Corona virus and force majeure in construction contracts: Has your contract been immunised

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While many were recovering from New Years’ celebrations, corona virus was starting to make its way into the headlines. For the last 2 months, corona virus has dominated the news with many people and businesses starting to feel its impact as borders are shut down and quarantines are imposed. At the time of writing, the World Health Organisation has reported that corona virus has spread to many parts of the world including Australia, North America and parts of Europe. With much of the corona outbreak concentrated to China, several businesses are starting to feel the economic impact. As the manufacturing hub of the world, China is responsible for much of the world’s imports. Further, as the corona virus spreads and causes further border shutdowns, it becomes harder for businesses to have certainty in knowing when they will be able to import or export their goods. With businesses having to meet their contractual deadlines, the uncertainty can create a real issue for some. Consequently, many businesses may be put into a position where they are unable perform their contractual obligations. This article focuses on the different ways a construction contract may deal with situations such as corona virus.

The clause typically suited to situations or events like the outbreak of corona virus is a force majeure clause. Force majeure means ‘superior force’ and commonly covers natural events such as earthquakes or unforeseeable and disruptive manmade events such as war and industrial strikes. In the Australian context, force majeure clauses are creatures of the contract. This means that they only exist by virtue of a contractual provision which allocates the risk between the parties. Further, Australian courts will interpret these clauses strictly, giving the clauses the minimum application available within the ordinary meaning of the provision. In the construction contract context, it is unusual to see a specific force majeure clause. By way of illustration, the Australian Standard contracts do not contain a standard force majeure clause. Therefore, it is up to the parties to amend and insert a specific force majeure provision into the contract if they wish to have a specific mechanism dealing with the risk arising from these types of events.

As many readers may be aware, at the core of construction contracts is the allocation of risk through program. Therefore, construction contracts may, by their very essence, be differentiated from non—construction contracts. For example, extension of time (EOT), delay costs and liquidated damages clauses assign time related risks between the parties. The definitions of qualifying causes of delay and compensable causes in the Australian Standard provide a mechanism to pass time and cost related risks from contractors or subcontractors to the developer or head contractor. Amending the definition of qualifying causes of delay to extend to force majeure events is one way a construction contract can account for circumstances such as the corona virus. The key difference between allowing relief through a force majeure clause and allowing an EOT for force majeure events is that an EOT provides a contractor or subcontractor protection against liquidated damages. This is differentiated from a force majeure clause which may generally limit a party’s liability under the contract.

Irrespective of the way force majeure events are incorporated into construction contracts, care must be taken in drafting these clauses. When getting into the force majeure territory, contractors and subcontractors need to make sure that the definition of ‘force majeure’ or ‘force majeure event’ is drafted clearly, but not too broadly. For example, stating that a subcontractor is entitled to an EOT for anything outside of their control may be clear, but too broad to specifically cover corona virus. However, stating that the subcontractor is entitled to an EOT for delays related to the corona virus may be clearly drafted, but it does not provide much further scope. The clause would not protect from outbreaks or re-emergence of SARS or other endemics, epidemics or pandemics. A balance must be reached between these two extremes and will depend on the specific project.

When drafting a force majeure clause, it is important to consider some broad points. Firstly, force majeure clauses are usually exhaustive in nature, meaning that only what is in the contract is covered. Secondly, the party affected by the force majeure event must not have caused or contributed to the event and will required to take all steps to overcome or mitigate its effects. There also needs to be a connection between the force majeure event and the performance of the contractual obligations. For instance, the mere occurrence of the corona virus is not sufficient to justify an EOT in all cases. It will only entitle relief from liquidated damages when the event has caused a delay. By including these conditions, a force majeure clause (whether in EOT form or specific clause form) will generally entitle a party to relief or suspension of their obligations under the contract.

A significant problem with force majeure events is that it can be difficult for parties to establish that they should be entitled to relief under the clause. For example, in relation to the mitigation element discussed above, a party is often required to show that it cannot fulfil its supply obligations. While a party may have its preferred third party supplier, the mere fact that supply is not available from this supplier will not justify force majeure relief. The parties are bound by their contractual deal and this remains the case even if the obligations become significantly more onerous or expensive to complete. However, if all of the supply of product X is unavailable, then a party should be entitled to relief under the relevant clause until the supply becomes available again.

If you or someone you may know is in need of advice on existing contracts or advice regarding the force majeure clause, please contact our office by phoning (02) 9248 3450 or by email at [email protected].

Contractual interpretation: What did we even agree upon?

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It is the question as old as human trade and commerce: when we made that agreement, what did we mean?

This is a deceptively simple question. It may appear to parties with amicable relations that the meaning of a document is clear, but when a dispute opens up, what tends to happen is that each party will stretch every definition to suit its purposes.
As will become clear, courts are still grappling with difficult questions about how an agreement should be interpreted, and what evidence put forward by the parties can be considered to discern its meaning.
We consider some basic principles to do with contractual interpretation, and look at a recent example of the circumstances in which courts will look at negotiations between the parties and the effect this has on the meaning of the agreement.

Basic principles

Where there is a written contract between two parties that are legally represented and commercially experienced, the law will likely consider this contract to be the complete statement of their legal rights and obligations. In some cases, a contract may be both oral and in writing, but proving this is onerous.
As a result, where there is a dispute, the contract is the first thing that the lawyers and judges will consider. The contract is considered to reflect how the parties intended to allocate risk.
When looking at a contract, the court will assess and interpret the contract to give effect to what is called the objective intention of the parties. This is not what was actually in the minds of the parties. Rather, it is what a reasonable person, a third-party bystander, would understand the words or actions of the parties to show about the parties’ intention.
In the commercial context, this means the court will look at the words used in drafting the contract and determine what they mean to a reasonable businessperson informed about the circumstances of the case.

