When reality outmatches your agreement

The last three years will probably form a thick chapter in future history books. And we now find ourselves in yet another unusual situation with war in Ukraine and inflation – and the legacy of Covid-19 still with many of us. One of the biggest challenges is deliveries for the construction industry as the war has led to rising energy prices and scarcity of resources. A difficult situation to navigate in as a developer and contractor to say the least – and, therefore, Legal once again plays a central role in navigating the organisation safely through crumbling budgets, breaches of contract and stretched time schedules.

The legacy of Covid-19 and the war in Europe have meant that many organisations have found that their contracts did not sufficiently resolve the delivery problems or perhaps did not lead to any useful results.

But does this imply that there is nothing you can do? No, fortunately not. 
It is possible to navigate your organisation – both within the contractual clauses and outside your concluded agreements. The internal Legal group can help you get an overview of the options and consequences of available choices to avoid the company being faced with severe claims in the long term.

If you want to get an overview of your client and supplier obligations, Legal can help you:

• What obligations do your company need to get out of or have suspended in different scenarios?
• What are the consequences and options to suspend obligations due to force majeure, issue notice of termination or suspend payments?
• Do you need to adjust your standard contracts and adapt them to your organisation’s changed needs in relation to e.g. payment terms, limitations of liability, termination options, secure supplies and flexibility to scale volumes?
• Is there a need for notifications and/or renegotiations to assert your company’s rights and avoid claims?
• Are there bank guarantees or sureties that can be triggered by or against you or your company?
• Have you prepared contingency plans and project plans for terminations, negotiations or other ways to handle critical contracts to align Legal with your management’s plans for the coming phases of the crisis?
• Do you need to involve external lawyers for claims handling, including potential litigation?
• Are you in control of the communication to the relevant business units in terms of how they should handle inquiries and claims from customers, suppliers and business partners?

The above list is far from exhaustive. But it provides a good starting point and can ensure that you are well equipped to navigate in obligations, options and consequences.

Most property developers and contractors have experienced significant price increases – partly due to Covid-19 and partly due to limitations in supply of materials from Russia and Ukraine combined with increasing energy prices.

Even when supply contracts have already been concluded, few suppliers will maintain a commitment to make substantial deliveries if this implies a direct loss for them.

Some suppliers have therefore simply raised the price unilaterally while others have announced that delivery will be made much later due to bottlenecks – or because production has been downscaled.

Others may offer to guarantee delivery for those contractors who pay an extra fee to secure their place in the production line. 

… You may think. And yes, it is of course possible to stand firm on the contract. But the contractor may only be entitled to have extension of time – e.g. due to force majeure – where the contractor would really rather have been financially compensated for his extra costs.

Public entities owning and/or constructing buildings have received a general request from the Danish State encouraging:

”… dialogue and [the state] recommends that the public authorities in case of challenged suppliers maintain the positive cooperation with private suppliers and show flexibility with a view to finding solutions to the specific challenges.”

The individual public entities make specific assessments in each individual case, but the public entities have been given the opportunity to pay an additional price to ensure the necessary progress in construction.

The alternative would be to reject all requests for additional payment from contractors and suppliers and simply refer to the contractual terms – after all, the public entities administer tax funds.

Private developers would often see reason in paying extra to ensure delivery if the alternative is a costly delay of the construction. And if you think strategically and long-term, you will give yourself a wider room to navigate in a difficult situation.

As a developer, you may be able to avoid an immediate extra claim by making your contractor stick to the contract, but, at the same time, you may risk delayed construction – and this may have greater financial consequences than the additional payment to the contractor. The parties thus risk delaying construction and ending up in a dispute of which none of the possible outcomes are especially attractive. 

A good starting point is to establish an overview of your contacts and focus on what is important to ensure flexibility, price regulation mechanisms and secured supplies. To safeguard the company best possible – not just a month ahead, but also in relation to the next phases – it is essential to create as good an overview as possible of the organisation’s contractual rights and obligations.

In our experience, the parties who successfully overcome the present challenges in the construction industry are those who immediately identify the problems and dare to take the dialogue on solving them. 
Just as in Finance and other support functions, it is equally important to stay calm in Legal to make the right decisions. Regardless of the current focus in your legal team, how much strain the business is under, and how hectic and unusual these days are, these are also the stakeholders who must be able to withstand the challenges and cooperate both now and in the long term. When supply and demand find its balance, it may be your company that needs a helping hand from one of your customers.

Therefore, we must be aware of the roles we are undertaking, and the signals we are sending to the rest of the business and to our business partners. So make sure to have a long-term focus, balance the adjustments of your contracts and help each other through the restraints of the current situation.