By Slim Majority, the High Court in Pafburn Says No: Developers and Head Contractors Cannot Apportion Liability Under the DBPA!

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In a narrow 4:3 ruling, the High Court of Australia in Pafburn Pty Limited v The Owners – Strata Plan No 84674 [2024] HCA 49 (Pafburn) has dismissed the appeal of a developer and head contractor, ruling that liability for breaches of the statutory duty under section 37 of the Design and Building Practitioners Act 2020 (NSW) (DBPA) cannot be apportioned under proportionate liability legislation. This highly anticipated decision significantly expands liability, holding developers and head contractors accountable for defects arising from the work of consultants or subcontractors.

The Facts

Background

The Owners Corporation of a North Sydney residential complex (the Owners) commenced proceedings against Pafburn Pty Ltd (the Builder) and Madarina (the Developer) for breaching their statutory duty of care under section 37 of the DBPA. The Owners claimed that the Builder and Developer failed to take reasonable care to prevent economic loss caused by construction defects. In response, the Builder and Developer sought to apportion liability for the defects among nine other concurrent wrongdoers involved in the construction, including the waterproofing contractor, the manufacturer and installer of the aluminium composite panels, the architect, the private certifier and even the local council. The Builder and Developer argued that, under Part 4 of the Civil Liability Act 2002 (NSW) (CLA), liability for the defects should be shared. The Owners contended, however, that the statutory duty under the DBPA was non-delegable, meaning the Builder and Developer could not shift responsibility for the defects to other parties that the Builder and Developer had delegated work to during construction.

Application to Strike Out Proportionate Liability Defences

The Owners sought to strike out the Builder and Developer’s proportionate liability defences. They argued that section 39 of the DBPA explicitly states that the statutory duty of care is non-delegable, preventing reliance on the proportionate liability provisions of the CLA. The Owners further contended that, under section 5Q of the CLA, the Builder and Developer should be treated as if they were vicariously liable for the negligence of those performing delegated work, including the alleged concurrent wrongdoers. As a result, the Builder and Developer should not be allowed to apportion liability for the defects to subcontractors or other parties involved in the construction work.

Key issue

The key issue was whether the Builder and Developer’s duty under the DBPA could be apportioned under the CLA, allowing them to share liability with other parties involved in the construction process.

 What did the Court say?

Primary Decision

The Supreme Court of NSW initially found that the Builder and Developer could plead the proportionate liability defences. Rees J rejected the Owners’ argument, determining that a claim for breach of duty under the DBPA was an apportionable claim under Part 4 of the CLA. Her Honour held that vicarious liability under section 5Q of the CLA applied to a defendant’s breach of a non-delegable duty in tort under common law, but not to the statutory duty under section 37 of the DBPA. This meant that the way in which parties led disputes remained largely unchanged.

Court of Appeal

The NSW Court of Appeal overturned the primary decision, ruling that the statutory duty of care under the DBPA is non-delegable. The Court found that section 39 of the DBPA expressly excludes the application of the proportionate liability provisions in Part 4 of the CLA. It also held that sections 5Q and 39(a) of the CLA treat breaches of the non-delegable duty as a form of vicarious liability, meaning the Builder and Developer’s liability cannot be reduced by the liability of others, thereby preventing any apportionment of liability for breaches of the statutory duty under the DBPA.

 High Court

 The Builder and Developer sought to appeal the Court of Appeal’s decision and reinstate Rees J’s orders. However, in a slim 4:3 ruling, the High Court dismissed the appeal, affirming that developers and head contractors cannot apportion liability for defects under the DBPA. The Court held that, under section 5Q of the CLA, they are vicariously liable for defects arising from the construction work, including those caused by subcontractors or consultants. Effectively, the Builder and Developer could not limit their liability by shifting responsibility to other parties involved in the construction process.

What does this mean for you?

Developers and head contractors who delegate construction work may not be able to apportion their liability under the DBPA. Depending on the circumstances, they may be vicariously liable (that is, 100% liable) for any economic loss caused by defects, including those resulting from the negligence of their consultants and subcontractors.

 Implications

 While owners of defective buildings will undoubtedly welcome the High Court’s decision. It will have several practical and potentially onerous implications for developers and builders:

  1. Increased exposure:
  • Developers and head contractors now face greater liability to exposure, leading to higher construction costs.
  1. Rise in cross-claims:
  • Developers and head contractors will need to pursue cross-claims against other parties involved in the construction to seek contribution for defects.
  • This complicates case management of proceedings, as defendants may struggle at the outset to identify other parties’ roles in the project, determine appropriate causes of action and balance the cost risks of joining third parties.
  1. Higher insurance premiums:
  • The removal of proportionate liability defences is expected to lead to higher insurance premiums and increased difficulty in obtaining insurance coverage for construction stakeholders.
  1. Limited scope (for now):
  • The decision currently applies only to developers and head contractors.
  • The High Court primarily focused on whether developers and head contractors can apportion liability, leaving the question unresolved of whether other parties, such as consultants or subcontractors (particularly when they have not delegated any part of construction works), can rely on apportionment defences.
  • Interestingly, the minority raised doubts about whether a certifier or local council, in performing their duties, even qualifies as “a person who carries out construction work” under the DBPA, raising further ambiguity about their potential liability under the Act.

