Coronavirus (COVID-19) and Construction Contracts: What are your options?

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Coronavirus (COVID19) and the construction industry: What are your options?

We recently published an article about how construction contracts can incorporate concepts of force majeure events. A copy of our article can be found here.

As the disruptions of corona virus begin to become more extensive with government mandates coming into effect, we believe it’s important for those in the construction industry to have a quick reference guide as to their options or important things to think about.

 

Pre-contract: Tendering, negotiating and drafting of contract
Force Majeure clause ·         Manages the relationship between the parties where there has been an ‘Act of God’ or other similar severely disrupting event

·         Depends on the contractual definition of the term

·         Generally, suspends the obligations until the force majeure event has concludes

·         Important to consider when the parties’ obligations will resume – what will indicate the end of the force majeure event
Scope of Works and mitigation of supply chain risk ·         Where possible, alternative supply or materials should be specified in the scope of works with pre-agreed variation prices
Extensions of Time ·         Can include force majeure event as a qualifying cause of delay

·         What circumstances can the contractor or subcontractor seek an EOT?

·         Generally appropriate for an EOT to be granted where there is suspension of works, variation, act, omission or breach of the other party, force majeure events and/or industrial action occurring across the relevant state or territory

·         Are there any duties to mitigate the delay which are a precondition to receiving an EOT
Delay Costs and/or damages ·         Does the contract provide for any delay costs or damages?

·         What are the circumstances that the contractor or subcontractor is entitled to costs and are there any relevant caps?
Legislative Provisions ·         How are the change in legislative requirement provisions worded?

·         Consider the definition of legislative requirement (and/or equivalent and related definitions)

·         Consider whether legislative provisions should include a carve out for where there is a change in the legislative requirements in relation to COVID19. Given the uncertainty around how the government will proceed, it is difficult to predict how the legislative regimes or executive orders will change as the response to COVID changes and adapts
Labour and Key Personnel ·         Are there any key personnel of the contractor or the subcontractor that should be specifically identified?

·         Are there specific measures the Principal/Contractor want to specifically implement? Examples may include split teams
Security ·         Consider what types of security will protect against insolvency risk of contractors or subcontractors – Parent guarantee, retention monies, material security and/or bank guarantees

·         Consider circumstances where there may be recourse to the security such as where a party becomes insolvent or there are defective works that require rectification

·         Consider Principal security for payment if there are any solvency concerns
Insurance ·         Principals should consider whether there are suitable insurance policies to protect from any delays to the works or any consequences that the delays may have at the end of the project

·         For example, Principals may wish to discuss delay in start-up insurance with their insurance broker
Warranty deeds and defects ·         Principals may wish to require warranty deeds from the subcontractors to insure against any insolvency risk from contractors and to allow for any defects to be rectified independent of the contractor
Financial capacity of the tenders ·         When assessing potential contractors, Principals should consider the financial capacity of contractors and whether there are any solvency concerns and if there are any parent companies that can provide guarantees
Project deadlines ·         What deadlines are imposed by related contracts such as sale of land for off the plan properties

·         How long are the deadlines and timeframes of the project? Can they be extended to account for coronavirus
Contract structures ·         Profit/cost-saving sharing models of contract or guaranteed maximum price may be considered by Principals to minimise cost exposure of contracts that may be affected by coronavirus (such as supply chain risk)
Contract administration
Extension of time ·         Principals and Superintendents generally have the power to issue an EOT even when a claim may not be made by the Contractor. While they are not obliged to use this power for the benefit of the contractor, there may be practical and goodwill benefits in using these powers

·         Contractors should seek legal advice in terms of the relevant EOT clause and whether they have a right to seek an EOT or what other options are available to them under the contract
Suspension ·         Suspension is generally a grounds for an EOT

·         Consider who bears the cost of suspension under the contract

·         Is there a right for the contractor to claim any suspension costs or costs associated
Change to legislative requirements ·         In the event of government mandated shutdown, there is likely going to be claims for legislative changes. These will largely depend on the wording of the clauses, who bears the risk on legislative changes and the form of the government shut down

·         Other considerations include whether construction work is considered an essential service and to what extent
Variations ·         Where there is a supply chain breakdown due to closed borders, there may be claims for variations being made by Principals or Contractors to allow the project to continue

·         Variations will be linked to the scope of work and whether there are alternatives that can be sourced
Payments ·         Principals may wish to change payment terms to accommodate contractors or subcontractors

·         As the effects of coronavirus move throughout the economy, there will undoubtedly be businesses that struggle and become insolvent. Where possible, Principals may want to consider changing milestone payments or frequency of payment claims to assist contractors’ cashflows

·         Any agreement between the Principal and relevant contractor should be evidenced in writing
Acceleration ·         If there is relatively small amount of work left, Principals may consider giving directions to accelerate

