We are all aware of the recent shortage of building supplies (especially timber) due to the COVID pandemic. Whilst this may not come as a surprise, what may surprise you is when your client refuses to give you additional time, and demands that you finish the job on time, or else. Here is advice about how to manage the pressure and find a way out
An all-too-familiar scenario we encounter goes something like this: You cannot find the item you are looking for, as no shipments are arriving from China due to the local lockdown and/or export restrictions. Your client (typically a commercial client) rings and asks when the job will be completed because they have a deadline to meet. The only answer you can give is either “maybe by ___ date” or worse, “I don’t know”. The client understandably gets frustrated and demands the job be completed on time, regardless. You desperately look around for available parts locally and realise everyone else is doing the same. The deadline is missed and not only does your client refuse to pay existing invoices, he/she also threatens to sue for damages.
Does this scenario seem awfully familiar?
In this article, we will explore the steps you can take in order to give yourself the best chance to defend your legal position. We also urge you to obtain legal advice as early as possible.
Step 1 – Dialogue in writing
The first step is to talk to the other side. It may seem like the client has shut the door on negotiations; however, I would still recommend that you have a formal dialogue in writing with the client to try and resolve the matter with a reasonable offer, such as alternative design. This is important if (or when) the matter escalates to litigation, which I will cover later.
It may be helpful to involve your own supplier in a multi-party negotiation. If an agreement is reached, we recommend capturing this in a written agreement to hold all parties responsible.
Again, please seek legal advice before entering negotiations as you may unknowingly agree to something which could affect your rights further down the track.
Step 2 – Work out if delivery time is stipulated
So, the negotiation failed and you are back to square one. It is time to start considering how to best defend yourself. A key question at this stage would be: what kind of agreement do I have with the client? Does the agreement stipulate the delivery time?
If the agreement was informal and does not stipulate the delivery time, then the timeframe for delivery or completion would be a ‘reasonable timeframe’. If this is the situation, then you are in luck, as the impact of the COVID pandemic and the resulting supply chain issues will
make the argument for a delay that much more reasonable.
If the agreement is informal but stipulates a fixed delivery time, then unless the client has waived the time limit, or has done something to contribute to the delay, you are obliged to deliver on time. We will address the concept of frustration shortly.
Step 3 – Check if contract provisions support you
If there is a formal written contract, then you may be able to seek additional time under the existing provisions of the contract.
Some contracts will contain provisions that allow the extension of time, provided certain criteria are met. Some examples of time extensions provided for in contracts are:
Unforeseeable physical condition.
Strike, lockouts or industrial action.
Something beyond the party’s control.
It is important to note that the terms of the written contract will take precedent. This means that whether you qualify for an extension of time will depend on the wording of the relevant clauses in the contract.
The contract may also contain a force majeure (uncontrollable event) provision which may allow the parties to terminate the contract on specific grounds. Again, this will depend heavily on the wording of the clause and can be limited to certain fixed scenarios (such as war, natural disasters, etc). It is worth noting that sometimes, a force majeure clause may require the parties to mitigate the consequence and avoid cancellation as much as possible.
If the contract does not contain any provision for additional time, then you will need to consider frustration, which we will cover next.
Step 4 – Frustration and court intervention
You have exhausted all attempts to gain more time or end the contract through contractual provisions, and things did not work out. It is now time to consider ending the contract through the legal doctrine of frustration. This method is indeed meant to be a last resort, as one would imagine a reasonable client in the majority of cases would accept a re-design and/or substituted material, given the supply issue.
Frustration is when the performance of the contract or agreement becomes impossible due to unforeseen circumstances. We will not delve into the legal technical test for frustration, but it is sufficient to say that you would need a very convincing argument for a court to declare a contract frustrated. The courts will take into account a variety of factors, and each case will be decided on its own merits.
In our scenario, we can make our case based on the following factors:
Government intervention (foreign and domestic) imposing COVID restrictions.
Long delays caused to the supply chain due to logistical backlog.
Unavailability of things or personnel made permanent due to businesses closing down.
The courts will make a detailed assessment and, if possible, preserve the contract to the greatest extent. The courts will consider things such as:
Whether the delay is indefinite or temporary.
Whether there are viable alternatives.
Whether the contract can be severed so only some parts become frustrated.
Whether the contract anticipated the situation whereby frustration is claimed (meaning such provision will be given effect).
The courts may grant a range of relief such as ordering money paid to be recovered or allow the party who has incurred expense to retain or recover money.
Remember earlier where we said it was important to have a formal negotiation attempt? If a settlement offer you made at an earlier stage is superior to the court-ordered result, you can apply to have the other side pay your legal costs, arguing that the dispute could have been resolved without the need for litigation in the first place.
Conclusion
It may feel like you’re trapped between a rock and a hard place and it’s you versus everyone else. Help is available, and with proper planning and advice, you can get through this difficult time. Please do not hesitate to give us a call if you need assistance.
Ron Qin is a solicitor and construction law specialist in the Auckland firm Martelli McKegg. He guarantees personal attention to new clients at competitive rates.
His phone number is (09) 950 9034, and email rq@martellimckegg.co.nz. This article is not intended to be relied upon as legal advice