Tag Archive for: Contract Issues

AMENDMENTS MADE TO THE SECURITY OF PAYMENT REGIME IN NSW – WHAT BUILDERS NEED TO KNOW

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Further reforms to the Building and Construction Industry Security for Payment Act 1999 (NSW) (the Act) have been proposed with the Building and Construction Legislation Amendment Bill 2022 (the Bill) and in the Building and Construction Legislation Amendment Regulation 2022 (the Regulation). The Bill outlines various proposed amendments in relation to the role of adjudicators, the threshold of value of projects when triggering retention funds, and regarding the process of serving payment claims.

Proposed Amendments

The following are the key proposed amendments:

  • The introduction of an ‘adjudication review model’ will allow claimants and respondents to request a review of an adjudication determination.
  • There will be a significant reduction in the threshold of the value of projects in triggering retention funds from $20 million to $10 million.
  • Payment claims which are served on owner occupiers will need to attach a Homeowners Notice information to the payment claim to ensure homeowners understand the SOPA provisions relating to payment claims and to outline the consequences of non-compliance.
  • Increasing the powers of adjudicators in engaging experts to investigate aspects relevant to the adjudication.

Adjudication Review Model

The adjudication review model will allow claimants and respondents to request a review of an adjudication determination.

However, there will be some restrictions in applying for a review of a determination. The determined amount must be:

  • Equal or greater than $100,000 of the scheduled amount; or
  • Less than $100,000 of the claimed amount.

While this amendment will allow parties to have a determination reviewed in specific circumstances, it will also add a layer of extra time and cost to the adjudication process. This is despite security of payment processes generally being considered a timely and less expensive means to resolve payment claim disputes.

Decrease in Threshold When Triggering a Retention Fund

The threshold of the value of a project which requires a retention fund will be reduced from $20 million to $10 million. This will allow for greater protection of retention funds held for the benefit of subcontractors, especially in circumstances where the head contractor becomes insolvent.

New Requirements for Payment Claims

The Bill has proposed changes with respect to the issuing of payment claims to homeowners, with the new requirement that there be a Homeowners Notice enclosed.

The Homeowners Notice will include information regarding the reason that the payment claim is being issued, the correct procedure in responding to the payment claim, and the consequences of disregarding the payment claim.

The Homeowners Notice has been proposed due to the level of uncertainty among homeowners who are unfamiliar with the security of payment regime. It is inferred that issuing a Homeowners Notice will allow homeowners to adequately understand the procedure under the security of payment regime and respond appropriately.

Strengthening the Powers of Adjudicators

The Bill endeavours to afford adjudicators further power in settling disputes. In brief, the powers will extend to adjudicators engaging an independent expert to investigate the relevant works and provide a report indicating their findings.

To Consider

In light of the proposed amendments to the security of payment regime, it is crucial that those who are involved in the construction industry are aware of the proposed changes and, if implemented, take note of the date the legislation will be in effect.

Please click the following link to access the Bill and Regulation:

Regulations link

Bill link

CONTRACTOR STRIKES SECURITY OF PAYMENT GOLD BY SKIRTING THE MINING EXCEPTION

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Mining owners and operators in most Australian States[1] will be aware of the “mining exception” in security of payment legislation.  The mining exception excludes ‘the extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works for that purpose’[2] (Mining Exception) from the definition of the term “construction work” and, consequently, the ambit of statutory interim progress payment mechanisms.

However, in a decision handed down on 11 November 2020, the NSW Supreme Court[3] followed the approach of the Queensland courts[4] by construing the Mining Exception narrowly in favour of contractors and subcontractors.  In short, the Mining Exception does not  extend generally to some broad category of mining industry operations.[5]

Facts

Downer EDI Mining Pty Ltd (Downer) was engaged by Cadia Holdings Pty Ltd (Cadia) the operator of the Cadia East underground panel cave mine south-west of Orange, under a “Works Contract” dated 16 November 2018 (Contract), to perform “development phase” works, being (for the most part) underground works to provide access to the proposed undercut and extraction levels for future extraction of minerals in the “production phase”[6]

Downer proceeded to adjudication on a payment claim served on Cadia.  An adjudicator appointed under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) determined that Cadia pay Downer $1,017,741.72.[7]

Cadia challenged the determination on two grounds:

  1. the Mining Exception applied so the Contract was not a “construction contract” within the meaning of the SOPA; and
  2. there was no available reference date to support Downer’s payment claim.

