What happens when the supply chain fails and what are your contractual obligations?

In these difficult times, many contractors face the prospect of having entered into a contract which requires them to supply a particular product, which becomes unavailable. The purpose of this article is to briefly address your legal situation should that occur.

The first thing you should do is to read your contract.

Termination

Can the contract be terminated? In particular, can it be terminated for convenience? This type of right is rarely given to contractors, but it is worth checking to see if it has been. Again, it would be unusual for a contract to provide that it can be terminated because of a breakdown in the supply chain, however it should still be checked.

Extension of time

You should check whether your contract has an extension of time provision. Most contracts are not going to specifically cover a supply chain break down, but many (such as AS 2545) contain a clause allowing for an extension of time where an event occurs which is ‘beyond the reasonable control’ of the subcontractor. That would likely cover a supply chain issue.

It is important to note that most extension of time clauses require strict compliance with the notice provisions contained in them. So, the moment you become aware that it is possible a product may be delayed, you must immediately give notice strictly in accordance with the requirements of the contract.

Force Majeure

This is the idea that if an event occurs outside the control of the parties, the parties will not be in breach of the contract if they fail to perform under the contract because of the event. There is no concept of force majeure under Australian law. For it to operate, it must be specifically provided for in the contract.

So once again, it will be necessary to look to your contract to see if there is a force majeure clause and whether it applies to blockages in the supply chain.

Frustration

This is a concept found in Australian law. A frustrating event is one where some event has occurred without default by either party to the contract which has made it impossible for them to perform their obligations under the contract.

If a contract were frustrated in these circumstances, both parties would be discharged from having to perform the contract. However, a different situation may apply in relation to deposits paid.

It must be said that it is very rare for a Court to find that a contract has been frustrated. However, as has been repeatedly noted, we live in unprecedented times and the law may develop to meet those times. However, at present, a finding that a contract has been frustrated is most unusual.

Alternative supplies

An important point to note is that if the product can be obtained from an alternative supplier, even if it is more expensive, it is most unlikely the contract will be frustrated or that the force majeure clause will apply. In other words, if you can obtain the product from a more expensive supplier, you will in all probability have to do it even if it makes the contract uncommercial.

Conclusion

Get help from experienced construction lawyers.

If this issue arises you should immediately get assistance from an experienced construction lawyer.

This is even more critical if the issue is likely to result in your business becoming insolvent. Insolvency has particular consequences in Queensland. That is why you need to consult a firm like Cornwalls, which can refer you to and work together with accountants who understand the QBCC financial requirements and the implications of an insolvency event for a person who wishes to continue to have a building licence in this State.

Queries
If you have any questions about this article please get in touch with the author or a member of our Building & Construction team.

Disclaimer
This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.

The Building and Construction team has extensive experience in dealing with the regulatory regime confronting the building industry. Our presence in Brisbane, Sydney and Melbourne means that we have detailed, ‘on the ground’ knowledge of the regulatory environment in the areas where we practice, and the ‘boots on the ground’ to deal with your matter in a timely and efficient manner. If you have a regulatory issue, we have probably seen it before, and can provide you with strategic advice to assist you in achieving outstanding outcomes.

The Author

Michael Cope

SPECIAL COUNSEL, BRISBANE

Key Contacts

Michael Cope

SPECIAL COUNSEL, BRISBANE

Ian Heathwood

PARTNER, BRISBANE

Richard Hutchings

PARTNER, MELBOURNE