addition, under some contracts, if a party fails to serve a notice on time, or at all, it may lose its contractual right to extra time or money where an otherwise valid claim exists under the contract. For every notice, parties should check how it is to be served, by when and what it must include. It would be a very lenient counterparty to allow a claim when the contract says it does not have to.

This underscores the commercial imperative of operating the contract machinery properly, but it does not mean that strict adherence to the contract should come at the expense of meaningful inter-party dialogue: transparency and communication are cornerstones of successful commercial relationships.

In these times of supply chain disruption, operating the contract machinery will help parties navigate the ever-changing construction landscape and, importantly, manage their risk. So, if in doubt, it is best to learn how your machinery works, before it breaks down, and implement it as required under the contract.

Oliver Pickford is an associate at Bryan Cave Leighton Paisner LLP.

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