Decision

Cadia’s challenge to the adjudication determination was unsuccessful on both grounds.

Stevenson J framed the effect of the Mining Exception as excluding ‘from the definition of “construction work”, the following works:

  • extraction (whether by underground or surface working) of minerals;
  • tunnelling or boring for the purpose of extraction (whether by underground or surface working of minerals; and
  • constructing underground works for the purpose of extraction (whether by underground or surface working) of minerals.’[8]

His Honour held that the heart of the question of the application of the Mining Exception to a contract is what a contractor undertakes to do under the contract in question, not what work that contractor actually does[9] (which comes to be answered later).

The works under the Contract did include “tunnelling or boring” as well as “constructing underground works”.  However:

  1. these activities were not for the “purpose of” extraction of minerals; and
  2. the Contract required Downer to undertake work beyond these activities which fell within the meaning of “construction work” or the supply of “related goods and services”.

On considering generally whether activities performed by a contractor are for the “purpose of” extraction of minerals, His Honour:

  1. agreed with Fryberg J in Thiess that the relevant purpose should be decided ‘by reference to what a reasonable person in the position of the parties would conclude as to the object of what purpose of the contract’[10];
  2. held that the Mining Exception is to be construed narrowly to benefit the subcontractor[11];
  3. held that a close “proximity” between the act of extraction and the tunnelling and boring or construction of underground works was required (and this was not so in this case, where the extraction phase would not begin until 2022 after subsequent works)[12];
  4. considered that “extraction” does not include work “associated with” or “preparatory to” extraction[13]; and
  5. noted that the SOPA expresses where there is an intention to bring in ancillary activities, which is not the case with the Mining Exception[14].

Further, in this case, His Honour considered that some works under the Contract required of Downer were “construction work” or supply of “related goods and services”, meaning the SOPA applied.  Relevantly, His Honour stated (accepting Downer’s counsel’s submission):

‘…if there is a contract which contains undertakings to carry out construction work and undertakings to carry out work that it not construction work, the contract remains a construction contract. If a payment claim includes a claim for work that is not construction work, the payment claim is valid, but the adjudicator should not award an amount for work that is not construction work. Thus, the Mining Exception has an important role to play in limiting the amount that the adjudicator should award.’[15]

On the reference date point, His Honour determined that there was an available reference date under the Contract for the service of the payment claim.  Most of the points raised were of limited significance for general application.  One point of general interest was that a clause of the Contract required Downer to invoice ‘in respect of the Services performed’ of the proceeding month.[16]  Downer’s works were performed not in the preceding month, but at an earlier time.

His Honour relied on s.13(4) of the SOPA which allows a contractor to serve a payment claim within the period determined under the construction contract or 12 months after construction work to which the claim relates was last carried out.  The payment clause in the Contract attempted to restrict the operation of s.13(4) and was a void provision, by operation of s.34 of the SOPA.

Take Home Tips

Contractors who consider that they are not entitled to have recourse to security of payment legislation simply because they work on a mine site should re-examine closely the terms of their contract.  Can it really be said that the contract works are for the “purpose of” extraction?  Or is there some distance between the works to be performed and the eventual act of extraction?

Perhaps there are portions or stages of works under the contract to which the Mining Exception would apply, but this would not necessarily mean that the entire contract is not a “construction contract” within the meaning of the security of payment legislation.

 

 

[1] Queensland, Victoria, South Australia, Tasmania and the Australian Capital Territory.  However, Western Australia is likely to shortly follow suit once the Building and Construction Industry (Security of Payment) Bill 2020 (WA) passes through Parliament.

[2] Section 5(2) of the Building and Construction Industry (Security of Payment) Act 1999 (NSW).

