Are time bar clauses for variations fair, why do they exist and potential solutions to issues (quick thoughts)
Most of us involved in the construction industry across New Zealand are aware of time-bar variation clauses within construction contracts.
For those of you who are not aware of what time bar clauses are, more common in recent years, construction contracts include terms which require Party A to notify Party B that variations or delays exist and claim for those occurrences, and/or provide the valuations for those occurrences within a certain time… or else !.
If Party A does not comply with these requirements then there is no entitlement to Party A. Note that these terms apply as much to small claims as they do to changes valued at millions of dollars and which may well be fatal to Party A when enforced.
Common standard form contracts include time bars including NZS 3910:2013, NEC & FIDIC contracts, and more. The speed at which Party A must act, and the work required to satisfy the terms vary.
This begs the question (which we will briefly discuss), is this fair ? and if not, then what difference does this make.
Fairness is a misnomer in some respects because contracts are not required to be fair. As long as contracts stay within the limits of the law then parties are free to decide whatever they want and agree to this in a contract.
There are various laws and principles at play where fairness may be a factor or an implied term (such as the Default Rule) and legislation such as the Fair Trading Act may well provide you with some relief, but time-bar terms are absolutely valid (subject to a few requirements) and Party A is highly unlikely to be unsuccessful when seeking to set aside the restrictions on the basis that the agreed terms are ‘unfair’.
It may well be that entitlement to be paid for performing additional works is absolutely critical to the survival of and Party A, and without payment for the hard work which was provided all is doomed ! It matters not.
Why have time-bar terms at all
The apportionment of risk (and avoidance of risk*) is a changing industry norm at the moment in New Zealand.
You only have to pick up a newspaper or refer to google for regular news regarding failures of significantly sized and able construction contractors and whispers of ongoing disputes are commonplace. Risk is real.
Time-bars perform a number of functions:
- If Party B is the ‘meat in the sandwich’ (i.e. a contractor in the middle of the supply chain) then it may be bound by a different contract to perform the same timely communications ‘upstream’ to its own client. It would be undesirable if the subcontractor/ supplier was not obligated to communicate promptly, because by the time the supplier informed Party B that a variation or delay existed, Party B’s rights pursuant to its own contract may already be ‘timed out’/extinguished’. In this respect some parties need time-bars to secure their own rights and risks. The common term for ensuring security when in this situation is being ‘back to back’ with upstream and downstream contracts.
- Another reason for restriction is that a party may want / need to be made aware on a highly regular and frequent basis that changes have occurred and/or will occur. Reasons may include: a) so that they may have a chance to mitigate the effects of any issues (such as delays) while opportunities exist, and b) to closely monitor their own cost exposure risk. This can be for insurance or company policy reasons. Changes of a certain magnitude may need to be managed in a particular way. After all, if you owned a car dealership and a customer walked in with $1 million to spend, you’d probably expect the customer to talk to a manager rather than a staff member attending their first day on the job. An organization is perfectly entitled to manage its own processes in this way.
- The third reason is slightly more difficult to justify when explored.
When restrictive terms are used in a contract, it increases the need for the parties (or party) ‘to do something’. This unavoidably leads to an increase in likelihood that the thing may not be done and this increases ‘risk’.
Of course, all contracts are basically just a list of these rights and obligations in the first instance and so it is important to realize that the issues discussed herewith are directed at ‘unreasonable’ time-bar terms, not ‘reasonable’ requirements which are discussed below.
Statistically, there is a chance that the time requirements of the contract won’t be satisfied irrespective of good intentions. An accident could occur, a natural disaster could strike, there could be a power cut, or human forgetfulness may play a part.
Why is this relevant? Well, in the eyes of the law it’s not currently. Parties are free to contract as they choose and that’s it. It’s a huge deal however for those at the sharp end who may not understand the implications of time-bar terms.
This leaves the ability for Party B to simply use a highly onerous and equally draconian time-bar clause to increase the chances that they will get ‘free work’ from Party A, or that Party A will stomach the cost for an event for which claim entitlement would otherwise arise. This would be the case where early notification and/or claim makes not material difference to Party B.
Of course specific circumstances are nuanced and as addressed earlier, Party B may currently absolutely need to use strict (and what could be considered ‘unreasonable’) time-bar clauses.
However, where the early notification makes no difference to Party B then it is the view then this is unfair.
Why is it a problem if Party A gets the chop ?
At this stage it’s important to discuss the purpose of the Construction Contracts Act 2002.
Pt1, S3 sets out the purpose of the CCA:
“(a) to facilitate regular and timely payments between the parties to a construction contract; and
(b) to provide for the speedy resolution of disputes arising under a construction contract; and
(c) to provide remedies for the recovery of payments under a construction contract.”
The Act is commonly referred to as the instrument which requires generally that parties ‘pay now argue later’. Its provisions are in order to make this happen.
The reason is because prior to the CCA (and indeed since), disputes regarding payments and the ‘going under’ of interim contractors has profound implications in the industry.