But wait there’s more

What is said above does not mean that the actions of the parties are irrelevant. Far from it.
In fact, it is sometimes necessary for courts to consider the surrounding circumstances of an agreement, so that they can determine what the intentions of the parties are with respect to what exactly constitutes the agreement and what its terms mean.
This might seem contrary to the court’s tradition of only looking at the contract. However, it will generally only be done when there is ambiguity in the words of the contract.
For example, in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, the High Court stated that it is not what the parties think about their rights and obligations that govern contractual relations. Rather, it is the words and conduct of each party that would lead a reasonable person in the position of the other party to believe.
Ten years later, the High Court again commented on the use of evidence outside the contract in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640. In this case, the High Court said that evidence of the parties’ actual (subjective) intentions is not relevant to construction. What is relevant is the evidence of surrounding circumstances known the parties.
External circumstances can be considered by the courts when interpreting contracts between disputing parties.

So how does this all work?

If courts are supposed to consider the contract as the full statement of the parties’ rights and obligations, but they are able to look at circumstances beyond the contract, how does a judge determine what is the agreement?
Firstly, the contract is still the primary document that is interpreted. The evidence considered by a court of what has been said or what has happened outside of the contract cannot be used to give the contract a meaning that is contrary to what the contract clearly states.
Put another way, evidence outside of the contract cannot be used to add to, vary or contradict the language of the written contract. This is the case no matter how unjust or inconvenient the written terms are. This makes sense, as effective relations depend on the meaning of an agreement being fixed and clear.
Permitting outside factors to change the meaning of a contract introduces significant uncertainty. As any businessperson will know, where there is uncertainty there is conflict. A party could for example attempt to impose its own view on the meaning of the document. External conduct is used to make the meaning of the contract clearer, not to change it. In practice, however, the line between these two can be very difficult to draw.
Secondly, matters outside of the contract become relevant only where there is ambiguity or more than one meaning in what is inside the contract. Words may have different meanings in different contexts, so the context is important in choosing the right interpretation.
To this end, courts may consider the commercial purpose of the contract, the market and industry in which it arose, and the factual background of the agreement. All of this can shed light onto what the parties “must have” intended when they drafted the contract.
It is important to note that courts will only consider outside circumstances that are known to both parties.
However, courts will only consider these factors if the meaning of the written document is not clear. Negotiations that occurred prior to the signing of the agreement are also rarely considered, for the simple reason that they do not often show what was agreed.

For example …

Cherry v Steele-Park [2017] NSWCA 295 was a case that turned on the meaning of a deed of guarantee. Specifically, whether this deed of guarantee required the guarantor to pay the damages that resulted from the failure of their company to complete a contract for sale of land. The guarantor argued that the deed only covered the amounts promised for extending the contract’s completion date. The difference was around $145,750.
The case appeared to challenge the principles talked about above.
The argument was around whether the meaning of term had to be ambiguous before a court would admit evidence outside of the contract to explain its meaning. What happens when a term that appears to have a plain meaning “becomes” ambiguous only when outside material is introduced?
The answer is that as long as the evidence is relevant as information about the genesis or purpose of the transaction, it can bear on the contractual language and can be considered. Then the court will make a conclusion about whether the written terms are clear or ambiguous.
In Cherry v Steele-Park, Cherry wanted to include in evidence emails exchanged between the parties, that represented negotiating positions that were communicated between the parties. (As a side note, it was important that both parties knew about these emails when entering the contract.)
The Court considered the emails. However, the case ultimately reinforces not challenges the conclusions talked about above. The interpretation of the clause given by the court ultimately did not bend to what was said in these emails.
Rather, the Court considered as primary the terms and the structure of the contract, including the definitions and the generality of their language. The interpretation put forward by Cherry was some but clearly not all of the guarantee.
The Court concluded that the emails did not defeat “the wide words in the Guarantee”. The emails showed that there may have been a commercial purpose to make a limited guarantee. However, this context could not overcome the content of the Guarantee. Or, as Leeming JA stated, “such context – even relatively powerful evidence of context such as the present – does not warrant doing the violence to the general language of the document executed by them that they require.”
It was in effect a warning, that regardless of how persuasive evidence of negotiations is, it will not limit or take away from what is stated in a contractual document.

Conclusion

Prevention is always better than the cure. In the early stages of a commercial agreement, a little expense given to ensuring a contract tabled between the parties truly expresses your intentions goes a long way to preventing protracted disputes.
Problems can arise even between parties with a great relationship, and as discussed, once a problem does arise courts will be very reluctant to look beyond the written document that was exchanged. What this written document says will be of paramount importance, so it is worth the extra attention.
If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email [email protected]

The benefits of mediation in a commercial dispute

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The popular image of a lawyer is a person keen on prolonging an expensive court action.

More often the opposite is true. Lawyers know that court cases are expensive and that clients are fearful that legal costs could escalate to an intolerable level. They are also all too aware of how long and unpredictable litigation can end up becoming. Lawyers interested in preserving long-standing relationships with their clients will often recommend alternative dispute resolution options – mediation being one.

Mediation allows parties to remain in control of their own disputes and outcome while facilitating parties to tell their side of the story to the other party and the mediator.

What exactly is mediation?

Mediation is one form of alternative dispute resolution with others including Early Neutral Evaluation, expert determination and arbitration.

In essence mediation is an informal conflict resolution process brought before an independent, neutral third party. Mediation gives the parties the opportunity to discuss their issues, clear up misunderstandings, and find areas of agreement in a way that would never be possible in a court case.

Mediation is often voluntary. Typically the mediator has no authority to make a binding decision unless both parties agree to give the mediator that power which is dealt with in advance of the mediation commencing.

