Contract Drafting for Major Plant Construction – How it's Done

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What happens if the contractor is so distressed that he must procure the current payment missed out by the employer from a third party? Delays in order processing by the contractor can also occur. It is therefore inconsequential whether the contractor fulfils his obligations to the employer with a contractual penalty; under certain circumstances, he may not be able to observe the deadline due to lack of financial resources.

The problem here is that the employer may not get his plant in time, or under certain circumstances, he may not be able to withdraw from the contract, or may be able to cancel the contract only with considerable difficulty.

The Solution: Conditional setting into force of Contracts

The coming into full force of the contract should be linked to clear conditions to be fulfilled mutually by the contract parties. The contract will come into full force only if these conditions are fulfilled comprehensively by the parties. What could these conditions be?

A first condition could be committing the contractor to furnish a payment guarantee (“Advance payment bond”) amounting to the contractually agreed sum, to the employer within 2 calendar weeks of the signing of the contract. The 2nd condition would then be to commit the employer to make the advance payment as stipulated to in the contract, to the contractor with another 2 calendar weeks after submission of an invoice, once the employer has received the payment guarantee. The contract will come into effect only after the parties fulfil the mentioned conditions fully. The contract deadlines will thereafter be binding on both parties.

Return of the Advance Payment Bond

Additionally, the contract must stipulate that the employer will return the Advance Payment Bond to the contractor without any delay as soon as the contractor provides proof that he has delivered services to the employer amounting to the value of the received payment. If the employer does not return the Advance Payment Bond to the contractor without any compelling reason, the employer must compensate the contractor additionally for the accruing surety charges.

But what happens if the conditional commencement of the contract fails? Read on on page 3!

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