The failure of Mainzeal in 2002 for example is reported to have ‘left a deficiency on liquidation to unsecured creditors of approximately $110 million. The unpaid creditors were sub-contractors ($45.4 million), construction contract claimants ($43.8 million), employees not covered by statutory preferences ($12 million), and other general creditors ($9.5 million)’.
Suffice to say, this no doubt results (at some level) in missed mortgage payments and liquidated subcontractors. Lack of commercial security is not good for business generally, which is the purpose of the CCA, and frequently the biggest losers in these unfortunate circumstances are the smaller subcontractors and individuals involved.
Consolidating freedom to contract and the time-bar issue.
The issue with overly onerous notification and claim requirements is that the parties are currently free to bind themselves, or rather, a party is able to commercially pressure the acceptance of almost impossible standards.
A case in point.
At the time of writing this blog, the most onerous time-bar term we at Contract Control have encountered was for Party A to notify Party B within 1 day when a variation and/or delay exists (which would otherwise give rise to a claim entitlement). The period of time begun when the contractor ‘became aware or “ought to have become” aware’ of the change.
This may well sound reasonable. After all, how hard could it be to know that a change has occurred…
Then, we must consider the fact that the contractor would receive thousands of ‘new’ contract documents per week on average, several hundred per day, which the contractor was required to check in order to know that a change had occurred before it could notify within the 1 day.
The Contractor was a small business with a handful of full time staff and the contract value was modest at best. The contractor was not prepared for what it encountered and as a result people lost their jobs as a result in December 2019.
Administrative obligations can quickly become very difficult (some would argue impossible in certain scenarios) to administer as agreed within a contract and the risk of non compliance increases as the obligations become more onerous. The failures occur often, be it due to a lack of knowledge about what the parties were letting themselves in for, or over enthusiasm where caution would have been better placed, or mishap.
The difficulty, and the reason for discussing time bar terms as a particular risk is that so much can ride on something which can quite easily be either misunderstood (this is aimed at particularly bad contract language and overly descriptive / onerous construction contracts using legalize, unfortunately these are becoming more and more common) by uninformed contractors, or by a failure to adopt operational systems enabling understanding of occurring events in real time. The impact often results in disproportionate loss of entitlements, possibly with no resulting harm to Party B as a result of the failure.
It’s easy to refer to freedom of contract as a defense of the parties choices, but for the fact that the Construction Contracts Act 2002 (CCA) already provides statutory protection which renders some contract terms ineffectual such as conditional payments (s13) and requirements for claims (s20) and retentions (s18FE) for example, and introduces terms into contract accordingly where relevant terms are not set out by the contract.
A proposed solution could be to mandate all time-bar terms in law.
This may seem counter intuitive at first glance, because ‘why would mandated time-bar clause, which limits entitlement, be better than no time bar at all if the concern is being paid fairly and to maintain cash-flow within the construction industry?’.
The answer is that regulation and a general understanding of uniform requirements provides security.
Similarly mandated processes are already provided by the CCA. The payment claims vs payment schedules process is draconian in nature whereby a valid payment claim must be responded to with a valid payment schedule pursuant to sections 20 & 21 of the Act. If no payment schedule is provided then the recipient of the claim must pay it, that simple. Further, absolute requirements to establish validity of a claim include the requirement to provide a Form 1.
These requirements entirely extinguish some claims and/or defenses to claims when not complied with and can certainly have catastrophic impacts considering they could turn on something as benign as providing a few paragraphs of text from the Construction Contracts Regulations 2003 in accordance with the CCA.
It is proposed that time-bar terms should be managed in the same way.
An amendment to the CCA could specify that all time restrictions for notices must be an appropriate duration, including time out notification & grace periods.
The amendment would have to consider the interactions between several parties within a contractual ‘supply chain’ i.e. in a scenario where several parties subcontract the work, it would not work if all parties had the same time to notify events because Party D could wait until the last minute to inform Party C. This would leave no time for Party C to tell Party B and onwards.
Provisions for addressing this issue may include a ‘+ 5 working days per contracting party within the same supply chain, for example.
The advantages may include:
- The amendment would regulate the industry on the issue which inherently reduces risk.
- Parties would be aware of time-bar requirements, instead of potentially being unaware due to ambiguous terms. This is aimed at protecting those in the construction industry who enter into contracts unaware. Unfortunately this is a common occurrence.
- Parties may avoid ‘commercial’ peer pressure often referred to as the race to the bottom (and the industry may avoid resulting cash flow risk), usually created by unfavorable & over-onerous terms when a contractor ‘bites off more than they can chew’ and accepts an overly onerous contract simply to remain afloat in times of uncertain commercial waters.
Whether it’s legislated or not, time-bar terms are entirely enforceable and must be respected.
Parties entering into contract should consider time-bar terms particularly closely and with a conservative eye. A legitimate risk awaits where we enter into terms at the edge of our capacity in the hope to muddle through.