When parties should consider mediation

In practical terms mediation is likely to be quicker and more cost-effective than the more formal processes of arbitration or litigation (in court). Mediation should be considered as early as possible after a dispute has arisen. It is particularly appropriate where a dispute involves complex issues and/or multiple parties.

In addition, mediation can be implemented prior to, or in conjunction with, other forms of dispute resolution such as arbitration or court proceedings.

In circumstances where privacy and confidentiality are important, mediation enables parties to preserve these rights without public disclosure. This often leads to more satisfactory outcomes for both parties.

Advantages of mediation

Some of the many advantages to mediation are as follows:

You get to decide: The responsibility and authority for coming to an agreement remain with the people who have the conflict. The dispute is viewed as a problem to be solved. The mediator doesn’t make the decisions, and you don’t need to “take your chances” in the courtroom. In doing this however, naturally you need to understand your legal rights so that you can make decisions that are in your own best interests.

The focus is on needs and interests: Mediation examines the underlying causes of the problem and looks at what solutions best suit your unique needs and to satisfy your interests.

For a continuing relationship: Colleagues, business partners, and family members have to continue to deal with each other co-operatively. Going to court can divide people and increase hostility. Mediation looks to the future. It helps end the problem, not the relationship.

Mediation deals with feelings: Each person is encouraged to tell their own story in their own way. Discussing both legal and personal issues can help you develop a new understanding of yourself and the other person. You are encouraged to see things from the other person’s perspective.

Higher satisfaction: Participants in mediation report higher satisfaction rates than people who go to court. Because of their active involvement, they have a higher commitment to upholding the settlement than people who have a judge decide for them. Mediations end in agreement about 80 percent of the time and have high rates of compliance.

Informality: Mediation can be a less intimidating process than going to court. Since there are no strict rules of procedure, this flexibility allows the people involved to find the best path to agreement.  Although it is normal for any dispute resolution to be taxing emotionally, mediation is a process that is much less confronting and is conducted in a much more comfortable environment than litigation.

Faster than going to court: Years may pass before a case comes to trial, while a mediated agreement may be obtained in a couple of hours or in sessions over a few weeks.

Lower cost: The court process is expensive, and costs can exceed benefits. It may be more important to apply that money to solving the problem, to repairing damages, or to paying someone back. Mediation services are available at low cost for some types of cases. If you can’t agree, other legal options are still possible. Even a partial settlement can lessen later litigation fees.

Privacy: Unlike most court cases, which are matters of public record, most mediations are confidential.

Where mediation is not the solution

With mediation a resolution is not guaranteed. There is the potential that parties may invest time and money in trying to resolve a dispute out of court, and still end up having to go to court. Ultimately it is a call that should be made in consultation with an experienced lawyer.

Mediation should not be a solution in circumstances where it is not appropriate. Where a court remedy is necessary such as an injunction or specific and urgent court orders, mediation is not helpful.

It must also be remembered that the mediator has no power to impose a binding decision on the parties. Therefore, even after the mediation the matter may be unresolved and you may still need to go to court. This is where the selection of the mediator requires careful consideration by all parties.

Fundamentally, mediation rarely produces a satisfactory resolution unless both parties to a dispute are committed to a resolution by this way. If one party does not cooperate or engage with the processes, mediation will be fruitless.

Conclusion

Mediation is an alternative to financially and emotionally costly and time-consuming processes such as using the court system. It is suitable for people who are willing to communicate with the other party and attempt to better understand and settle their dispute with the help of a trained third party.

To find out more call us on +612 9030 7400 or email [email protected].

Different options for resolving building disputes

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A building dispute can have serious implications for all parties involved, the most obvious being delays to the construction project and the resulting financial loss.

A dispute may arise from disagreements over the interpretation of a contract term, incomplete or defective works, variations to the scope of works, or charges for prime cost items and provisional sums.

Bringing a building dispute matter before a court or tribunal can exacerbate the issues between the parties, delay the project further, incur additional costs and cause even more damage to the parties’ strained relationship. It is almost always beneficial to settle a building dispute through alternative dispute resolution (ADR).

ADR involves retaining an impartial third party to assist in reaching an early settlement of the matter. In fact, most jurisdictions require that parties to a building dispute make genuine attempts to settle the matter before proceeding to a tribunal or court.

Construction contracts often contain ADR clauses that specify the approach to be used if a dispute arises. The ADR method may be facilitative, advisory or determinative.

When preparing or entering a construction contract, it is important to understand the different ADR approaches and their implications, and to choose the type most suited to the circumstances. If there is no ADR clause, the parties may agree to use a particular method. The following is a summary of each.

Facilitative

A building dispute may be resolved through mediation which involves a neutral person meeting face to face with the parties to assist them in narrowing the disputed issues, exploring options and reaching a solution.

Mediation is informal and confidential, and the mediator does not provide legal advice nor does he or she determine the matter. The parties should be willing to negotiate in good faith and make genuine attempts to resolve the dispute.

The parties meet in a “without prejudice” environment and the mediator coaches the parties through the issues and encourages them to engage in meaningful negotiations.

Mediation allows the parties to reach an early settlement that may be more flexible than one imposed by a court or tribunal and may assist in preserving the parties’ commercial relationship allowing them to continue working throughout the project and beyond.

The construction contract will usually specify who may be appointed as a mediator and stipulate who is responsible for the costs of the mediation – this is often shared equally between the parties.

Advisory

Advisory ADR processes may include conciliation, expert appraisal and case appraisal. Each involve the appointment of a third party to consider the available material and provide advice regarding the facts and appropriate law and how the matter may be settled.