Bradbury Legal is a specialist building and construction law firm. If you or anyone you know requires advice or assistance, reach out to us on (02) 9030 7400, or email us at [email protected] to see how we can assist you.

Righting the Wrong in Wrongful Termination

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A common reason why an owner may seek to terminate a building contract is that they believe the builder has taken too long to complete the works. They would then claim that the builder has failed to proceed with due diligence under the contract.

For this argument, an owner must be able to show that the builder did not proceed with the works with due diligence within the time stipulated in the contract – which is a breach of the contract and the statutory warranties (as set out in section 18B of the Home Building Act 1989 (HBA)).

This concept of claiming a ‘due diligence breach’ was established in Re Stewardson Stubbs & Collett Pty Ltd v Bankstown Municipal Council [1965] NSWR 1671, which stated that the requirement of due diligence is breached when there is a failing to act with a level of promptness that is expected of a reasonable person undertaking a building project with regard to the contract. However, several cases have since challenged the ease with which owners are able to terminate building contracts by way of alleging a breach of due diligence.

Let’s start with a review of the statutory warranties

Implied into every residential building contract, the HBA states that the works under a building contract will be completed within the time stipulated in the contract or, if there is no time stipulated, within a reasonable time. For example, it must take into account instances that are out of the builder’s control such as third party delays. The HBA also determines that the owners must allow reasonable access to the site for builders who may be seeking to rectify any defects.

Turner Corporation Ltd (Receiver and Manager Appointed) v Austotel Pty Ltd (1994) BCL 378

In this case, Turner appealed the decision in favour of Austotel for the recovery of costs of engaging third parties to rectify defects in Turner’s work without notice and without allowing Turner to rectify the defects. The Court found that the owner did not follow the procedural steps and notice provisions in the contract relating to the defects. Here it is important to acknowledge sections 18BA(3)(a) and (b) of the HBA whereby the owners, through their own conduct, prevented Turner from rectifying the defects and were ultimately unsuccessful as a result.

Hometeam Constructions Pty Ltd v McCauley [2005] NSWCA 303

In this case, it was decided that practical completion of the building work would be in May 2000, and in July of the same year a notice of default was served on the builder for failing to proceed with the building works with due diligence, and by the date for practical completion. In August 2000, the owners terminated the contract, claiming that the builders had failed to remedy the situation. The Court held that there had been no breach of contract, and the builder’s delay and lack of programme for completion, was not enough to amount to a substantial breach of due diligence.

Patel v Redmyre Group Limited [2021] NSWCATAP 132

In this case, the builder worked on the restoration of a residential apartment terrace which was to be completed within 32 weeks. However, the building was not complete by the time specified in the contract and the owners issued a notice of termination with immediate effect. At the time the notice was issued to the builder, the work was 26 weeks behind schedule. The builder sought to rectify the defects, but the owner did not allow access to the site. NCAT held that the builder did not fail to proceed with due diligence and no damages for delay or incomplete works were awarded as the owners failed to mitigate the loss and provide reasonable access to rectify the defects.

THINGS TO CONSIDER

In summary, whether you are a builder or an owner, there are some useful points derived from these cases that may be helpful in understanding if there has been a failure on the part of the builder to proceed with the works with due diligence:

  1. What is the reasonable and relevant time period for a diligent builder to complete the works?
  2. Whether the works are incomplete and, if so, whether there are any circumstances preventing the builder from performance of the works, as well as the pace of performance. This may include any disputes in relation to payment, lack of instructions, a change in scope, request(s) for variations, all of which would cause delay;
  3. Whether there is a lack of activity on the project for a significant period of time that cannot be satisfactorily explained;
  4. Whether the owner mitigated his/her/its loss by allowing reasonable access to the site for the builder to rectify its defects; and
  5. Whether the builder issued extension of time claims and updated programmes if required by the contract.

Terminating a contract based on the failure to proceed with due diligence is a risky one and this is why it must be approached carefully. Otherwise, the owners claiming a breach of due diligence could be found to have repudiated the contract and be liable for damages.

Legal advice should always be sought before terminating a contract.

If you have questions or would like to discuss this article, please contact us.

Think twice! The NSW Supreme Court’s take on Generative AI in practice

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Following its introduction in 2022, ChatGPT paved the way for other generative artificial intelligence (Gen AI) platforms, making them a force to be reckoned with, capable of streamlining any task with the help of data extrapolation and language learning processes.

Gen AI is considered a subset of artificial intelligence that operates by producing written responses (including images) when prompted. To produce these responses Gen AI relies upon the datasets it is fed, but these datasets can often be traced back to websites or other unverified sources of information.

In response to this, the NSW Supreme Court in conjunction with the NSW Land and Environment Court have developed a set of considerations, ensuring lawyers and other key players within the legal industry think twice before outsourcing key responsibilities to any open or closed source Gen AI models.