[3] Cadia Holdings Pty Ltd v Downer EDI Mining Pty Ltd [2020] NSWSC 1588 per Stevenson J.

[4] HM Hire Pty Limited v National Plant and Equipment Pty Ltd [2012] QSC 4 and Thiess Pty Ltd v Warren Brothers Earthmoving Pty Ltd [2012] QCA 276 (Thiess)

[5] At [133].

[6] At [92] and [93].

[7] At [3].

[8] At [34].

[9] At [70].

[10] At [96], quoting Fryberg J in Thiess at [76].

[11] At [102]

[12] At [103] and [91].

[13] At [104].

[14] At [105].

[15] At [134].

[16] At [171].

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.

A Downer of a decision: The importance of articulating adjudication submissions

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In Diona Pty Ltd v Downer EDI Works Pty Ltd [2020] NSWSC 480 (Diona), the Supreme Court considered an application to set aside an Adjudicator’s Determination for failure to consider the terms of the contract as required by s 22(2)(b) of the Building and Construction Industry Security of Payment Act 1999 (the SOP Act).

Key takeaway:

  • It is important to ensure that adjudication submissions clearly articulate all relevant arguments and contractual provisions. Unclear, poorly framed or ambiguous submissions can be costly.
  • An adjudicator’s decision will not be declared void simply because it contains what one party considers to be an error or failure by the adjudicator to expressly address all arguments made in parties’ submissions.
  • Lawyers can be useful to assist in preparing an adjudication application and response. Having prepared and responded to numerous security of payment claims, the lawyers at Bradbury Legal are experts at ensuring your arguments are clearly articulated.

 

Background

Diona Pty Ltd (Diona) entered into a subcontract with Downer EDI Works Pty Ltd (Downer), for Downer to provide works in relation to safety upgrades on the Great Western Highway, Blackheath. Downer proceeded to adjudication on a payment claim under the SOP Act. On 16 April 2020, the relevant Adjudicator determined that Downer was entitled to a progress payment of $430,990.13 (Determination).

Diona made an application to the Supreme Court, seeking a declaration that the Determination was void and an injunction preventing Downer from requesting an adjudication certificate or filing the adjudication certificate as a judgment debt. Diona contended that the Adjudicator had incorrectly awarded a set off claim by Downer, in response to Diona’s liquidated damages claim, in the amount of $30,000 on account of two extension of time claims (EOT Claims).

Diona argued that the Adjudicator had not fulfilled the requirements of s 22(2)(b) of the SOP Act because the Adjudicator had failed to give any reference to, or consideration of, Diona’s contention in its adjudication response submissions that Downer was not entitled to these extensions of time, due to the operation of a time bar in the contract.

 

Did the Adjudicator consider the time bars?

The central question was whether the Adjudicator considered the provisions of the contract. Under section 22(2)(b) SOP Act, an adjudicator must consider the provisions of the construction contract.

To determine if the Adjudicator did consider the contractual provisions, especially those containing the time bar, the Court looked at the submissions made by both parties and the Adjudicator’s determination.

The Court noted that Downer had ‘devoted a number of pages to its contentions concerning extension of time and, in particular, its asserted entitlement to EOT 18 and EOT 21’. This was contrasted with Diona’s submissions, the Court found did not properly engage with Downer’s EOT Claims. Diona’s submissions stated:

‘Determinations of claims for…extension of time…by Diona are final and cannot be disturbed except by raising a Claim under the Contract, see relevant clauses of the Subcontract.’

The Court highlighted a part of the Adjudicator’s reasons which stated:

‘The Act at section 22(2)(b) requires the adjudicator to consider the provisions of the construction contract when making the determination’

Having regard to the Adjudicator’s express reference to s 22(2)(b) of the SOP Act, the Court stated that there were several reasons why the Adjudicator did not refer to the dispute clause in the Determination. Firstly, the Adjudicator may have felt that Diona did not properly articulate and develop the time bar argument. Alternatively, the Adjudicator may have misunderstood the submissions. The Court concluded that:

‘The Adjudicator may have come to the wrong decision about Dower’s entitlement to EOT 18 and EOT 21. But that, without more, is not a basis to set aside the set aside the determination.’