Early Neutral Evaluation was first used in the United States in response to a critical backlog of cases within the courts system and generally falls within the category of case appraisal. An evaluator with knowledge of the law is appointed and considers the parties’ respective arguments and evidence. The evaluator may be a dispute resolution practitioner or judicial officer. They make a non-binding evaluation of the strengths and weaknesses of each side, the likely liability and an estimate of damages.

In other words, the parties are provided an expert opinion, from an experienced and respected neutral party, regarding the likely outcome if the matter was to go to a court or tribunal. The evaluation is confidential, and the appraisal provided generally encourages settlement without the delay, costs and formalities associated with a court or tribunal hearing.

Senior Executive Appraisal, also known as a mini-trial, involves a panel of senior experts joining an independent neutral third party to consider and evaluate the dispute. The parties present their own evidence and the panel convene to attempt to settle the matter. The power conferred on the panel and independent third-party is predetermined by agreement.

Determinative

An independent expert with appropriate technical knowledge is appointed by the parties to determine the dispute. The determination is generally made on the respective parties’ written submissions, statements and evidence and the expert may conduct his or her own investigations before determining an award. Oral evidence does not usually form part of the process.

The contract generally sets out the process governing this method of ADR, including who the expert should be, how the expert is appointed, the relevant timeframes, the binding nature of the decision and how costs are to be paid.

If the contract provides for the determination to be binding and a party refuses to comply with the decision, then the other party will generally need to rely on the contract’s provisions to enforce the decision through the court.

When ADR is unsuccessful

Not all building disputes may be successfully negotiated.

If resolution is impossible or impractical, either party may make the appropriate application to their state or territory Administrative Tribunal or court. The matter will proceed according to the type of construction project, the value of the claim, and the parties to the dispute. Tribunals and courts are formal jurisdictions and have strict processes and timeframes.

Conclusion

Unresolved building disputes can escalate quickly depleting valuable time and resources of the parties involved. Utilising ADR to resolve a dispute can be time efficient, cost effective and assist in preserving the relationship between the parties.

Determining which ADR method is appropriate will depend on the facts and circumstances of each case. In all matters however, the parties should be willing to listen and make genuine efforts to negotiate and resolve the issues.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email [email protected].

The dreaded ACL injury: the Australian Consumer Law and building contracts

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Since it fully came into effect on 1 January 2011, the Australian Consumer Law (ACL) has lived up to its infamous initials. Just as athletes live in fear of hearing those three letters from physicians, now businesspeople must also tread carefully to avoid hearing them from judges.

The ACL is part of the Competition and Consumer Act 2010 (Cth). Although recently enacted, many of its provisions were previously in effect under the now-repealed Trade Practices Act 1974 (Cth).

This law touches all trade and commerce in Australia in some way, and seeks to ensure that parties adhere to standards of fairness and honesty in business. Failure to do so can lead to a number of consequences, including a contract being torn up and even criminal sanctions.

The regime is part of a broad shift of the law away from the fundamental legal principle that if parties willingly and knowingly agree to a contract, they must keep their promise, regardless of how difficult this is or ends up becoming.

Perhaps its name is to blame, but many are under the false impression that the Australian Consumer Law only applies to everyday retail consumers. However, complex “high-end” commercial deals can equally be subject to the ACL. Your building contract could be affected in the same way that Amy buying a DVD player is affected.

This article is only a primer to a range of consumer law issues that people on construction projects should be thinking about. For information about how these might apply to your project or your claim, please seek legal advice.

What is the ACL?

The ACL is the primary law governing protections and expectations about business conduct in Australia. It applies nationally, to every State and Territory. It also applies where foreign companies do business with businesses in Australia.

In general, it is important for developers, homeowners and contractors to know that the ACL applies even if the parties have “agreed” that it doesn’t apply. Parties cannot contract to exclude the application of the ACL.

Having said that, courts are still working out how to deal with contracts that in roundabout ways exclude its operation.

What transactions are caught by the ACL?

This depends.

Certain protections apply to any trade or commerce taking place in Australia. Additional protections regulate more specific types of transaction.

Developers and builders would do well to ask themselves the following questions:

  1. Is my project trade and commerce?
  2. Is my contract a consumer contract?
  3. Is my contract a small business contract?

Is my project “trade or commerce” under the ACL?

This is the broadest category of protections given by the ACL, so if you are thinking about it the answer is very likely “yes, my project is trade and commerce”.

The ACL covers trade or commerce that takes place within Australia and includes business or professional activity (whether for-profit or non-profit).

Some previous examples of constructions that were affected by ACL claims include projects to:

  • build extensions to a large domestic airport;
  • construct a spillway for a dam;
  • design and install a ceiling to an aquatic centre; and
  • build a strata title development in Kirribilli.

So what protections apply in trade and commerce?

The most famous protection is misleading and deceptive conduct. Not precisely defined, it encompasses a broad range of statements, representations or behaviour that may mislead or deceive a reasonable person. In certain circumstances, silence may be misleading, and this will be caught too. It does not matter that the person did not intend to mislead with their conduct, and does not matter that the deception happened before the contract was executed.

Related to this is the protection from unfair practices, which are activities that are broadly misleading. These include false or misleading claims about the standard of goods and services being supplied. They also include prohibitions against bait advertising, against asserting a right to payment without a reasonable cause to believe there is a right to payment, and against supplying unsolicited services.

Another line that all businesses involved in trade or commerce must toe is that of unconscionable conduct. The definition of “unconscionable conduct” is broad and not limited to what is written down in the statute books. Either a supplier or an acquirer of goods or services may be accused of unconscionable conduct.

Some examples of what might be considered to be unconscionable include: the imposition of conditions not reasonably necessary to protect the interests of a party, the exertion of any undue influence or pressure on a party, and unreasonable failure by a party to disclose intended conduct or risks that would not be foreseen.