·         While this may increase the cost of the project, the Principal may be able to ensure the project is completed before shutdowns come into effect
Employment ·         Employment law advice should be sought about how to manage employee relationships while projects are on hold by reason of coronavirus
Teams and social distancing ·         Head contractors may wish to implement policies that flow down the contracting chain in relation to splitting teams and social distancing where possible
Other arrangements agreed between the parties ·         Sometimes the best changes are those made between the parties and not from the lawyers

·         However, even where this is the case, ensure that such agreements are evidenced in writing and you seek legal advice on the impacts of the agreement and whether there are any potential consequences that you may not have considered
Other issues
Financiers ·         In many developments, there may be a financier involved and different obligations that arise under these loans and security documents

·         Principals should consider their obligations to notify their financier(s) where appropriate
Other stakeholders ·         There may be a range of other stakeholders that may have an interest in the construction contracts

·         It is important to manage these aspects of the development to reduce or eliminate any potential problems later on
Dispute resolution
SOPA claims ·         At the time of writing, there have been no changes to the strict deadlines imposed on submitting and responding to payment claims under the NSW Security of Payment legislation

·         SOPA is a contractor friendly forum, allowing for money to flow down the contracting chain

·         SOPA claims can be challenged on jurisdictional grounds or can be settled at the end of the contract if there has been an overpayment
Alternative dispute resolutions ·         Many alternative dispute resolution professionals are not taking new appointments. This can create a delay in parties complying with the relevant dispute resolution clauses

·         Parties may consider teleconferences or videoconferences to resolve disputes, rather than physically meeting
Courts ·         Many courts are operating via videoconferencing, with physical appearances limited

·         The court process may have more delays than usual as judges and parties adjust to the temporary measures of case management

·         Where a party is seeking urgent injunctive or other relief, it is important to seek legal advice as soon as possible to ensure that an application can be made efficiently and protect your interests
Contract termination ·         If you are seeking to terminate the contract it is important to terminate in accordance with the contractual provisions and to consider any common law rights or duties in relation to termination

·         Those seeking to terminate where the counterparty has become insolvent will also need to be aware of the recent insolvency changes and the restrictions on terminating pursuant to insolvency

 

 

Regulatory Overhaul and Reform Pillars: building confidence and stronger foundations for the NSW building and construction industry

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Transparency, accountability and quality of work are always issues at the forefront of the building and construction industry. In the wake of many high profile instances of defects in newly built developments, these are also the big issues that the NSW Government is tackling in 2020.

Where it began: the Shergold Weir Building Confidence Report

Back tracking to early 2018, the Shergold Weir Building Confidence Report recommended the implementation of a national best practice model. The purpose of this was to enhance public trust in the building and construction industry and strengthen the effective implementation of the National Construction Code. The best practice model comprises 24 recommendations relating to:

  • registration and training of practitioners;
  • roles and responsibilities of regulators;
  • the role of fire authorities;
  • integrity of private building surveyors;
  • collecting and sharing building information and intelligence;
  • adequacy of documentation and record keeping;
  • inspection regimes;
  • post-construction information management;
  • building product safety; and
  • how the above recommendations will be implemented.

The NSW Government’s Response: Building Stronger Foundations Discussion Paper

The NSW Government welcomed the Shergold Weir Report and announced that it is committed to improving the building and construction industry through a number of new reforms. In June 2019, the NSW Government presented its Building Stronger Foundations Discussion Paper seeking input from stakeholders on its four key reforms. These reforms are:

  1. requiring practitioners defined as ‘building designers’ (e.g. architects, engineers) to declare that their building plans/specifications/solutions are compliant with building regulations, including the Building Code of Australia;
  2. introducing a registration scheme for ‘building designers’ who will be making declarations;
  3. ensuring that building practitioners owe a duty of care to owners’ corporations and subsequent residential homeowners; and
  4. appointing a Building Commissioner who is a consolidated regulator for the whole of the NSW building and construction industry.

What to expect in 2020 and beyond

It has been just over a year since the NSW Government committed to implementing regulatory reform and six months since it consulted with stakeholders to shape the direction of these reforms. So what progress has been made in that time?

In October 2019, the first tranche of reforms was introduced with the Design and Building Practitioners Bill 2019 (the “Bill”). The Bill seeks to deliver the NSW Government’s first, second and third key reforms by imposing new obligations on design and building practitioners. The Bill is currently before the NSW Upper House. Make sure to read our next newsletter as we will be providing a detailed explanation of the substance of the Bill.

