For many, if not most, companies serving the global mining sector, contracts are the mortar that binds the foundation blocks of industrial growth. Various types of contractual agreements—for equipment, construction, services or commodities, to name just a few—represent income for some, capital investment or asset upkeep for others, and are generally written with the intent to recover maximum value from the resources expanded to award or win them. However, despite any level of care and attention paid to preparation, contractual disputes can arise for a vast number of reasons, and one of the most common causes of confusion or misunderstanding is also among the most basic: the definition of days, dates and deadlines.
Recently, the Potsdam, Germany-based claims and contract management consulting firm 11:55PM Consultants released a briefing paper that offers insight into potential problems and solutions surrounding the subject of “effective dates” for project contracts, warning that, for the establishment and definition of contractually defined times and periods in the implementation of industrial projects, attention and precision are needed to avoid jeopardizing the success of the project for either party.
The briefing outlines the problem by acknowledging that “...it is certainly more than gratifying when the work that goes into an extensive offer regarding the design, production, delivery, installation, and commissioning of plants and machinery leads to an order being placed by the employer” (i.e., customer or client), but cautions that a project can be plagued from the outset by a lack of defined terms. In a hypothetical example, the authors posit that a contractor’s sales and technical departments have worked on a bid for the design, production, delivery, installation and commissioning of a process plant for months. Following lengthy negotiations, the contract is signed by both parties, coming into full force as a result of being signed by both parties on January 2, 2016, as provided for in the contract. From the outset, it is the employer’s intent to be able to provisionally accept the plant from the contractor on June 30, 2018. The contract obliges the employer to make a down payment to the contractor of 10% of the contract price. The contract also contains a liquidated damages provision: If the acceptance deadline is not met by the contractor, it will be liable to 0.1% of the contract price in liquidated damages per calendar day of delay.
This example, according to 11:55 PM Consultants, contains two weaknesses in the formulation of the contract, both of which harbor high potential for disputes between the parties that may prove difficult for the contractor to win.
Weakness 1—In this example, the contract becomes effective upon being signed by both parties (“unconditional coming-into-force”). The deadlines contained in the contract for providing the mutually contracted performances become legally effective. The contractor is obliged to enable the successful completion of provisional acceptance of the process plant as of June 30, 2018. It is required to meet that deadline whether or not the employer made the downpayment in the amount of 10% of the contract price to it. If it happens that the employer fails to make the downpayment, for whatever reason, the contractor will be obliged to render its contracted performance to the employer, thus putting it in a “cash-out” situation.
Weakness 2—The deadline for provisional acceptance of the installations is fixed. It is a fixed date and not defined as a period in a number of calendar days from the effective date of the contract, which links the moment of provisional acceptance of the plant to the effective date. Even if a conditional effective date of the contract were agreed to, the contractor would be obliged to ensure that the employer can successfully complete provisional acceptance at June 30, 2018. This means that, assuming an effective date of the contract of January 2, 2016, as originally intended between the parties but then not fulfilled, the contractor would have had a total of 910 calendar days until June 30, 2018 to prepare the plant for successful provisional acceptance. With each day that the now-conditional effective date of the contract is delayed, the construction period available to the contractor is reduced and the risk therefore also increases of its having to pay liquidated damages to the employer, in addition to the costs that the contractor incurs to defend itself against the employer’s potential demand for liquidated damages.
Tips for remedial action in these instances include:
Contractually agreeing on a conditional effective date—The effective date of the contract should be linked to the contractor issuing a down payment bond to the employer in the amount of the contractually agreed down payment and receiving from the employer, against the submission of a down payment invoice, the down payment in the agreed amount. Only when both of these conditions have been completely fulfilled by the parties does the contract become effective. Both parties have thus obtained more security with regard to the future of the joint project. In addition, it should be agreed in the contract that the down payment bond will be promptly returned to the contractor by the employer as soon the contractor has provided appropriate proof to the employer that it has rendered performances to it in the amount of the down payment amount. If the employer does not return the down payment bond to the contractor without a valid reason, it will be obliged to compensate the contractor for the additionally incurred guarantee fees.
Agreement on relative performance deadlines—Absolute performance deadlines should be avoided as much as possible in the formulation of the contract. With regard to the completion dates, delivery dates, engineering deadlines etc., periods in calendar days relating exclusively to the conditional effective date of the contract should always be defined. This ensures that a company is entitled to the period for performance that it calculated as being necessary at the planning stage during the preparation of the offer. For the example presented above, the time of successful provisional acceptance of the installations would be defined as “910 calendar days after the effective date of the contract.”
There are additional measures that should be considered, including:
- Unambiguously define contractual units of time: Apart from money, time is the most important asset in the project, so in the preamble of the contract define the units of time to be applied in the project. Agree on calendar days. Contractually establish the time when a calendar day starts and finishes, as well as the time zone, which is to apply for the performances to be rendered by the contractor on that calendar day. This will help to avoid disputes if things “get tight” in the project. Do not use “weeks” as the unit of time to avoid getting into a dispute as to when a week begins. Internationally, the unit of time known as “a week” can start and end on many different days.
- Define public holidays or special local circumstances: Contractually agree which calendar days are not business days at which place of performance; for example, due to religious or national holidays. These days should, depending on the place of performance, be defined in the contract as “non-business days” and the construction period measured accordingly. This contractual measure also helps to avoid disputes and ensure clarity in the measurement of the contracted performances.