Is my contract a small business contract?

The contract in question might be a “small business contract”. This will be where:

  • A contract is for supply of good or services, and
  • A party to the contract is a business that has 20 or fewer employees, and
  • The upfront contract price is up to $300,000 (or the upfront contract price is $1 million and the contract has a duration of more than 12 months).

These are the questions businesspeople should be asking themselves.

Small business contracts have all the protections outlined above (including misleading and deceptive conduct, unfair practices, and unconscionable conduct). In addition, they are protected from unfair contract terms

An unfair contract term is a term in a standard form contract that would cause significant imbalance in the parties’ rights, is not reasonably necessary to protect the legitimate interests of the party benefiting from it, and would cause detriment to the other party.

There are no hard and fast rules about what is an unfair term, as the circumstances of the case will always be considered carefully by a court. However, an example is a term that allows one party unilaterally to vary the characteristics of the goods supplied, or to vary the terms of the contract.

Is my contract a consumer contract?

The most protected species under the ACL are consumers. The contract for goods or services is a consumer contract if:

  • The price of the goods or the services is less than $40,000; or
  • The goods or services were of a kind ordinarily acquired for personal, domestic or household use or consumption; or
  • The goods were a commercial road vehicle.

Where any of these apply, the person acquiring the goods or services could be a “consumer” in the eyes of the law. In addition to the protections listed above, consumers benefit from consumer guarantees.

Consumer guarantees are a litany of warranties that a supplier of goods or services makes to a consumer the moment the contract is in place. Some examples include:

  • The goods or services are of acceptable quality;
  • The services are rendered with due care and skill;
  • The services are reasonably fit for a purpose, if the consumer makes it know they hire the services for this purpose.

Many of these guarantees already exist elsewhere, in tort and contract. The difference here is that contracting parties cannot contract out of these consumer or small business guarantees. Subject to what is said below, they will apply regardless of any contractual term stipulating that they don’t.

Remedies

Parties who are a victim and suffer loss or damage because of another party’s breach of the ACL have many remedies at their disposal.

The main remedy is that they may make a claim for damages from the offending party. This claim for damages must be made within 6 years of the day that the entitlement for the claim first arose.

Some of the above breaches of the ACL are also criminal offences. This especially includes false or misleading representations, and unfair practices.

If the ACCC or local bodies such as Fair Trading NSW bring actions against businesses for the above breaches, they can enforce pecuniary penalties. They can also request injunctions preventing the offending conduct. There are a myriad of other remedies to suit the specific circumstances, including requirements to undertake training of staff.

Limiting the effect of the ACL

The effect of the ACL cannot be excluded, restricted or modified by a term of the contract. Any contractual term that purports to do this is struck out by courts.

Though this principle appears clear as day, courts have found it difficult to apply in the real world, and there are isolated examples of businesspeople who have avoided a nasty ACL claim through clever drafting of the contract.

In one NSW case, a contract purported to prevent claims made under statute after one year from the date of practical completion. This had the practical effect of reducing the 6 year limitation under the Act, and the court found this was acceptable. Similarly, another NSW case held that a monetary limit of $300,000 was effective to prevent a claim under the ACL from more than this amount. The courts in both cases gave detailed consideration to the surrounding circumstances.

However, a recent Victorian case has gone the opposite direction. The contract purported to require a claimant to give 7 days’ notice to the other party if it was going to make a claim, including under statute. The Victorian Supreme Court found that this contractual provision was void.

Hopefully these issues will be definitively settled by a superior court. Until then, parties must be wary both of the possibility that the ACL will override what their contract says, and of the possibility that contractual time bars or monetary bars might affect a claim they have.

Conclusion

It is essential for anyone involved in business and all their staff members to understand their obligations under the ACL, because you can be sure the lawyers of the other side will know them. There is no escaping them, as they apply irrespective of what the contract says and government regulators are on the lookout for breaches.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email [email protected].

The role of an expert witness in a building dispute

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If you are involved in a domestic building dispute, whether as a building professional or homeowner, it will often be beneficial or necessary to retain an expert witness.

The role of an expert witness in a building dispute is to provide objective, qualified and documented evidence relevant to the facts in dispute.

Engaging an expert witness is usually a complex and expensive exercise. Further, the expert’s role as an impartial observer, and not as an advocate for the instructing party, is often misunderstood. Parties to a dispute can become anxious when it appears that the expert they have retained is not “on their side” or that the other party’s expert is an “opponent” in disputed proceedings.

It is therefore helpful to understand the role of expert witnesses, their obligations to a tribunal or court and how they can assist in determining a building dispute.

What is an expert witness?

An expert witness is a qualified professional with both specialised technical knowledge in a particular area or industry, and the necessary skills to provide an opinion, in writing and verbally. This opinion may be used as evidence in negotiations, dispute resolution processes or during tribunal or court proceedings.

When and why is an expert used?

The role of the expert is to assist the parties in negotiating a settlement, or if the matter proceeds to a tribunal or court, guide the decision-maker towards a reasonable determination.

A residential building dispute does not typically concern the interpretation of a contractual term, which, in a court or tribunal, would be a matter for lawyers to argue.

Rather, a residential building dispute typically concerns claims of incomplete and/or defective construction work the nature of which is highly technical and industry specific. The subject matter of the dispute may be a single dwelling or a multi-storey residential complex.

A layperson is not qualified to provide evidence of a technical nature which, in court or tribunal proceedings, could be considered an opinion or hearsay. Similarly, a lawyer is not qualified to assess the costs of rectification of a building.

In such matters evidence should be given by a person with specialised knowledge in the subject matter that is based on his or her training, study or experience. One example of an expert is a quantity surveyor.

