The importance of having in place a written contract is widely accepted in the construction (or any) industry. But are you putting in the time necessary to understand and document your negotiations, so that your rights are properly secured by your building contracts?

An unresolved contractual dispute depletes time and resources and has potential to damage the parties’ reputation and relationship. Disputes have a devastating effect on a building project and if they are not resolved by negotiation between the parties, they will likely escalate to dispute resolution processes, or even to a hearing before a Court.

In many cases, determination of the dispute will turn on the contract between the parties and what it does, or does not, contain. The words of the contract will be scrutinised, and poorly-drafted terms that are unclear or ambiguous can be the undoing of an otherwise valid agreement.

Case study

Incomplete contract terms that lack explanation or process lead to uncertainty. This was the case in Port Macquarie-Hastings Council v Diveva Pty Limited [2017] NSWCA 97.

In 2011, Diveva Pty Limited trading as Mid Coast Road Services entered into a contract for asphalt works with the council, having successfully tendered in 2005 and 2008. The contract contained an ‘option clause’ which merely stated, ‘with a future twelve (12) month option available’.

There were issues regarding one of the projects undertaken by Diveva, with the council claiming that Diveva had failed to comply with certain specifications under the contract. This matter appeared to remain unresolved both at the time when the council notified Diveva that it would not be exercising the option, and when the council advertised for tenders for future works.

In reliance of the contract, Diveva notified the Council that it was exercising the option. It did not take part in any tendering process. No further contract was offered, and Diveva sued the council for breach of contract.

Original proceedings

In the original Supreme Court proceedings, the Council claimed that the option could only be exercised unilaterally by the Council. The Supreme Court disagreed.

The task of the Supreme Court was to determine in whose favour the option worked. In the absence of a clear term in the contract, the Supreme Court was required to look at the overall language used throughout the entire agreement and found that repeated use of the term ‘option’ was a commercial inducement to tenderers.

The Supreme Court determined that, upon its construction, the 2011 agreement ‘conferred an option upon [Diveva] to extend the Agreement for a further 12 month period’. This conclusion was based on the words ‘with a further 12 month option available’ and the meaning of these words determined objectively and within the context of the Agreement.

Hall J considered that the Council could have protected its interests with clear drafting: ‘It would have been open to the Council to simply have said expressly that the option could only be exercised by Council. However, it did not. The Council could have, but did not use the same formulation, as discussed above, “Council reserves the right…” (employed in other sub-clauses in the Agreement) had it wished to make clear that the Council had the right to renew the Agreement for a further 12 month period.’

Diveva was successful and was awarded damages for loss of profits and opportunity.

Appeal

The council appealed to the NSW Court of Appeal, asserting again that the option clause could only be exercised by the Council alone, or at the very least by mutual agreement.

The Court of Appeal arrived at the same conclusion, and the appeal was dismissed. In its judgment, the Court considered that interpretation of the real meaning in the contract relied on the words used and the intent and purpose of the parties.

The Court found that there was an inference throughout the agreement that the council would offer further work to successful tenderers. The words ‘option’ and ‘available’ were used repeatedly in both the agreement and tender request which, according to the Court, deemed the option capable of being exercised by Diveva unilaterally.

The Court also noted that the option clause provided no qualifying matters, hence council’s allegations of the non-complying work would not preclude Diveva from validly exercising the option. But for the disputed works, the Court considered there was a strong likelihood that the council would have entered into a further contract with Diveva, given its track record, previous dealings and knowledge of council works.

Key points

As the option clause referred to in the above case was silent as to the time, method and respective rights of the parties to exercise, the Court was required to determine its true meaning by looking at the intent of the parties and the language used elsewhere in the agreement.

This may have been avoided if the option clause was drafted to provide how and when the option could be exercised, in what circumstances, and by whom. As stated by the Court, had the council required that the option was to be exercised only unilaterally then it was open for it to have included this in the terms.

Keep in mind the following points to ensure that your building contracts can, under tight scrutiny, protect your rights and interests:

• Your construction contracts should be negotiated, prepared and reviewed with assistance of an experienced construction lawyer. Money spent now can protect your business against loss down the track.
• Read your construction contracts, highlight the terms that you don’t understand and ask for them to be explained. Ask, ‘what if’, ‘what happens when’, ‘how should’, ‘who might’.
• Construction projects often comprise several contracts – these need to align and, where relevant, reflect reciprocal obligations and rights. Pay attention to timelines, completion dates, extension and delay clauses and, of course, options.
• Use precedent contracts carefully – ensure the fields that are likely to vary from build to build are highlighted so that important information can be populated. Don’t rely on the precedent alone – read the entire contract for each project for relevance and completeness.
• It is easy for important terms to be overlooked or formatting errors to occur when using precedent contracts, particularly if prepared by staff who are unfamiliar with their contents. Appointing a precedent custodian to supervise access to precedent contracts will help minimise some of these issues.