What do you need to know?

Commencing on 3 February 2025, Practice Note SC Gen 23 – Use of Generative Artificial Intelligence (Practice Note) contains a set of guidelines outlining where Gen AI is considered acceptable for litigants to use[1], as well as corresponding amendments contained within Uniform Civil Procedure (Amendment No 104) Rule 2025 (NSW) (Amended Rules).

The Practice Note does not apply to search engines, transcription or translation software, generic editing software like Microsoft Editor or legal research platforms supported by AI.[2]

Following a set of amendments published on 28 January 2025, the Supreme Court has outlined that Gen AI has limitations that both practitioners and unrepresented litigants should be aware of, including:

  • the production of inaccurate or incorrect responses including false citations or fabricated sections of legislative instruments;
  • the potential for spreading misinformation as the datasets fed to AI may contain irrelevant, out of date or ‘selective’ information; and [3]
  • information provided by Gen AI programs may not be relevant to the NSW legal jurisdiction.

Moreover, a host of ethical concerns arise when considering that many Gen AI platforms lack any inbuilt safeguards to maintain professional privilege over correspondence or other documents that may be uploaded in an attempt to make certain repetitive or administrative tasks more efficient.

Tips for Practitioners

Generally, Gen AI must not be used in generating the content of any ‘affidavits, witness statements, character references’ or other material that is intended to reflect the deponent or witness’ evidence and/or opinion without leave of the court.[4]

It is essential that practitioners include disclosures for deponents specifying that “generative artificial intelligence was not used to generate the content of the [affidavit/witness statement]” within the body of the affidavit/witness statement.[5]

Further, legal practitioners cannot enter information that is subject to non-publication orders, suppression orders, or Harman undertakings (documents obtained in proceedings can only be used for a litigious purpose) or produced by subpoena to Gen AI platforms.[6]

As an exception, provided specific criteria are met[7], practitioners can use Gen AI for the preparation of chronologies, to assist with the review of documents and to prepare written submissions.[8] In relation to written submissions, the writer must manually verify in the body of the document that the citations and academic authorities and references exist, are accurate and have relevance to the proceedings on foot.[9]

Considering the range of strict prohibitions, practitioners should consciously:

  • include the necessary disclosure in all witness statements/affidavits;
  • ensure they are familiar with the contents of the Practice Note so leave is sought for the use of Gen AI, where appropriate;
  • direct the attention of any expert witness being relied upon to abide by the guidelines set out in the Practice Note (see below), and noting Schedule 7 of the UCPR has been amended as part of the Amended Rules;
  • maintain confidentiality over all privileged documents, by storing them on secure document management systems and not uploading them to Gen AI platforms; and
  • where the use of Gen AI is permitted by the Practice Note, review all work produced to ensure accuracy.

Advice for Experts

The Practice Note also highlights the obligations of expert witnesses engaged to produce reports that state their opinion/s and reasoning as evidence.

As part of these obligations expert witnesses should now note that:

  • using Gen AI to produce an expert report is now prohibited without prior permission from the court[10];
  • where permission or leave has been granted by the courts, experts must now disclose and identify the parts of any report that have been produced with the assistance of Gen AI; and
  • reports prepared between 21 November 2024 and 3 February 2025 must identify which parts of the report (if any) have been produced with the assistance of Gen AI.

If at any point in the drafting process Gen AI has been used, the prompts provided to the AI tool and a record of how the outputs were used within the draft or final report must be annexed to the final report. [11]

What’s next?

The Practice Note will be subject to continued review as the capabilities of Gen AI expand beyond simple drafting assistance. Therefore, it is essential that practitioners, expert witnesses, and others periodically review the Practice Note for any updates to maintain best practice when using Gen AI.

Practice Note SC Gen 23 can be read here, but if you or anyone else you know is concerned about how these new guidelines may impact you, please contact Bradbury Legal on (02) 9030 7400 or at [email protected] to see how we

[1] Practice Note SC Gen 23 – Use of Generative Artificial Intelligence.

[2] Ibid [6].

[3] Ibid [7].

[4] Ibid [10] and [15].

[5] UCPR rules 31.4(3B) and 35.3B(2).

[6] Ibid [9A]. Also Harman v Secretary of State for the Home Department [1983] 1 AC 280.

[7] Practice Note SC Gen 23 – Use of Generative Artificial Intelligence at [9A].

[8] Ibid [9B and 16].

[9] Ibid [16].

[10] Ibid [20].

[11] Ibid [22(b)].

Case Study – Architect’s Adjudication

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In December, Bradbury Legal acted for a Queensland architecture firm in preparing an adjudication application against a builder for unpaid payment claims and variations claims. The architect was engaged to design an aged care facility in the New South Wales area. The builder sought to withhold over $200,000 from our client’s payment claim, citing back charges, defects, and unapproved variations.