The argument that Diona sought to raise, while potentially valid, was not properly articulated. Therefore, it could not be inferred that the Adjudicator had failed to consider the provisions of the subcontract as required by s 22(2)(b) of the SOP Act.

 

So what?

The significance of this case is that it shows that what appear to be errors or failures to consider an argument by an adjudicator will not always result in a basis to set aside the adjudicator’s determination. The adjudicator’s decision can be rough and ready, provided the adjudicator makes their decision in accordance with the SOP Act. Payments made under SOP Act are on account only and may be determined on a final basis at a later stage.

 

Case article – Brolton Group Pty Ltd v Hanson Construction Materials Pty Ltd

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In Brolton Group Pty Ltd v Hanson Construction Materials Pty Ltd [2020] NSWCA 63 (Brolton), the NSW Court of Appeal considered the jurisdictional and procedural fairness grounds of an adjudicator’s determination.

Background

Brolton was contracted by Hanson to build a quarry processing plant at Bass Point. The parties agreed on a guaranteed maximum price of $85 million (excluding GST) in which Brolton was entitled to claim monthly progress payments on the last Tuesday of each month. Hanson claimed liquidated damages and the contract was eventually terminated on 3 October 2018. In August 2019, Brolton served a payment claim on Hanson. The payment claim claimed work up to September 2018 as well as interest on unpaid amounts to August 2019. The adjudicator determined in favour of Brolton, issuing an adjudication amount of $2,877,052.75. Hanson challenged the decision in the Supreme Court, with the Supreme Court finding in favour of Hanson. This resulted in the appeal by Brolton to the NSW Court of Appeal.

The Court’s decision

Brolton raised two main grounds of appeal. The first and most pertinent issue, concerning jurisdiction, centred predominantly on the availability of a reference date on which Brolton could make its payment claim.
Importance of jurisdiction and the trouble of jurisdictional error
Under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) section 22, an adjudicator is given the statutory authority to determine the amount of a progress payment, the date on which such amount became payable and the rate of interest payable on any such amount. The importance of section 22 is that it sets out the jurisdiction of an adjudicator. As the saying goes, with great power comes great responsibility. While the adjudicator is given the power to make these determinations, section 22 sets out the limited factors that the adjudicator can consider. These are the responsibility components of the adjudicator’s determination. Two of the relevant factors to consider in Brolton was the provisions of the SOP Act and the payment claim.
While adjudicators are given the power to make determinations, they can only do so in certain circumstances or if there are specified preconditions. In the legal world, this is called a ‘jurisdictional fact’. As Gleeson JA described in Brolton (at paragraph 28), the term jurisdictional fact is used to describe ‘any precondition which a statute requires to exist in order for the decision-maker to embark on the decision-making process’. Jurisdictional facts fall into two types:

1. The existence of an identified state of affairs; or
2. A state of satisfaction of the decision-maker as to an identified state of affairs.

A jurisdictional fact gives a decision-maker the power to make the decision. If it exists, then an adjudicator can make a determination. In this way, the reference date activates the adjudicators powers to make a determination under the SOP Act.
Under the SOP Act, a claimant is only able to make a payment claim when there is a reference date under the construction contract. Therefore, the existence of a reference date is a jurisdictional fact that falls into the first category. This is because the existence or non-existence of a reference date is objective and does not depend on whether the adjudicator is satisfied that a reference date exists. Where an adjudicator exercises its power, but the jurisdictional fact does not actually exist, the adjudicator has made a jurisdictional error..
Getting back to the case, in submitting its payment claim, Brolton claimed in its adjudication submissions that the reference dates for August 2018 and September 2018 were available for the payment claim. Hanson also contended that the September 2018 reference date was available for the progress payment. However, the adjudicator ‘went rogue’ and determined that the reference date was in fact 23 October 2018. There were a few issues with this. Firstly, the 23 October 2018 was not the last Tuesday of the month (which in fact was 30 October 2018). Secondly, the contract had been terminated on 3 October 2018, meaning no further reference dates arose. As the clause entitling Brolton to a progress payment did not continue beyond the termination of the contract, the adjudicator had made a jurisdictional error. The reference date the adjudicator relied on did not exist, and therefore the determination was void and the $2.8 million decision was overturned (as if it had never been made).