Conclusion

Poorly-drafted contracts can have unforgiving results, and roll-on effects to subsequent building projects.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email [email protected].

Most construction contracts allow for a principal or head contractor to require the other contractor or subcontractor to provide a form of security. The purpose is to protect the principal or head contractor from loss should the other party breach the contact or fail to perform its obligations.

The simplest form of security constitutes the principal withholding a specified sum of money from a contractor / subcontractor’s progress payments. This is known as a retention amount or cash security.

The timing of release of the retention amount after work is completed by the subcontractor is sometimes contentious. Many contracts do not allow release of retention monies until certain events under the head contract are achieved. In this respect, security of payment legislation across all jurisdictions of Australia prohibit ‘pay when paid’ provisions.

In its simplest form, a ‘pay when paid’ provision is a contract term that makes payment to a contractor / subcontractor contingent upon the head contractor or principal being paid. However, the legislation goes further to catch certain other provisions which by their nature, will constitute a ‘pay when paid’ provision.

In Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5 the High Court took a broad approach in defining a ‘pay when paid’ provision and determined that certain terms tying the release of retention monies to an event under the head contract will constitute a ‘pay when paid’ provision and be void.

The facts

Maxcon Constructions Pty Ltd (Maxcon) (as head contractor) entered into a contract with Mr Vadasz (as subcontractor) for the design and construction of piling for an apartment building.

The contract provided for security in the form of a cash retention of 5% of the contract sum which was to be released to Mr Vadasz once the certificate of occupancy for the building issued.

Mr Vadasz completed the work under the contract and served a payment schedule on Maxcon from which Maxcon deducted retention monies. Mr Vadasz subsequently applied for the matter to be adjudicated and the adjudicator determined that the retention constituted a ‘pay when paid’ provision and was therefore void.

Maxcon appealed, asserting that the adjudicator had made an error.

‘Pay when paid’ provisions void

A ‘pay when paid’ provision is generally defined as a contract term that:

1. makes the liability of one party to pay money owing to the other contingent upon some payment to the first party by a third party; or
2. makes the due date for payment from one party to the other party, the due date for payment by the third party to the first party; or
3. otherwise makes the liability to pay money owing, or the date for payment of that money, contingent or dependent on the operation of another contract.

The Court found that the clause making release of the retention money contingent upon issue of the occupation certificate fell within the third category of ‘pay when paid’ provisions and was therefore void.

In its reasoning the Court considered issue of the occupancy certificate was:

‘…dependent upon certification by the builder, Maxcon, that the building work had been performed in accordance with the issued documents, including the head contract between Maxcon and the owner of the land [and] issue of the certificate depended on completion of the whole project in accordance with the provisions of the head contract.’

In other words, release of the retention monies was essentially contingent upon completion of building work under another contract (i.e. between Maxcon and the landowner).

As a consequence:

‘…the due dates for payment of the retention sum were dependent on something unrelated to Mr Vadasz’s performance.  They were dependent on the operation of another contract – namely, the completion of the head contract, which in turn would have enabled a certificate of occupancy to be issued.’

Conclusion

Clauses in construction contracts that tie the release of retention monies to an event under the head contract and not to the subcontractor’s performance (and other obligations under the contract) will likely constitute a ‘pay when paid’ clause, and be void.

Subcontractors may now be able recover retention monies earlier than once thought.

Principals and head contractors should review contracts to ensure that they are not relying on terms that breach security of payment legislation.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email [email protected].

Due to the widespread construction of high density apartments and townhouses there has also been an increase in the construction of balconies. Balconies are susceptible to water damage which can lead to damage to the internal elements of the building.

The defective construction of balconies has become an increasingly common dispute affecting owners’ corporations.

In this article we look at some common defects and a case that illustrates the issues facing owners and builders if a dispute arises.

Causes

Defects with balconies can arise as a result of poor architectural design, defective construction by builders or maintenance issues.

For example, an inadequate slope that does not drain water properly, or drains it toward the building can lead to water ponding on the balcony.