Retaining an expert witness

The selection of an expert witness is typically made by the lawyer representing a party to the dispute, who will identify a professional with the necessary expertise required for the particular case and the ability to provide written, and oral evidence, if required.

Written instructions should be provided to the expert which will include an overview of the matter, the issues in dispute, the matters to be addressed, and additional information that will assist in compiling the report, such as building contracts, plans and specifications, and invoices for building materials.

Most unresolved domestic building disputes are heard in a tribunal with specific rules and codes of conduct regarding the use of an expert witness and the required format for expert reports. This is generally to ensure consistency and uniformity. A copy of the relevant expert evidence guidelines and reporting requirements from the tribunal should always be attached to the instructions given to the expert.

It may also be necessary to engage an additional expert with specialist knowledge, such as a structural engineer, to provide a supplementary report for specific issues like a retaining wall claimed to be defective.

A quantity surveyor may be engaged to assess the cost of rectification works for more complex matters. For relatively simple matters, retaining an expert may not be necessary, as obtaining quotes from building professionals and tradespersons may be sufficient.

The expert report

An expert will draw upon his or her construction knowledge to provide a qualified opinion in response to the issues raised in the instructions. A report will typically include:

  • the expert’s formal qualifications, experience and field of expertise in which the evidence is being provided;
  • a summary of the issues upon which the expert is required to report;
  • any facts or assumptions upon which the expert has relied (i.e. the letter of instruction);
  • the identification (and categorisation) of incomplete, non-compliant and/or defective building work;
  • an opinion as to why the building work is incomplete, non-compliant and/or defective, qualified with reference to relevant standards, construction codes and tolerances, and the building contract, plans and specifications;
  • any examinations, investigations or tests used to form the opinion;
  • an assessment of the cause of a defect;
  • recommendations for the rectification of incomplete, non-compliant and/or defective building work including reasons for the recommendation;
  • suggested methods for rectifying the incomplete, non-compliant and/or defective building work including any reasonable alternative remedies;
  • the estimated cost of the recommended rectification work.

The duty of impartiality

Tribunal and court rules, practice notes and directions require that an expert witness is impartial and not an advocate for a party to a proceeding. He or she has an overriding duty to assist a tribunal or court on the matter relevant to the expert’s expertise.

Independence is paramount and any hint of bias towards the instructing party by the expert can be detrimental to that party’s case and may initiate a request by the opposing side for the tribunal to disregard that expert’s evidence.

The expert’s reputation and credibility in such circumstances will also be at stake.

Conclusion

An expert witness may be retained to provide an impartial qualified opinion to assist in determining a matter in dispute.

Choosing an expert with the requisite qualifications, knowledge and experience to provide an objective opinion is essential for many building disputes. When retaining an expert, it is also important to bear in mind that the expert is not an advocate for the instructing party.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email [email protected]

Protecting your plans: intellectual property basics for architects

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Architectural designs and plans are a valuable commodity in the building and construction industry. With technology facilitating the seamless reproduction, transformation and dissemination of printed and digital material, architects should be vigilant in protecting their original creations and their livelihoods.

This article provides an overview of copyright law in Australia and explains how architects may take steps to protect their original works from copyright infringement.

Application of copyright law to architectural designs

Federal copyright protection was introduced in Australia in 1905 and has since evolved into the Copyright Act 1968 (Cth) which is currently in force. This Act includes broad categories of subject matter benefiting from its protection, to keep pace with emerging technologies.

The subject of copyright material comprises ‘artistic works’ or ‘forms of expression’ rather than ‘ideas, information or facts’ – that is, the actual production of work in a material form, rather than a mere idea or thought.

Architectural drawings and designs (whether sketched or generated with software), models of buildings and the buildings themselves all fall within the category of ‘artistic works’ and are therefore protected by copyright law. An architect will also have copyright over plans drawn from ideas or instructions received from a client, as they have been produced and expressed in a material form.

What is copyright infringement?

The owner of copyright work has an exclusive right to reproduce it in material form, publish the work and communicate it to the public.

Infringement of copyright occurs when a person does anything that constitutes the exercising of these rights, or the authorising of another person to do so without permission of the owner.

Essentially, the creator of the work should have control over its commercial exploitation including licensing the use of the work to a third party.

To prove infringement, there must be a fundamental link between the original work and the copy. This link can often be established where an infringing party has seen or had access to the original work.

The alleged reproduction of the work must be in a material form with an objective similarity between the original and copy. The objective similarity need not relate to an entire work provided a substantial part of it is reproduced.

In copyright cases concerning architectural drawings and plans, the reproduction of unique, distinctive or important design aspects can be influential in determining whether the work has been infringed.

Protecting plans from infringement – service agreements

Because copyright subsists in an original creation, such as architectural drawings and designs, there is no requirement (or method) to register the work with an authority to obtain the protection of copyright law. This makes the process appear simple, however it opens the door to disputes over who is the original creator of the work.

Architects can be proactive in protecting their original work by ensuring that a service agreement is entered into by every client who retains their services.

The agreement should set out the terms of retainer, the parties’ respective rights and their respective responsibilities. It should also include provisions regarding intellectual property rights and the licensing of the work created by the architect.

A licence may be exclusive or non-exclusive.

Generally, a service agreement will provide that an architect retains ownership in the copyright of their work but allow for the licensing of the work created to the client who has paid for it.

An exclusive licence will allow the client of the architect (the licensee) to exercise the rights to the exclusion of all others. This means that the licensee may take action against others for infringing the copyright and using the material, including action against the original creator of the work.

A non-exclusive licence limits the use of the material by the client (licensee) in accordance with the terms negotiated and contained in the agreement. A non-exclusive licence will enable the architect to continue to use the works and allows the architect to grant further non-exclusive licence rights to other parties. This may be appropriate if an architect intends to reuse the work elsewhere.

