Out-Law Guide | 18 Aug 2020 | 1:21 pm | 7 min. read
It is common with many large construction projects that take place over a number of years that parties decide to resolve issues that arise by agreement, but that can result in changes to the contract terms, which then need to be carefully documented.
It can be challenging to accurately and precisely document those changes in a way that modifies the bargain in the way the parties intend and allow historic differences to be settled. There are therefore important things construction companies need to consider when agreeing changes and common pitfalls to avoid.
This is part of a series of guides from the specialist infrastructure lawyers at Pinsent Masons. Other guides published include on the topics of managing change, giving effective notices, managing delay, disruption claims and the cost of project acceleration. Guides to follow will address the differences between civil and common law approaches to construction project claims, and termination and suspension.
For complex projects, with a large degree of change management occurring, it is relatively common for parties to a construction contract to experience difficulties in keeping up to date with change management requirements, particularly matters relating to programme and cost. Such difficulties are often encountered in the early stages of the project with many months, if not years, to go before completion. Whilst the contract will allocate risk to one or other of the parties for the challenges encountered, there often will come a point where all involved wish to move on from historic problems, with a desire to 're-set' the commercial position and agree changes to the contract.
At this point, there is a temptation to agree commercial 'deals' and informal modifications to the contract, but such informality quite often leads to considerable commercial and contractual uncertainty with significant risk to both parties. In those circumstances it is better and best practice to formalise the parties' agreements on these contractual and commercial issues by way of a formal amendment to the existing contract. These agreements are often called 'line in the sand' agreements because they combine a settlement of historic claims, up to an agreed date, with modifications to the contract terms from that point on.
Any party looking to enter a line in the sand agreement should treat the negotiation and drafting as they would the original contract
Line in the sand agreements can be of any length or level of complexity, depending on the nature of the issues to be settled and the extent and scope of the updated commercial terms. In an industry which regularly uses standard forms, often with standard schedules of amendments, line in the sand agreements need to be approached with appropriate caution.
There are many case reports where the facts of the case tell a sorry tale of the parties agreeing terms to amend their agreements and ending up in dispute in relation to the different interpretations of the terms of the agreement that was intended to resolve their difficulties. For example, certain issues may be settled when the parties' rights were intended to be preserved, claims that were intended to be settled may be left open and unresolved, and adjustments to contract mechanisms can give rise to unintended effects.
Any party looking to enter such an agreement should treat the negotiation and drafting as they would the original contract. Just because an agreement may be relatively short and concise, do not assume it is not complex, and should be treated with the same level of care as would the original negotiation to the existing contract.
It can often be tempting for parties to engage as soon as possible with the terms of a line in the sand agreement, but remember that if there are pre-existing disputes any discussions around the terms of settlement should be clearly stated as 'without prejudice'. To avoid concluding an unintended agreement, companies should also keep negotiations and draft terms 'subject to contract' until the final version is prepared for signature.
Parties should think about where they are in the project and whether the contract in question should take the form of a side agreement or formal amendment to the contract. Side agreements are usually more appropriate towards the end of the project where the terms of the settlement have greater importance than modification to the contract terms for ongoing work, such as at or around the point of 'Practical Completion' in a JCT project. If there is a significant proportion of work remaining, a formal amendment to the contract is likely to be more appropriate. Formal amendments generally work better where the drafting respects and maintains the original contract structure and operates by altering the existing clauses rather than implementing wholesale new drafting.
Think about whether a simple contract is sufficient or whether it is preferable, or necessary, to execute a deed, and make sure the execution formalities are complied with. Parties can often spend significant time negotiating the terms of their agreement and then, caught up in the celebration of achieving an agreement, forget to sign at the end. If the agreement is not concluded things can unravel quickly if the situation on the project changes.
If the contract specifies how it can be changed and who has the authority to do so, then make sure the line in the sand agreement meets those requirements. If the contract says it can only be modified by agreement in writing those types of clauses have been found by the courts to be effective.
Consider whether there are any other contracts which are affected. Do those parties also need to execute the agreement or is a separate agreement needed? Obvious examples here include funders, parent companies providing guarantees and bondsmen. Even if no direct changes are made to project securities it is good practice to make sure the providers consent to the changes in the underlying contract even if the security says they don't have to in order to be bound by the changes.
Parties should be precise about what they are looking to achieve and what needs to be agreed to facilitate that. Think very carefully about what claims are being settled and if any are to remain available after the agreement is executed. Settlement should be all-embracing for relevant issues and identify carefully any issue or matters where entitlements are preserved. Variations are a common area for difficulty if they are not considered carefully – depending on the wording, one party may end up settling its entitlements to pursue variations or leave open that opportunity when they thought it had been closed out for good.
If the commercial terms of the original contract are to be adjusted, be precise in making amendments to identified clauses. Be cautious of general language that describes the intention of the parties, which are quite often drafted over-optimistically, but which do not make specific amendments – these provisions can be a fertile ground for future disputes, particularly where the parties agree commercial matters based upon certain works being completed by an agreed date and the agreement doesn't cater for the commercial and contractual consequences where, for whatever reason, this event does not take place.
If there are sections of the contract which are to be significantly altered, consider omitting the clause entirely. Sometimes it is safer, easier and clearer to achieve amendment with an entirely new schedule than it is to document all the changes in the original contract.
Negotiating and documenting line in the sand agreements can be a drawn out process as events on the ground can easily overtake the progress of negotiations. Once an agreement is achieved it is often prudent to arrange for execution promptly.
To get to that stage the parties need to be clear at any point who is 'holding the pen' to document changes and keep up with events before passing the draft for comment. Without clear transfer of responsibility, negotiations can quickly unravel and be made unnecessarily complicated.
It is worth remembering that a line in the sand agreement is a contract like any other so boiler plate clauses such as governing law, entire agreement and confidentiality need to be included. Boiler plate clauses serve an important function to clarify issues that can lead to future disputes so it is always worth considering carefully which boiler plate clauses to include.
Line in the sand agreements represent both a significant opportunity and risk. Those agreements allow for a refresh of the contract to align with the up to date realities of the project and helps draw a line over past events, allowing the parties to focus on future challenges.
Often the agreements can have a galvanising effect, aligning the parties on refreshed terms and joint and shared goals. However, there are circumstances where it can have the opposite effect. For example, when line of the sand discussions become too protracted and are never implemented or when the agreement is so poorly drafted that disputes arise, creating unnecessary uncertainty and increasing the strain on the parties' relationships with each other.
The following checklist can help construction companies avoid problems:
10 Aug 2020
31 Jul 2020