When water ponds on a balcony it might bring to light issues with the waterproofing membrane at the door threshold or on the balcony itself. For example, waterproof flashing may have been omitted or damaged during the construction of the balconies.

Finally, balcony leaks might be caused by issues such as render cracking caused by foundation movement as a result of lack of property maintenance.

Disputes in relation to balcony defects can be complicated due to the technical nature of the disputes and often cannot be satisfactorily resolved without expert evidence as to the cause of the defects.

Case Study

The case of Guney & Ors v CFM Property Group Pty Ltd (Domestic Building) [2013] VCAT 514, involved a dispute between 4 owners of townhouse units and the builder of those units, regarding the alleged defective construction of the balconies. The owners alleged that water leaks in the balconies and exterior cladding had occurred.

The parties reached a settlement of the dispute at mediation whereby it was agreed that the builder would rectify the defective balconies within a certain timeframe. The builder failed to undertake the rectification works, stating that he was unable to complete those works due to inclement weather.

The owners pursued their claim before the Victorian Civil and Administrative Tribunal. And each party retained a building consultant who provided expert evidence before the Tribunal.

The Tribunal found that the owners had given the builder ample opportunity to rectify the defective balconies and that it would be unreasonable to require the owners to give the builder a further opportunity. Instead, the Tribunal assessed the owners’ damages as the costs they would incur in engaging an alternative builder to attend to the rectifications.

Conclusion

Building defects can have serious detrimental effects on the use, enjoyment and value a property. It can often be difficult to identify the party responsible for rectifying balcony defects. Without expert legal advice, it is possible that the costs of the defect will be unfairly borne by an incorrect party.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email [email protected].

The term ‘latent condition’ can strike trepidation in the heart of the most hardened builder or sub-contractor, especially when the term is preceded by the words ‘unexpected’ or ‘unforeseen’.

Depending on what the latent condition is and the expense involved in rectifying any problems that arise as a result of the latent condition, the existence and subsequent discovery of a previously unforeseen site condition can be the difference between turning a profit on a job and losing a considerable amount of money.  So it is important to understand what is meant by the term and what steps you can take to proactively manage your risk and exposure.

What is a ‘latent condition’?

Latent conditions are physical conditions which are either on, under or adjacent to a site. They cannot easily be identified during a routine site inspection and may also remain hidden even after a certain amount of site investigation has been carried out based on information provided at the time a tender or contract was prepared.

What constitutes a latent condition will vary depending upon the site in question.

Examples of latent conditions you may encounter on a site include hidden utility services such as power and drainage lines (if not shown on tender documents), mine shafts and soil contamination.

Who is responsible for latent conditions?

Just who will be responsible for any latent site conditions is an important consideration in any tender or contract process. Ideally the question of responsibility for any latent conditions should be considered and addressed as early as possible in the tender or pre-contract phase of any development or build.

Ultimately, the question of who will bear the risk of additional costs associated with any latent conditions comes down to a question of ‘What does the contract provide’?

Principals generally would prefer to pass the risk of any latent defects on to contractors and, not surprisingly, contractors would generally prefer the risk to be at the expense of the principal or at least shared with the principal.

If in doubt check and double check your contract and tender documents and always seek legal advice as soon as possible to avoid a potential costly dispute developing down the track.

Managing the risk of latent conditions?

Prior to entering into any contract or site investigation stage it is important that both principals and contractors are clear as to where the risk of any latent conditions lies.

In particular, consideration should be given to a range of matters including:

• Deciding whether one party will bear all the risk of latent conditions or whether the risk and cost associated with any latent conditions will be shared between the principal and any contractors;
• If a contractor is going to be responsible for the risk of any latent conditions, allowing them, as far as any time limits permit, sufficient time to carry out their own risk assessment and site inspections so as to ensure they are aware of the potential risks and costs involved;
• Deciding what site testing is to be undertaken and who will bear the cost of any testing;
• Considering any historical searches available in relation to either the subject site or any neighbouring properties; and
• Agreeing, or providing, a framework that requires all parties to share any knowledge of any potential latent conditions that they suspect may be present or which are uncovered during any routine site testing and investigation.

What if liability for latent conditions is excluded or limited by contract?

If you are a principal and wish to exclude any liability for latent conditions it is recommended that you seek legal advice prior to preparing any contract or tender documentation.

Similarly, if you are a contractor and you are being asked to sign up to a contract where you will bear the risk of any latent conditions it is prudent to obtain advice prior to signing any documentation that may mean the chances of you turning a profit on a project are severely limited.