In late October, our client submitted its payment claim for approximately $335,000. After issuing the section 17(2) notice, the builder certified just under $103,000, a difference of over $200,000. The Adjudication Application involved numerous late nights (including an all-nighter by Vinesh, Frankie, and Lachy), reviewing various documents, and drafting submissions and statutory declarations so that the Adjudication Application would be served before the Christmas shutdown period. In the end, the Adjudication Application totaled six folders worth of documents substantiating our client’s right to payment. This was a phenomenal effort by the Bradbury Legal team given the quantity of documents involved, the complexity of the issues, and the strict timeframes under the Security of Payment Act.

The Adjudicator awarded an Adjudication Amount of over $240,000 in favour of our client, representing an incredible result which the client was incredibly thankful for. The Adjudication Amount represented more than double the scheduled amount by the builder, promoting greater cashflow for the architecture firm.

Bradbury Legal is highly experienced in preparing and responding to adjudication applications. If you or anyone you know is struggling to be paid from a head contractor or developer or you have received an adjudication application, please contact Bradbury Legal.

The West Gate Tunnel leads to arbitration

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The D&C JV contractors on the West Gate Tunnel (Project), CPB Contractors and John Holland (Subcontractors), have won the first round in their dispute against Transurban (Project Co) over the presence of contaminated “PFAS” soil in the tunnel area and subsequent purported termination of their contract due to force majeure.

In Transurban WGT Co v CPB Contractors Pty Ltd [2020] VSC 476, Victorian Supreme Court (VSC) refused applications designed to prevent the disputes from proceeding through arbitration.

Facts

The Subcontractors purported to terminate their contract with Project Co on 28 January 2020 due to the discovery and persistence of “PFAS” contamination, which it claimed was a “Force Majeure Termination Event” under the contract.[1] Since this time, the Subcontractors and Project Co have been engaged in disputes on the validity of the termination and various related matters.

By notice dated 2 March 2020, the Subcontractors sought to initiate a “downstream” arbitration with Project Co in relation to various claims.[2] Some 3 months later, Project Co initiated its own “upstream” arbitration in relation to various claims which it had passed upstream via its head contract with the State of Victoria.[3]

Project Co claimed the disputes were “Linked Disputes” under the contract with the Subcontractors. Project Co argued that clause 44A.3(a)(ii) operated to suspend the downstream arbitration while the upstream arbitration progressed (suspension clause).[4]

The Subcontractors sought to refer their various disputes with Project Co to arbitration. Project Co made an application for:

  1. a declaration that the suspension clause was enforceable; and

 

  1. an interlocutory injunction to restrain the Subcontractors from taking steps to progress the downstream arbitration until such time as the upstream arbitration was determined.[5]

The Subcontractor argued that the arbitral tribunal should decide whether to grant such relief to Project Co, not the court. The Subcontractor pointed to ss 5, 8, 9 and 17J of the CAAs which provide only limited powers for court intervention.[6]

The Subcontractor made a referral application to the VSC relying on s 5 and / or 8 of the Commercial Arbitration Act 2011 (Vic) (CAA), requesting the court refer Project Co’s query in relation to the operation of the suspension clause to the arbitral tribunal.[7]

Decision

Lyons J:

  1. found that the court had no power to make a declaration of the kind sought by Project Co;

 

  1. refused Project Co’s application for interlocutory injunctions; and

 

  1. granted the Subcontractor’s application to refer to the arbitral tribunal the question of whether the suspension clause was inoperative.[8]

Lyons J considered in detail the relevant law on the nature of arbitration and the limited ambit given to the court under the CAA. Some of His Honour’s key conclusions included that:

  1. the question whether the suspension clause is valid and enforceable was a matter ‘arising in connection with’ the contract between the parties and, therefore, it was a type of dispute the parties had agreed under their contract would be arbitrable;[9]

 

  1. the arbitral tribunal had the power to make orders relating to the validity, enforceability and/or applicability of the suspension clause of the kind sought by Project Co in court;[10]

 

  1. under the CAA the court’s power to grant interlocutory relief to matters which the CAAs apply derives from s 17J[11]. Accordingly, the court’s power to intervene is limited; and

 

  1. Project Co had failed to establish that the circumstances of the case were exceptional or objectively urgent such that court intervention was required.[12]

As a result, the Subcontractor’s claims in relation to the contract will be heard and determined by an arbitrator. The arbitrator will need to determine whether the suspension clause is enforceable and, if so, operates in the circumstances to pause the downstream arbitration.

Take Home Tip

Parties who agree to arbitration as their preferred dispute resolution forum should note that the courts are increasingly minded to allow arbitral tribunals to rule on their own jurisdiction or “competence” under the CAA. A party should closely consider whether their set of circumstances are truly urgent or exceptional to warrant intervention by the court. If not, it would be better to apply its resources in ventilating preliminary issues in the arbitration first, then challenging the arbitrator’s determination on those issues if necessary and as permitted by the CAA.

Importantly, Lyons J considered that he was bound by Hancock v Rhodes[13], being ‘a decision of an intermediate appellate court in circumstances applying sections of a uniform commercial arbitration act in force in each state in Australia.’[14] This reinforces the relevance of the current decision of the VSC to parties in all States and Territories in Australia.

