By MDA Attorneys director Odette Potgieter

As specialist contract negotiators for the mining, infrastructure, energy and building sectors, MDA Attorneys often see a suite of contracts used across various disciplines despite the contracts in the suite being unsuitable for the services provided. This results in significantly greater risks for the employer and the supplier or contractor, and contractual provisions that cannot be applied in practice.

Types of contracts in use and suitability

Most mining projects involve procuring and supplying equipment, which is critical to completing the project successfully.

Mining projects commonly use both in-house bespoke contracts and internationally recognised standard-form construction and engineering contracts. However,

construction and engineering contracts are particularly unsuitable for supplying equipment in the mining industry.

The NEC suite of contracts includes a supply contract, whereas the FIDIC suite does not. As a result, we regularly see the FIDIC Yellow Book used as a supply contract where the mining house has prescribed using the FIDIC suite on a project.

Rather than the construction of physical structures, the supply of equipment typically involves:

• the provision of specific machinery
• spare parts
• the supervision of installation, testing and commissioning services (to maintain the warranties on the equipment).

Unsuitable forms of contract may not adequately address the complexities relating to the delivery of the equipment. For instance, International Commercial Terms (Incoterms) used may contradict the passing of risk as well as the delivery of plant (equipment) provisions in the contract.  Completion dates may have a different meaning to delivery dates and penalties levied for late ‘delivery’. Other complexities include the defects liability periods (or warranty periods, which is the standard terminology for equipment suppliers) and the provisions relating to the calling back of the supplier to attend to the supervision or training services required in the contract. Misalignment can lead to serious gaps in the contract terms and, consequently, costly disputes.

Deliverables and milestones

Standard-form construction contracts focus on deliverables and milestones. Under the FIDIC Yellow Book, for example, the contractor must complete the work by the defined time for completion. In a supply contract, however, the time for completion needs to correspond to the delivery date of the equipment to the site (or as per the Incoterm).

Completion tests must be passed before a “taking over certificate” can be issued to complete the work. However, the employer’s requirements specify that these tests are only undertaken once the equipment has been installed and commissioned.

Under the FIDIC contract, the contractor carries risk from the commencement date until the taking over certificate is issued, creating a gap between the delivery of the equipment (meaning it is no longer in the supplier’s care and custody and the supplier, therefore, has no control over it), and when the employer’s contractor has installed it under the supplier’s supervision.   

Failure to meet the project schedule

In construction contracts, failure to meet the project schedule is seen as a delay or default on account of them being designed to manage construction delays, not equipment supply. Conflicts can arise when the parties involved cannot agree on the root cause of delays, which could be related to supply chain problems, design issues, or external factors outside the equipment supplier's control.

In addition, because the contract envisages a time for completion, it is often erroneously referred to as the date when the commissioning is complete. In reality, the actual delivery date of the equipment, the gap in time between such delivery and the calling back of the supplier to attend to the supervision services must be taken into account. After all, the supplier has no control over the time frame for the equipment installation and can only control the delivery date.

Pricing, payment structure and defects

The FIDIC Yellow Book provides a lump sum price, which may be suitable for pricing the equipment, including packing, transport, taxes and other costs. Supervision services, however, need to be re-measurable costs, given that the time frame to provide the services relies on the employer and their construction contractor’s programme.

The payment structure is another important area to assess a contract for suitability. The equipment supply usually involves progress payments tied to production milestones, installation, or testing phases. As such, the payment terms of construction contracts may not provide sufficient flexibility to accommodate changes in delivery times, lead times, or other unforeseen circumstances, which could result in financial strain or payment disputes.

The defects liability period has also proven to be contentious. Consider a situation where the contract specifies that the defects liability period commences when the taking-over certificate is issued. Remember that this is often only provided once the commissioning is complete. Suppliers will want the warranty period to commence from the date the equipment has been delivered. A common compromise is that the defects liability period is defined as 12 months from commissioning (taking over) or 18 months from delivery to site - whichever occurs first.

Other complexities

Various other complexities may arise when using a construction contract as a supply contract. The good news is that the risk can be mitigated by making amendments to the standard form contract. You, and your specialist legal advisor just need to know where to look.