April 15, 2020
At Law 365 we have received a lot of questions about how to manage project delays for onsite services and for some remote services if the employees do not have the right tools to enable the work to be done.
The second chapter in the series ‘Contracts for Beginners’ looks at a topical issue a lot of Microsoft Partners and technology companies are dealing with due to the Coronavirus pandemic. In case you missed it, you can read the first blog in the series about ‘time is of the essence’.
In this chapter, we look at delays from both sides. First, if you delay a project — what rights does your customer have? Secondly, if your customer delays a project, what are rights do you have under a contract?
COVID-19: How to manage project delays caused by the Supplier
Question: What if I’m responsible for delaying a project or service due to Coronavirus?
It’s likely you’re in the midst of delivering a variety of services— These may be professional or managed services which can be a mixture of physical onsite services and/or remote managed services.
Answer: You need to review your contract.
Specifically, contracts will have a few areas where they deal with “delays caused by the Supplier” and most of the time, if these are not professionally negotiated, resolving the situation may become quite onerous and expensive for you.
What to look for?
a) “Carve-outs” and “any events beyond your control”You will often see the wording in customer friendly contracts saying that if you as the Supplier delays delivering the Services then you will have to (1) refund the total amount of the Services; (2) refund part of the Services not delivered but paid for; (3) pay for any replacement supplier in order to complete the Services, and (4) pay for wasted expenditure or losses caused to the customer’s business. If these provisions are in your contract, look to see if there are carve outs whereby you are not on the hook for any delays which are caused by (1) the customer and its third parties; or, crucially, (2) any events outside of your control. The last bit here is obviously quite relevant during COVID-19. This carve out often follows a suggestion by the parties to enter into new timelines that are reasonable to the parties at the time of the event.
b) Time is of the essence
If the contract mentions that the delivery of services shall be delivered based on ‘time being of the essence’ you will need to understand what this means in terms of your Customer’s rights.
Making time of the essence for a project normally means they are able to cancel if the work is not performed exactly on time. “Time of the essence” makes the time limit in question a condition of the contract. That means any delay in breach of the limit, no matter how small, automatically triggers the right to terminate. A potential loophole might exist if you never set out timelines in the first place, in which case, this wording won’t have any foundation and therefore be redundant.
COVID-19: how to manage project delays caused by the Customer
Question: What if my customer delays the project due to Coronavirus?
B2B contracts often focus solely on delays caused by you, the Supplier, to ensure that services are delivered to the timeline the customer is paying for. This, often incorrectly assumes, that you, the Supplier, would for some reason want to delay services. What a lot of customers fail to understand is that Suppliers tend to bill on milestones being achieved, and therefore are not naturally incentivised to delay services.
We encourage the businesses we work with to ensure that their customers also have contractual obligations to meet timelines we set for them to ensure that there are no disruptions to meeting timelines. How can your contract ensure that both you and your customer are meeting deadlines?
a) Liquidated Damages
Liquidated damages in any contract are seen as quite a draconian remedy and often used as a last resort for very time-sensitive projects. At Law 365, we often flip this round to the customer.
The argument is that you are naturally incentivised to meet delivery dates because often payments are conditioned on meeting them. In fact, what tends to happen is that a customer who wants to delay payment will delay you, the Supplier, from fulfilling your timelines.
The knock-on effect for your business could be significant, a delay in payment means the start of cash flow issues in the business. Bad timing of payment may even mean you have to lay off staff if cash in the business doesn’t come in at the time it is supposed to.
Liquidated Damages can be a day rate for every day the customer delays to an overall percentage of the project costs. Whatever level is agreed, it needs to be a fair and as accurate an estimate as possible of what it would cost the business to forego that cash in the business and a remuneration akin to bridging that gap. Penalties, which are simply numbers thrown in a contract with no real meaning behind them and which serve to simply penalise a party, are not enforceable at law. Therefore, Liquidated Damages must be correctly established with guidance from your advisors.
b) Payment on Milestone
If you can’t claim for liquidated damages, then the next best thing is to ensure that your customer pays for the milestone if they are responsible for the delay, which will ensure that you continue to get paid even if there is a delay getting resources from their side. You can go one step further and make this payment subject to ‘time is of the essence’ but again, this will be a waste of time if this isn’t linked directly to a specified payment milestone in your relevant statement of work.
c) Contractual Obligations
Finally, you can ensure that as part of the customer representations, your customer agrees to the dates set out in any statement of work and also provides relevant information at the time you request it. If your customer fails to do this, this could be treated as a breach of contract. You can also go one step further and make this specifically a material breach. If there is a breach of a contract, depending on a few other conditions, it can give rise to a right for you to terminate and seek damages.
Read more in our “Contracts for Beginners” series
This is the second chapter in the series, contracts for beginners, please look at the others available.
- Chapter 1 in the ‘Contract for Beginners’ series: Time is of the Essence
- Chapter 3 in the Contract for Beginners series: Employment contract termination
- Chapter 4 in the Contract for Beginners series: legal action for non-payment
- Chapter 5 in the ‘Contract for Beginners’ series: Force Majeure clause during a pandemic
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