[1] At [10(1)].

[2] At [12].

[3] At [12].

[4] At [14].

[5] At [23].

[6] At [115] and [128].

[7] At [20].

[8] At [208].

[9] At [170].

[10] At [174].

[11] At [147] and [191].

[12] At [192] to [203].

[13] Hancock Prospecting Pty Ltd v DFD Rhodes Pty Ltd [2020] WASCA 77.

[14] At [147].

What is the amount of damages available to an owner for late completion of work on a residence that the owner does not intend to live in or rent?

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In Leeda Projects Pty Ltd v Yun Zeng [2020] VSCA 192, the Victorian Court of Appeal (VSCA) was required to answer this question.

The case demonstrates that the court will look at the intention of the owner in ascribing a value, if any, to the use of the residence which was unable to be enjoyed as a result of a builder’s breach by late delivery of works.

Facts

In March 2011, Mrs Zeng and her husband purchased the penthouse of the Eureka Tower in Melbourne. On 24 September 2013, Mrs Zeng and Leeda Projects Pty Ltd (the builder) entered into a contract for fit out of the property as a private art gallery with a residential component consisting of two bedrooms with ensuites, a lounge, kitchen and laundry.

Mrs Zeng and her husband intended to use the property as a non-profit private art gallery and potentially spend some time residing in the property. They had access to several other Victorian premises to live in (when they were not travelling internationally), and their primary residence was in Shanghai. There was no intention to rent out the property.[1]

A dispute arose between the builder and Mrs Zeng. The builder made a claim to the Victorian Civil and Administrative Tribunal (VCAT) for progress payments and release of retention. Mrs Zeng counter-claimed for substantial damages on account of the delay in completing the works.

By the time the matter had reached the VSCA, it was not controversial that the builder had breached the contract as there was a delay period of 130 weeks between the date when the works should have been completed and the date when practical completion was achieved. Accordingly, Mrs Zeng was unable to occupy the apartment for those 130 weeks.

However, Mrs Zeng was not required to rent an alternative residence because she continued to live in Shanghai and had other Victorian residences available to her. Mrs Zeng did not lose:

  1. the opportunity to rent the property, as it was never intended to be a rental investment property; or
  2. takings from the art gallery, as it was intended to be a non-profit gallery.

Decision

The VCAT’s award of $100 nominal damages was not the correct measure, nor was the award of $357,500 plus interest by the trial judge for lost rental income at the rate of $2,750 per week.[2]

The VSCA[3] held that case authorities recognised the possibility of the loss of use of a property as being an available compensatory claim.[4] In ordinary cases, this might result in a financial loss to the owner of rent for an alternative residence.[5]

However, in this case, the proper award of damages to Mrs Zeng was $283,802.17 which Mrs Zeng spent on owners corporation charges, council rates and utilities during the 130 weeks.[6] These amounts were spent without benefit to her, but in respect of the property which the builder retained for its own use, being the completion of its works and were a reasonably foreseeable consequence of the breach of contract.[7]

Take Home Tip

If parties want to ensure certainty in the measure of damages payable by the builder in the event of delay, a mechanism for payment of a rate of liquidated damages for such a breach should be included in the contract. However, in doing so, parties must be mindful that a clause for liquidated damages may be challenged where the pre-estimated loss is found to be a penalty clause because it was not based on a genuine estimation of the loss that would result from the builder’s breach.[8]

In the absence of a liquidated damages clause, a builder faced with a claim should check whether the amount claimed is truly compensatory – i.e. does it put the owner in the position in which it would have been if the builder had not breached the obligation to complete on time?

[1] See [86] and [143].

[2] Per McLeish JA at [184].

[3] Comprised of Tate, Kaye and McLeish JJA. We note that McLeish JA gave the lead judgment on the ground dealt with in this case note, with Tate JA agreeing. Kaye JA agreed with the orders proposed by McLeish JA, yet His Honour gave a separate analysis of the authorities.

[4] Per McLeish JA at [174] and [175].

[5] Per McLeish JA at [179].

[6] Per Kaye J at [58] and McLeigh JA at [187].

[7] Per Kaye J at [57] and McLeish JA at [191].

[8] See Paciocco v Australia and New Zealand Banking Group Limited [2014] FCA 35.

ADR Processes Part II

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This article is Part II of our article on ADR process. In this article, we will be covering the common pitfalls of ADR clauses. In Part I, we discussed the different types of ADR processes that are common in construction law matters. You can find Part I of our article HERE. While there are benefits to ADR processes, the drafting of dispute resolution clauses can sometimes result in the clause being void and unenforceable. Alternatively, there are times where the drafting of the dispute resolution clause means parties are left with a result under the contract which is unfair or unjust in the relevant circumstances. Often dispute resolution clauses are thrown into a contract without the parties giving much thought or consideration as to its enforceability or suitability to the circumstances. The following matters are pitfalls you should consider when you are drafting a dispute resolution clause.