Implied licences

If there is no service agreement or if an agreement is silent as to the assignment of copyright, the law generally recognises an implied licence for the benefit of a client who has commissioned the architect for a certain purpose, such as the production of plans for a specific site.

The extent of the implied licence will depend on the circumstances. However, it is generally limited to one-off use of the plans on the site for which they were designed.

The recognition of an implied licence may leave an architect vulnerable in circumstances where the relationship between the architect and client breaks down and the retainer is terminated. A written agreement with provisions stating that any implied or express licence will be revoked, and that the agreement is terminated in the event that the client refuses to pay the architect for the services, should help to protect the architect in such circumstances.

Other steps to protect copyright works

In addition to having a service agreement in place before commencing work, there are other steps architects can take to protect their designs.

Copyright notices and the copyright symbol “ © ” should be placed in prominent positions on all original work.

When giving sample drawings and designs to potential clients, architects should also provide a written warning stating that allowing access to the plans does not constitute an implied licence to use them, and that copyright remains at all times with the original creator.

Architects can also keep original drafts, drawings and references tracking the production of their work, and any other information such as commencement dates, instructions, notes and communications, that all may assist in proving the work’s originality, should this become necessary.

Remedies for infringement

Proceedings for copyright infringement may be instigated in the Federal Court or the Federal Circuit Court.

Remedies include an injunction (restraint) which prevents the immediate and future use of the copyright material by the infringing party, an award of damages for financial loss, or an account of profits requiring the infringing party to forward all profits made from the material to the owner or licensee. The infringing party may also be ordered to pay legal costs.

When calculating damages, the Court may consider the infringing party’s conduct and whether it was deliberate or reckless, the benefit accrued to the infringing party and the need to deter others. Exemplary damages, which are additional damages, may be awarded for conduct that is flagrant and deliberate.

Conclusion

Copyright laws acknowledge that creators of original material should receive legal recognition and reward for their efforts and that third parties should not benefit unlawfully from a creator’s work.

Although copyright subsists for the benefit of the creator of an original work, architects must be proactive in protecting and enforcing these rights.

Builders should also be cautious when requested to work with clients who bring ‘their own’ architectural designs to be used in a proposed building project to ensure that use of the design has been authorised.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email [email protected]

The Modern Slavery Acts: what businesses need to know

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After much discussion, the Australian government has followed the examples set by the NSW government and overseas countries.

On 29 November 2018, the Modern Slavery Act 2018 (Cth) (Commonwealth Act) was passed by Parliament. It will join the Modern Slavery Act 2018 (NSW) (NSW Act) and impose reporting obligations on large businesses.

Both Acts will come into effect when the respective governments announce it in their gazettes in the near future. The first reporting obligation will likely kick in on 30 June 2020.

It is hoped that such anti-slavery laws will make a dent into the staggering number of people that are subjected to modern slavery. The Global Slavery Index estimates that this is 40.3 million people globally, 25 million in the Asia-Pacific region, and 15,000 in Australia. Such exploitation is estimated to be produce $150 billion per year for the global private economy.

Who is affected by the Commonwealth Act?

Entities that:

  1. are based or carry on business in Australia, and
  2. have a revenue of over $100 million for a financial year,

are affected by the Commonwealth Act.

This includes not just individuals and companies, but also partnerships, trusts, and superannuation funds. Not-for-profits and foreign companies should be aware that the Act will apply to them if they satisfy conditions (1) and (2) above. All Australian-based principals and contractors should check their balance books. Any entity that might be affected by the Act should seek advice.

In total, there are approximately 3000 large companies and entities who will now be required to lift the lid on how their supply chains create risks of modern slavery.

In a world first, the Australian government itself will also be subject to the same reporting requirements as the private sector. This includes not just the Australian Government, but also Corporate Commonwealth entities, and Commonwealth companies. The Act does not capture state governments.

Any entity may also volunteer to submit a report on its activities.

However, even if an entity does not fall under (1) or (2) above, it may be affected by the NSW Act (see below).

What do entities have to do?

Entities must produce a signed Modern Slavery Statement. This statement must:

  • describe the structure, operations and supply chains of the reporting entity;
  • describe the risks of modern slavery practices in these operations and supply chains;
    • this includes the operations and supply chains of any entities that the reporting entity controls (e.g. a subsidiary company)
  • describe actions taken by the entity to assess and address these risks (including due diligence and remediation processes);
    • this will include policies and processes to manage the risks and training for staff about modern slavery
  • make an assessment of the effectiveness of these actions;
  • describe any process of consultation that a reporting entity has with entities that it controls, and
  • include any other relevant information.

The statement must be given to the Minister for Home Affairs within 6 months of the end of the reporting period. As mentioned, this will likely be within 6 months of 30 June 2020.

These reports will be stored by the Minister for Home Affairs, in a register that will be called the Modern Slavery Statements Register. The Register will be made accessible to anyone for free on the internet.

The Commonwealth Act imposes no obligations on businesses to actually take steps in response to the risks of slavery in supply chains. It merely requires reporting on them.

Legally trained readers will be thinking that these obligations can only apply to natural persons or corporate entities. This is why, in the case of non-persons like partnerships, the obligations will be imposed instead on a responsible member of the entity. This will fall on persons such as a trustee, or an administrator.

What if the entity doesn’t report?

In short, nothing.

In contrast to the NSW Act (below), the Commonwealth Act does not provide for any penalty if an entity does not produce a report.

However, this might change in the near future as the Commonwealth Act takes effect and entities develop processes for compliance. The federal Labor Party has indicated that it supports penalties for an entity’s failure to report. Thus, depending on the outcome of 2019 elections and other factors, this situation may change.