In particular, Courts in Australia have held that if a principal has a significant amount of bargaining power any exclusion clauses will be carefully scrutinised and must be properly drafted.

If there is any suggestion that a principal has been negligent or has provided any misleading or deceptive information or failed to provide any information that it already held they may well find themselves with an unenforceable exclusion clause and a large bill for any additional costs associated with a variation in works arising out of the latent condition. 

If in doubt seek advice first and sign on the dotted line later….

The old saying “a stich in time saves nine” is very apt when managing the risk and cost associated with latent conditions. Whether you are a contractor or principal it is always best to take a prudent approach to the issue of latent conditions and never to assume things will sort themselves out down the track as life and construction are rarely so simple.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email [email protected].

Reforms to insolvency laws will prevent contracting parties relying on certain clauses in construction contracts effective from 1 July 2018.

The reforms introduce changes to the Corporations Act 2001 (Cth) and are likely to impact significantly on construction contracts.

The laws aim to assist contractors who are facing financial difficulties by allowing them to trade their way out of the predicament rather than having the contract unilaterally terminated. A contracting party will no longer be able to rely on an ipso facto clause to end a contract in certain circumstances pertaining to the other party’s financial position.

Participants in the building industry should be aware of the effect of these changes and review their contracts and internal processes accordingly.

What is an ipso facto clause?

Ipso facto is a Latin phrase which, broadly interpreted, means ‘by the fact or act itself’. Ipso facto clauses are regularly used in contracts to enable a party to terminate the contract based on the existence of a fact or circumstance, rather than default by the counterparty.

The trigger allowing the party to invoke the ipso facto clause will generally be an insolvency event. In the construction industry, such clauses can be grounds for a principal to terminate a contract when the subcontractor runs into financial difficulty. The provisions are drafted broadly to encompass not only actual insolvency but precursors to insolvency such as the appointment of an administrator.

The benefit to a principal of invoking an ipso facto clause is its ability to mitigate loss by taking action once the risk of insolvency becomes apparent. The contract will allow the principal to exercise certain rights before an actual insolvency occurs, such as:

• terminating or modifying the contract;
• suspending works, stepping into the contract and / or engaging third party subcontractors to complete outstanding works;
• calling on bank guarantees, securities or retentions;
• setting off claims against payment claims by the subcontractor.

How do the reforms change ipso facto clauses?

The new laws restrict a party from relying on an ipso facto clause by reason of:

• the counterparty entering a scheme of arrangement or voluntary administration;
• the counterparty’s financial position, credit rating or possibility that it might be under administration.

Effectively, the reforms put a ‘stay’ on a party exercising certain rights on the basis of a potential or pending insolvency. The contractor benefiting from the stay has an opportunity to continue receiving the benefit of the contract and trade its way out of financial difficulty.

If the contractor company subsequently goes into receivership or liquidation, the stay is lifted, the protection no longer exists, and the ipso facto rights will be enforceable.

The reforms do not affect other termination rights (such as non-performance).

In some circumstances, the stay may be lifted – either by arrangement between the administrator and the party seeking to rely on the ipso facto clause, or on application by that party to the Federal Court where it would be appropriate and in the interests of justice to do so.

The new laws are mandatory and cannot be contracted out of, with special government intervention powers being granted to address any loopholes.

The laws are not retrospective, thus any ipso facto clauses existing in contracts entered before 1 July 2018 will remain intact.

Why make these reforms?

The laws are part of an insolvency innovation reform package. They follow safe harbour provisions recently introduced to give additional personal liability protection to directors facing cashflow issues who take certain steps to better the company’s financial position.

The reforms aim to find an appropriate balance between encouraging enterprise and protecting the community.

By imposing a stay on the exercise of an ipso facto right in certain circumstances, it is hoped that a distressed contractor will be in a better position to trade its way out of the financial predicament and remain solvent.

What should those in the construction industry do?

Managing financial risk during a construction project has always formed an integral part of management. Introduction of the ipso facto regime places even greater importance for principals to implement proactive risk-management processes.

Moving forward, construction companies should understand the potential effect of the ipso facto regime on future contracts and review processes to ensure that they:

• carry out comprehensive pre-contractual checks on all counterparties including company and name searches, PPSR checks and inspections of financial records;
• have systems in place to identify early signs of insolvency of the counterparty;
• obtain director guarantees and / or parent company guarantees;
• consider / check termination for convenience clauses in contracts; and
• strengthen other termination clauses that are not affected by the reforms such as termination based on non-performance.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email [email protected].