 

Factors that may make the clause void and unenforceable:

 

Precondition to Court or other legal action

 

One of the biggest problems with ADR clauses arises when they set compliance with the ADR process as a pre-condition to seeking any court relief. This is problematic because it attempts to prevent the parties from approaching the Court when it has jurisdiction. If not properly drafted, these types of clauses can make the dispute resolution term unenforceable.

 

Words or phrases to look out for:

 

‘The parties must not seek any court orders until the parties have attended mediation.’

 

Words or phrases that can prevent the clause being unenforceable:

 

‘Nothing in this clause X prevents the parties from seeking urgent or injunctive relief from the Court.’

 

The key difference between these clauses is that the first tries to remove the jurisdiction of the Court by preventing the parties from seeking any relief from the Court until after the ADR processes have been complied with. This can result in some of the parties’ legal rights being wrongly enforced under the contract. For example, in cases where one party seeks to have recourse to security and the other party disputes this, the ADR process mechanisms may be too slow in resolving this dispute. Therefore, it is appropriate for the Court to be able to order urgent or injunctive relief to prevent recourse to the security. The parties can still have the underlying dispute proceed to the elected ADR process, but the security providing party may be able to (in the interim) prevent recourse where it is contested that the other party is not entitled to the benefit of that security.

 

Agreement to agree

 

A dispute resolution clause will be unenforceable if it is void for uncertainty. This often happens when there is an agreement to agree in a clause. For example, if a contract provides that the parties must agree on a matter and the parties are unable to reach an agreement, where do the parties stand in respect of their contractual duties? In the context of a dispute resolution clause, this can occur when the parties are required to agree on the form of the dispute process, or the appropriate body to determine the dispute or the rules that are to be applied to determine the dispute.

 

Words or phrases to look out for:

 

‘The parties must agree on an expert’ or ‘the parties must agree on the form of dispute process’

 

Words or phrases that can prevent the clause being unenforceable:

 

‘The parties must agree on an expert. If the parties cannot agree, the expert shall be appointed or administered by the [for example] Australian Disputes Centre.’

 

The important difference between the two clauses is the second has a mechanism for resolving the uncertainty. If the parties cannot agree on which expert should be appointed, the clause provides for a third party to appoint or determine who the expert will be. Obviously, when nominating a third party to make the decision, it is important to confirm that the third party can and will appoint a dispute resolution professional.

 

Time frames should also be included as part of these clauses to avoid uncertainty. For example, a clause may state that parties are given 14 days to meet together to discuss the dispute before it proceeds to mediation. Without the 14 day timeframe, there is no clear indicator of when the parties are to engage in their dispute resolution process. A deeming mechanism should also be included to account for when the parties simply do not comply with the dispute resolution process. For instance, if the parties do not meet within 14 days, then the dispute should be automatically referred to mediation, or expert determination (as per the next tier of the agreed dispute resolution process) or simply allowed to proceed to litigation.

 

Broad and unclear drafting

 

The last pitfall of dispute resolution clauses discussed in this article is broad and/or unclear drafting. As a general problem with contracts, broad and/or unclear drafting can result in less certainty in the obligations between the parties. In the context of a dispute resolution clause, unclear drafting may occur in any of the following circumstances:

 

  • where there is not a clear process for a dispute to be resolved;
  • where the scope of the ADR powers and what can they determine is not defined;
  • where the rules that guide the ADR process are not clearly referenced; and
  • when can parties appeal the decision.

 

The consequence of broad and/or unclear drafting is that when a dispute arises, further disputes may occur when it comes time to interpret the clause. If a Court considers that the clause is uncertain and is unable to be properly interpreted, it may be held that the clause is void for uncertainty.

 

To assist with some of the considerations that arise with broad or unclear drafting, the next section of this article gives commentary on some of the considerations of ADR clauses so as to ensure your clause is suited to the parties and properly drafted.

 

Important Considerations in ADR clauses

 

Scope of ADR power

 

A dispute resolution clause can be customised by the parties. One way that parties can customise their dispute resolution clause is by determining what types of dispute will be resolved in which ways. For example, the parties may agree that technical matters to do with the scope of works or variations are unsuited to a determination by a legal professional. In such technical matters, the Courts will often have to consider expert reports from both parties, including any updates and responses from the experts. Even after considering the expert reports, the Court may nevertheless be unequipped or unsuitable to determine exactly what the correct outcome is or should be. Methods such as expert appraisal or expert determination can be effective ways of the parties reducing their costs and ensuring an appropriate resolution of the dispute. If this method is agreed by the parties, it is important to clearly set out exactly which disputes are to be resolved in which way. For example, the dispute resolution clause may state that any dispute involving a disputed variation or defective work that hinges on a technical interpretation must be resolved through expert determination. Accordingly, such a clause would also express that any dispute that hinges on legal interpretation be directed to a court of competent jurisdiction.

