This article focuses on risks for construction contractors and suppliers when agreeing to standing, purchase order or umbrella contracts and provides some tips on how to avoid or mitigate those risks.
“Standing”, “purchase order” or “umbrella” contracts are frequently used where:
- the client engages, or intends to engage, a contractor or supplier across in multiple projects; or
- where the quantity of works, goods or services or time when those works, goods or services are required is unclear or subject to change.
Umbrella contracts aim to settle a set of standard terms and conditions with which both parties are comfortable, with the variables such as quantities and time for performance set out in the purchase order later.
Purchase order contains additional adverse terms or terms that conflict with the umbrella contract
A risk in using umbrella contracts is that the client issues a purchase order which includes or appends an additional set of terms and conditions which are not agreeable to the contractor and/or conflict with the umbrella contract. If the contractor commences performances in accordance with that purchase order or otherwise does not raise objection within a reasonable time:
- a “battle of the forms” may occur, where which terms and conditions prevail becomes debatable; and/or
- the client’s purchase order terms may be considered accepted due to the contractor’s performance of the works or services the subject of the purchase order.
Some ways that the risk can be avoided or mitigated include:
- Prevent inconsistency: Ensure that the umbrella contract contains a term which states that it will apply to the extent of any inconsistency with the purchase order.
- Settle form: Ensure that the umbrella contract contains a term which requires any purchase order issued to be in the form appended to the contract as an annexure (and ensuring that the purchase order issued aligns to that form).
- Minimise variables: Minimise the amount of variable information that will be subject to the purchase order. The parties should agree as many terms as possible via the umbrella agreement and leaving the purchase order less work to do.
- Contractor’s acceptance: Include a term in the umbrella contract that the purchase order will not become operative (i.e. an agreement on its terms reached) unless the contractor accepts the purchase order in writing. Then, do not accept the purchase order in writing unless the variable terms included in it (such as the time for delivery of goods) are achievable.
- Limits on liability: Ensure the umbrella agreement contains all necessary limits on liability – e.g. a cap on liquidated damages.
Creation of multiple contracts
It is not uncommon for an umbrella contract to contain a term to the effect that a separate contract is created upon issue (or acceptance) of each purchase order. This is generally desirable when the umbrella contract is intended to operate as a standing agreed set of terms governing the parties’ relationship across multiple projects.
However, where such a term is included and multiple purchase orders are issued on the one project, such a term can:
- create general difficulties in administering the contracts and enforcing rights under those contracts; and
- impact the operation of security of payment legislation.
On the first issue, the parties would need to issue contractual notices with reference to various purchase orders. For example, in the event of a delay event occurring which impacts multiple purchase orders a notice would need to be issued to the client with reference each separate purchase order, satisfying all relevant criteria under the umbrella agreement for such a notice. By way of another example, a dispute between the parties may arise due to non-payment of various purchase orders or defects in goods or services supplied under various purchase orders that may need to be individually pursued using the relevant contractual dispute mechanism.
On the second issue, the security of payment legislation in NSW (and other States and Territories) does not permit a payment claim being served (and adjudication application being made) across multiple contracts.
If there is a clause in the umbrella contract stating that each purchase order will give rise to a new contract, the contractor must submit separate payment claims in relation to each purchase order and pursue separate adjudications on each payment claim.
This was highlighted in a case where Holcim pursued an adjudication application against Acciona for work on the Sydney Light Rail project where some 12,500 purchase orders had been issued. The New South Wales Supreme Court determined that Holcim’s payment claim which encompassed several purchase orders was not a valid payment claim and Holcim lost out on the benefit of an adjudication determination worth nearly $3M. In this type of case, the issuing of purchase orders which created separate contracts resulted in commercial and administrative unworkability and prejudiced the subcontractor’s ability to pursue a large adjudication against the head contractor.
Whether or not the umbrella contract should contain a clause which provides that each purchase order issued will give rise to a new contract should be considered on a case-by-case basis.
 Acciona v Holcim  NSWSC 1330 at .