In relation to fourth key reform, the NSW Government has appointed David Chandler OAM as the NSW Building Commissioner. In January 2020, Mr Chandler announced the Six Reform Pillars, which is the public’s first insight into his plans and implementation strategies for the reforms. The Six Reform Pillars are:

Pillar Actions Outcomes
Building a better regulatory framework

 

 Implementing legislation and regulation and transforming the focus of the regulator

 

 Ensure that NSW has a strong customer focused regulatory framework
Building rating systems

 

 Work with ratings agencies, insurers and financiers to assist in better selection of industry participants

 

 Move away from one-size-fits-all participant recognition and better identify risky players

 
Building skills and capabilities

 

 Improve accreditation of construction related programs through improved standard modules

 

 Shared minimum learning content and open source resources for all institutions

 
Building better procurement methods

 

 Establish clear standards for engagement and outputs

 

 Viable risk allocation and performance accountability

 
Building a digital future

 

 Digitise the NSW Building Industry and move away from analogue record keeping

 

 Shared industry wide platforms that build confidence

 
Building the reputation for quality research

 

 Evidence based approach to accessing and closing the gap via case studies and other research

 

 Baseline and measurement against our ability to improve confidence in the industry

 

 

This article provides a snapshot of the NSW Government’s plans to implement effective and wide ranging regulatory reforms of building and construction industry. This summary demonstrates that there is a significant task ahead in implementing these reforms, so watch this space for future updates.

If you or someone you know wants more information or needs help or advice in relation to this article, please contact us on (02) 9248 3450 or email info@bradburylegal.com.au.

Construction Disputes: What’s Really in Your Best Interest?

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Late last month, the Court of Appeal, in the case of Duffy Kennedy Pty Ltd v Galileo Miranda Nominee Pty Ltd [2020] NSWCA 25 reminded parties that when it comes to building and construction project disputes, it is imperative that parties take a commercial approach to dispute resolution. Parties should ensure their actions are proportionate to the circumstances at hand and that emotions are, as much as possible, checked at the door.

This case effectively, revolved around the decision of a party to suspend works which were almost complete, over a $177.40 unpaid interest claim. We take a look below at the circumstances, which are not themselves exceptionally uncommon, and how it resulted in almost 18 months of dispute resolution and litigation.

The Parties and the Project

On 18 April 2017, Duffy Kennedy Pty Ltd (Duffy Kennedy) entered into a Contract with Galileo Miranda Nominee Pty Ltd (Galileo) to Design and Construct, the Palisade, a residential apartment block in Sydney’s Sutherland Shire effectively consisting of two unit blocks, a car park and a pool.

The Contract was for a lump sum of just under $66 million and specified the date for Practical Completion as 18 February 2019.

The project was administered by Resource Co-Ordination Partnership Pty Ltd (RCP), being the Principal’s Representative. In the usual way, RCP’s role in the project was to decide upon, and certify contract elements such as extensions of time and relevantly, progress payment entitlements in accordance with the Building and Construction Industry Security of Payments Act 199 (NSW) (SoPA).

The Principal Certifying Authority, responsible for issuing certificates under the Environmental Planning and Assessment Act 1979 (NSW) was McKenzie Group Consulting (NSW) Pty Ltd (McKenzie).

The Facts

As is the case in many projects, the Practical Completion date was not met. Duffy Kennedy alleged that, as at the end of February 2019, about ‘99.9%’ of the works, by reference to the Contract sum, were complete, with the value of the remaining works to be about $56,000. In order to obtain the Occupation Certificate, McKenzie required:

  • a ‘Penetration Schedule’ identifying each location within the project where pipes, wires or other services ‘penetrated’ structural walls, ceilings or floors of the building (of which there were hundreds); and
  • The increase in the heights of the balustrades on four balconies to meet safety requirements of the Building Code of Australia.

Progress Claim

In this context, on 26 February 2019 Duffy Kennedy issued a Progress Claim to Galileo, claiming $1,010,161.72.

RCP issued a Payment Certificate and Payment Schedule in response on 12 March 2019, assessing the sum due was $293,984.42 (plus GST).

The parties did not dispute that payment was due on 19 March 2019. Galileo initiated an electronic payment on 22 March 2019, for the certified amount, which was received on 25 March 2019.

Despite s11(2) of the SoPA, there was no provision within the amount paid for interest. The outstanding interest, had any been owed, was $177.40.

Duffy Kennedy Notices to Suspend Works

On the basis that Galileo failed to include interest accounting for the late payment, Duffy Kennedy issued two notices to Galileo on 25 March 2019. Effectively, both sought to provide notice of Duffy Kennedy’s intention to suspend works.

The first notice was issued pursuant to s16(2)(b) of the SoPA. The second notice was issued under the terms of the Contract, which purportedly gave Duffy Kennedy the right to suspend works if the Principal defaulted in making any payment under the Contract.