 

Statutory Provisions

 

When drafting a dispute resolution clause, it is important to consider whether there are any statutory provisions that may impact on the operation of the clause. For example, the Home Building Act 1989 (NSW) prevents the use of arbitration in some contracts for residential building work. In Victoria, the Building and Construction Industry Security of Payment Act 2002 (VIC) has an intricate regime for claimable variations in high value contracts (being contracts with a consideration over $5,000,000). These statutory provisions can have significant impacts on the clauses chosen by the parties. Further, while the Home Building Act prohibits the use of arbitration, the Victorian Security of Payment Act has consequences for the parties depending on the type of resolution used. It is important then to consider the statutory provisions and what their effects may be.

 

Binding or non-binding

 

A major consideration that parties should think about is whether to have the dispute resolution process as a binding or non-binding method. The Courts have generally held that where parties agree to a binding dispute resolution process, they will be unable to appeal the determination. While there may be circumstances where the parties can appeal to have the determination overturned, as a general rule, parties should expect to be bound by the decision. Therefore, parties should consider when they want to be bound by the decision of the dispute resolution professional.

 

Rights of appeal

 

While the process may be binding, the parties may agree to allow for appeal rights in the dispute resolution clause. For example, the parties may agree that a decision can be appealed where a party claims there has been a manifest error of law or where the amount in dispute exceeds a specified threshold. These mechanisms are interesting ways that parties can customise their dispute process and ensure that they are satisfied with the way any potential disputes will play out. It is important to consider any cost implications with appeal rights. While parties may not wish to be bound by a decision in certain circumstances, appeal rights may inevitably lead to higher costs in resolving a dispute.

 

 

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

 

 

ADR Processes

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ADR Processes: What are they and how do they work?

 

In many construction contracts, it is common to have a clause that deals with the process the parties will go through if a dispute arises. These clauses attempt to provide an alternative dispute resolution (ADR) process to litigating over every dispute that arises. While there are some disputes that are suited to being litigated (such as where a specific legal remedy is needed, the subject matter involves the legal rights of the parties or the issues are legally complex), many can be resolved through an ADR processes. ADR processes, if effective, can reduce the time and cost of disputes for parties.

 

This article discusses the different types of ADR processes and Part II will address some of the common pitfalls of ADR clauses that render these clauses unenforceable.

 

Types of ADR processes:

 

When it comes to construction disputes, there are several standard types of ADR processes. These include:

 

  • Negotiations between senior executives or authorised representatives;
  • Mediation;
  • Arbitration; and
  • Expert determination and appraisal.

 

Negotiations

 

Negotiation between senior executives is the most simple and informal dispute resolution process. The senior executives or authorised representatives meet and discuss the dispute that has arisen. Using their best endeavours, the authorised representatives can talk about how the dispute may be resolved and attempt and find any potential compromises. While the discussions may not necessarily resolve the dispute, it gives the parties a chance to hear the other side and understand the issues faced by the other party. This can help narrow the issues that are in dispute between the parties, saving significant time and money if the dispute escalates to litigation.

 

Mediation

 

The next step in the ADR ladder is mediation. Mediation is slightly more formal than negotiations between the parties’ authorised or senior representatives. This is because mediation involves appointing a third party (the mediator) to meet with the parties and work to resolve the dispute. The mediator will discuss the positions and interests of each party and try to find common ground on which the parties can agree and tries to help facilitate a resolution of the dispute.

 

One of the biggest benefits of mediation is the fact that it is so flexible in the resolutions that can be generated in response to a dispute. For instance, parties can find creative or unorthodox solutions to their problems which would not be available if the dispute were to be litigated. At mediation, the parties have the control over the resolution of the dispute and can work together to create a solution that is potentially more appropriate than a court order.

Arbitration

 

Arbitration is a common dispute resolution process in the building industry. Between commercial parties, arbitration can be an effective alternative to court because it operates much like a Court. The Commercial Arbitration Act 2010 (NSW) sets out the various matters relating to domestic commercial arbitrations including the arbitrator’s powers and the appeal process. The decisions of arbitrators are binding and the resulting awards can be enforced by the Courts.

 

Arbitrations can sometimes be as expensive and time consuming as litigation. This is because of several factors such as the cost of hiring an arbitrator and decisions are often appealed. However, some of the benefits of choosing arbitration include that it can be confidential and allows the parties to have more control over the rules and procedures that resolve the dispute. Subject to any overriding arbitration legislation or rules, the parties can essentially decide how they want the determination to run, how many arbitrators they want involved or any grounds of appeal.

 

Expert Determination

 

Another ADR process discussed in this article is expert determination. Expert determination can be binding, or non-binding (dependent on the rules of the particular expert agreement or contract that sends the parties in dispute into that forum). Unlike arbitration, there is no statutory framework for expert determination or appraisal. Therefore, it is the contract that will guide the expert and their decision. Using an expert to make a final and binding decision is useful, as the majority (if not all) building disputes will rely on expert evidence to determine issues such as program, defects or rectification costs.