What about state laws?

Entities should be aware that they may be subject to separate obligations imposed on them by state governments.

For instance, in mid-2018 the NSW government passed the NSW Act which requires entities to report to it about risks to modern slavery. In fact, these obligations are in some cases much more stringent.

Like its Commonwealth counterpart, it is not yet in force.

When it does come into effect, the NSW Act will apply to organisations that:

  1. supply goods and services for profit or gain, and
  2. have employees in NSW, and
  3. have a turnover of $50 million or more for the financial year.

Certain NSW government agencies are affected, as are non-corporate entities such as partnerships. Not-for-profits however will not need to report to the NSW government.

To satisfy the NSW Act, an entity’s modern slavery statement must outline steps taken to ensure that an organisation’s goods and services are not the product of supply chains in which modern slavery is taking place.

In contrast to the Commonwealth Act, the NSW Act imposes hefty penalties for not producing a statement to the NSW government, or for providing false or misleading information in the statement. The maximum penalty is $1.1 million in either case.

The NSW Act also allows courts to make modern slavery risk orders against a person. Such orders may prohibit certain actions, such as contacting any victim of the modern slavery offence.

Conclusion

Large businesses and not-for-profits now have legal obligations to examine their goods and services supply chains. They must inform the public about their findings and what they are doing to address them. In some cases, they will be reporting to multiple governments so they should seek advice as soon as possible on the requirements that apply to them.

As the Assistant Minister for Home Affairs states, it is hoped that these Acts will drive a ‘race to the top’ in which businesses compete for the favour of market funders, investors and consumers by improving their supply chain ethics.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email [email protected]

Personal Property Security Register and the construction industry

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The introduction of the Personal Property Securities Act 2009 (PPSA) was a move by government to streamline the registration of securities over personal property. The Personal Property Security Register (PPSR) is a national, electronic register of security interests in personal property that was established on 30 January 2012.

How does the PPSR affect me?

If you have an interest over any personal property you need to register that interest on the PPSR in order to ensure that you have priority over any other claim.

Whilst the operation of the PPSR is by no means limited to the construction industry, there are a number of industry specific situations that can arise. Taking proactive steps to avoid any potential loss of interest is an important step in any construction project.

Construction industry-specific effects of the PPSR

If you are involved in a construction project that involves parting with possession of personal property including, for example, scaffolding, formwork, plant and other equipment, you would be wise to consider registering your interest as a matter of urgency on the PPSR.

Failing to register your interest on the PPSR could result in that interest being defeated at some later date if the party with possession, such as the owner of the site or the head contractor, manages to grant a later security interest in your goods or goes into liquidation. Your security interest might then lose out to another’s security interest over the same property, or in the case of insolvency, you will have to get in line with other creditors.

Temporary works

Temporary works such as formwork and scaffolding that are removed at the end of a project are examples of personal interests over property that should be registered on the PPSR.

Prior to the introduction of the PPSR, a contractor would simply rely on their legal ownership to protect their interest and remove these items at the end of a project. Now if you fail to register your interest in these or other temporary work items you may be in for a nasty shock at the end of a project. This is because the party in possession, such as the head contractor or site owner, sometimes passes title onto another purchaser. If that occurs and the new purchaser registers their interest on the PPSR, then you may well find that your interest in those goods is defeated by the new purchaser’s claim.

This is because registered claims take priority in many cases.

Retention of title

If a supply contract includes a clause providing that title to goods will not pass to the purchaser until full payment has been received, then because of the PPSA that clause is likely to mean that a security interest in favour of the supplier arises. Your interest will need to be registered on the PPSR if it is to be enforced against third parties.

Leasing equipment

If you own and lease goods and equipment for use on building sites you may be surprised to learn that legal ownership of the equipment may not be sufficient to protect your interest.

Under the operation of the PPSA, the lease may be considered to be a PPS Lease. Your interest in any goods or equipment covered by the lease will be deemed to be a security interest. A failure to register your interest on the PPSR could result in you losing ownership if another party uses those goods or equipment as security for another loan.

Principal’s rights on take out

It is not uncommon in construction contracts for the principal to be given the right to take over a contractor’s construction plant and works in the event that the contractor defaults on their portion of the construction contract.

The principal’s right to act in this way is likely to be considered a security interest under the PPSA. If you are a principal you must register your interest on the PPSR in order to ensure that you have priority over any other possible competing interests.

How can the PPSR help me on my construction projects?

The PPSR provides a national central register where you can record any interests you have in goods including plant or equipment, or in the case of principals, any rights to take out.

Very importantly, the PPSR also provides a useful resource for checking whether goods you may be thinking about purchasing or accepting as collateral are already encumbered with a debt or charge. This is particularly relevant if you are thinking of purchasing construction specific goods such as plant equipment including formwork or scaffolding that are currently located on a construction site. Check the PPSR to ensure that there is no prior interest registered in these goods prior to purchase.

The PPSR is also an excellent risk protection tool. If you find yourself on the other side of the table and are trying to raise funds for your business using your interest in plant equipment, including scaffolding and formwork as collateral for any loan, you may find that you are able to raise finance more easily because potential purchasers are able to check on the PPSR to confirm that the goods you are offering as collateral are not subject to a pre-existing loan arrangement.

A properly registered interest on the PPSR can mean that you are the first party in line to get your goods back if a party in possession attempts to raise funds using your plant equipment as collateral. This is a much more preferable position to be in at the end of what may be a very long queue of an insolvency process if your customer goes belly up, owing you and many others money.

Ensuring that registrations on the PPSR are correct and complete is also important. Our experienced lawyers can advise and assist you on all aspects of the operation of the PPSR and particularly how it can assist those working in the construction industry. If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email [email protected].