Show Cause and Take-Out Notices

In response, on 29 March 2019, Galileo issued a Show Cause notice requiring Duffy Kennedy to show reasonable cause why Galileo should not exercise their contractual rights to terminate the contract or take the works out of the Contractor’s hands. Relevantly, the Show Cause notice was issued on Galileo letterhead and signed by both a representative of Galileo and of RCP.

Galileo and Duffy Kennedy held ‘without prejudice’ discussions to attempt to resolve the issues disputed between them, but were unable to reach an agreement.

The response to the Show Cause notice issued by Duffy Kennedy was deemed unsatisfactory by Galileo. A Take Out Notice was issued to Duffy Kennedy on 29 April 2019 by Galileo.

The Take Out Notice, pursuant to the Contract, required Duffy Kennedy to leave the site. The key contention in this respect was the completion of the ‘Penetration Schedule’ described above.

Return of Security

In response to the Take Out notices, Duffy Kennedy disputed the validity of the Take Out Notice, asserted the Take Out Notice was a repudiation of the Contract.

Duffy Kennedy argued that, as Galileo had repudiated the Contract, Galileo were required to return the bonds which has been provided as security for Duffy Kennedy’s obligations under the Contract.

The Supreme Court Proceedings

The Supreme Court Proceedings were initially commenced by Galileo, who sought to affirm the Contract and compel Duffy Kennedy to perform their obligations under the Contract following the Take Out Notice’. Duffy Kennedy Cross-Claimed and sought orders that Duffy Kennedy return the Security Bonds.

Decision

The first issue in dispute between was whether or not Duffy Kennedy had been entitled to suspend the works, for the failure of Galileo to pay $177.40 in interest on the ‘Certified Amount’ in the Payment Schedule. Failing this, did Duffy Kennedy have ‘reasonable cause’ to suspend works, acting in good faith on the basis that payment of the interest was not forthcoming.

The answer in the first instance was, put simply, no.

The decision highlighted that, in circumstances where a payment schedule has been issued, the SoPA requires payment of the ‘scheduled amount’. The Scheduled amount, in the absence of an adjudication determination or Court order, does not automatically include interest which is payable under s11(2) of the SoPA.

The Court went on to establish that in commercial contracts between parties, a business-like approach must be taken to the behaviour of the parties and to the construction of the parties’ rights and obligations. The Court made specific reference to the fact that the decision to suspend the works on the basis of a failure to pay $177.40 was, on an objective assessment of the circumstances disproportionate and therefore unreasonable.

The second issue was whether the Take Out Notice had been validly issued by RCP and whether Galileo had been entitled to retain the security to satisfy any costs incurred by Galileo in engaging other Contractors to Complete the works.

Among other considerations, the Court determined the Notices on Galileo letterhead could be validly issued by “RCP’. By way of the relevant RCP representative having reviewed and signed the documents, RCP had indicated their consent to the document’s contents, and have discharged their duties to act in good faith when making determinations on contractual issues.

The Court further found that parties conducting settlement discussions on a ‘without prejudice’ basis, are not precluded from using information disclosed within these meetings to inform commercial and contractual decisions.

The Appeal

Duffy Kennedy challenged the above decision, on the grounds that Judge in the first instance erred on the following issues:

  • Duffy Kennedy were entitled to suspend the works pursuant to the SoPA;
  • Duffy Kennedy had reasonable cause to suspend the works under the Contract;
  • Galileo had been too involved in the issue of the Show Cause Notice, and the Show Cause Notice was not valid; and
  • Galileo had been too involved in the issue of the Take Out Notice; and the Take Out Notice was not valid.

By way of a unanimous decision of the Court of Appeal, Duffy Kennedy failed on all grounds and the reasoning of the Supreme Court in the first instance was largely affirmed.

How Does this Affect Building and Construction Contracts?

Whilst it is not uncommon for building and construction projects to go awry, and for parties to get upset with one another, it is imperative that parties act with a level head and with commerciality, as opposed to emotions, in mind. Where possible, legal advice should be obtained early on, which can add a level of impartiality to dispute resolution discussions.

Parties should also take extra care to bear in mind that, when undertaking “without prejudice” settlement discussions, the other party may still able to use what you have said to inform their opinion or their next steps.

In this case, the decision to suspend works over unpaid interest claimed in the sum of $177.40, ultimately gave rise to the retention of security and a right to terminate the Contract.

The case highlights the fact that parties should take extra care when negotiating their rights in the Contract and should always ensure that the actions taken when exercising rights under contracts are proportionate and reasonable to the circumstances.

The above discussion is not intended to be legal advice, and readers should bear in mind that every case is different. If you or someone you know wants more information or needs help or advice, please contact us on 02 9248 3450 or email info@bradburylegal.com.au.