 

Using non-binding expert determination can prevent or reduce the need for a court to consider these technical issues and can simplify the litigation process. A potential drawback for expert determination is that it can be very difficult to challenge. Provided the expert has understood the scope of their obligations and the issues they need to review, it often will not matter if the expert made a mistake, a gross over or under valuing or if irrelevant considerations were considered. As stated by the NSW Supreme Court in TX Australia Pty Limited v Broadcast Australia Pty Limited [2012], the fundamental question is whether the exercise performed by the expert in fact satisfies the terms of the contract.

 

It is not uncommon for a dispute resolution clause to have multiple different ADR processes available to the parties. For example, parties may be required to enter negotiations with each other and then must proceed to mediation or arbitration. Therefore, it is important to understand the aspects of each different ADR process so that you can choose the one most appropriate for your business. Each ADR process has its benefits and its drawbacks and will be more effective for certain types of disputes. In the Part II of this article, we will look at dome of the common pitfalls of ADR clauses. Particularly, how you ensure that the clause is enforceable, the key aspects of the ADR clause, and what are the common issues that arise when negotiating an ADR clause.

Expertly building evidence: Lessons learned from White Constructions

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Case note: White Constructions Pty Ltd v PBS Holdings Pty Ltd [2019] NSWSC 1166

In White Constructions, Hammerschlag J considered the issue of delay damages. White Constructions was the property developer of a site in Kiama NSW. The development involved the development and subdivision of 100 lots and required design and installation of sewer infrastructure. These works required a s 73 Certificate issued by Sydney Water before subdivision could occur. White Constructions appointed the Defendants to assist with the design and approval works needed as part of the development and resulting subdivision. A substantial part of the judgment was devoted to the preparing and designing of the sewer designs and the approval of Sydney Water, including the different types of sewage systems, Sydney Water’s preference in relation to these systems, preparation of option reports and correspondence between the Superintendent, the Defendants and Sydney Water.

The discussions between Sydney Water, the Superintendent and the Defendants took considerable time. As a result, White Constructions alleged that the delay in coming to the approved sewage design caused White Constructions to be liable to their building contractor for delay damages. In arguing the substance of the dispute, the parties tendered complex expert evidence. As a result, the Court appointed an expert to assist in interpreting and assessing the expert evidence presented.

With the expert’s assistance, Hammerschlag J criticised the experts’ approach to determining the delays attributable to the sewage works. Both experts used methods derived from the United Kingdom Society of Construction Law, the Delay and Disruption Protocol (the Protocol) in analysing the delay. The Protocol identifies six different methods of delay analysis, but Hammerschlag J held that the inclusion of a delay analysis method in the Protocol does not necessarily mean it should be used. While the Protocol methods have been endorsed in other cases, the analysis of delay must pay close attention to the actual evidence of what was happening on the ground of the project. The delay analysis must show and prove that, on the balance of probabilities, the delay:
• played a role in delaying the project;
• how it delayed the project; and
• how much it delayed the project.

This approach is in line with the common law common-sense approach to causation which the High Court referred to in March v E&MH Stramare Pty Ltd (1991) 171 CLR 506.

A lot of value in White Constructions comes from Hammerschlag J’s analysis of what evidence is needed in cases where delay is alleged in construction matters. Firstly, the Court stated that close attention must be paid to the facts of the matter, rather than the opinion of experts. This evidence should not be general in nature, but specific in that it is able to precisely identify delays in the project. This evidence should be a contemporaneous record of the project. A classic example of this kind of evidence is a site diary which records the day to day of the project, as well as specific cause and effect of each delay.
• what works were undertaken/completed;
• the instructions received from the client;
• the delays/any complaints of delays and how they have affected other activities;
• which personnel were onsite; and
• any other relevant details

The Court found that it was important that the contemporaneous record identified which activities were adversely affected by the delays. For example, if the works of one contractor were delayed and, as a result, caused delay for another contractor, the site diary should record these details. Failing to record these details means that it is harder, if not near impossible, for parties to establish that there was in fact a causal link and adverse effect.

How does White Constructions impact a project?

White Constructions shows the importance of proper project documentation. Most importantly, the site diary, or similar contemporaneous document, should be the primary record of the specific of what is happening on site and how specific events affect different contractors. Proper record keeping, while it may be administratively burdensome, allows the Court to analyse and determine the proper entitlements of the parties if the project ever comes into dispute. While other evidence can be adduced in pursuit of proving delay, it runs the risk of being generalist in nature and not enough to prove the causal link of the delays.

The lessons learned in White Constructions may also have some application in respect of other delay related mechanisms under construction contracts. For example, a comprehensive site diary would also be useful in determining any claim for an EOT claim. However, it is important to note that these types of claims are largely determined by the contract and its processes for determining what is in fact an EOT. Nevertheless, contemporaneous records of what has happened and how this has affected the project is useful in establishing a claim by a party as to their entitlements.
Another important point that comes from White Constructions is ensuring experts are given the proper lay evidence to ensure that they can properly opine on the project. While it does not displace the role of lay evidence such as site diaries, it can assist in assisting the Court in considering and making appropriate decisions on what the parties are entitled to.

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].