Although Hanson succeeded on the first issue, the Court was still minded to consider the second issue on appeal. The second issue concerned the procedural fairness of the adjudicator’s decision. Like jurisdiction, procedural fairness is a legal term that has important consequences for adjudication determinations. Procedural fairness is an aspect of natural justice, a foundational legal principal that sets the standards of how people are to exercise their authority. The concept of procedural fairness means the process in which a decision is made should be just. Procedural fairness requires that parties have the right or opportunity to have their case heard by the decision-maker. If there is a substantial denial of natural justice, the decision-maker’s determination will be void. In this case, the issue of procedural fairness arose because the adjudicator determined that the relevant reference date was a date not submitted by either party. Brolton argued that while procedural fairness was denied to the parties, it was immaterial and should not void the adjudicator’s decision. The Court found that the findings by the adjudicator were a material breach of procedural fairness and therefore there was a breach of natural justice.

Take-away points

While this article has discussed a few technical legal concepts, the main take away points from Brolton are that:
• A progress payment must be linked to a specific reference date. If an adjudicator incorrectly attributes a payment claim to a reference date which does not exist, the determination will be void.
• It is not enough that another reference date is available for the payment claim to be linked to. If the adjudicator goes rogue and determines a reference date not submitted by the parties, the decision will be void.
• Claimants should identify and make it abundantly clear the relevant reference date to which a payment claim relates and make submissions in the adjudication application as to what the relevant reference date is.
• Reference dates are essential for an adjudicator to make a determination. A failure by the adjudicator to appropriately determine a reference date can have dire consequences to claimants.
• Note: The recent amendments to the NSW SOP Act have eliminated the post-termination payment claim issue. Section 13(1C) now states that for construction contracts that have been terminated, a payment claim may be served on and from the date of termination. This change will only apply to contracts entered into after 21 October 2019.

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.

 

 

COVID Update – Environmental Planning and Assessment (COVID-19 Development – Construction Work Days) Order 2020

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Yesterday (April 2,2020), the Environment Planning and Assessment (COVID-19 Development – Construction Work Days) Order 2020 came into effect. The Order allows for building work and demolition work to be carried out on Saturdays, Sundays and public holidays, provided that the development is approved through development consent and continues to comply with all other conditions of the development consent. Further any work that is performed on a Saturday, Sunday or public holiday must:

  1. comply with the conditions of consent that restrict hours of work on any other day as if the condition applied to work on a Saturday, Sunday or public holiday;

 

  1. not involve the carrying out of rock breaking, rock hammering, sheet piling or similar activities during the weekend and public holiday work hours; and

 

  1. all feasible and reasonable measures are taken to minimise noise.

 

So what does this mean for the construction industry? Where a project is subject to development consent conditions that restrict the days of working to Monday to Friday, the Order allows for the approved working hours in the development consent to apply to weekends and public holidays. The purpose of this Order is to allow for construction sites to implement social distancing measures which may require smaller workforces on site but prevent or minimise loss of productivity by allowing works to be carried out on more days.

As a result, construction programs may need to be reconfigured to balance the slower rate of progressing the works due to social distancing and/or team splitting, any EOTs claimed and the greater number of days that can be worked.

The Order may also result in contractors and subcontractors being able to make a claim in relation to a change in legislative requirements under their contracts. This may result in entitlements for time or cost relief arising from complying with the Order and other government orders made in response to the COVID-19 outbreak.

If you need advice as to how this order affects your contractual obligations or are negotiating a contract, please contact us. We are committed to providing the highest quality of legal services at competitive prices to help you and your business get through these challenging times.

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

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

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

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

 

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

·         Depends on the contractual definition of the term

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

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

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

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

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

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

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

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

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

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

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

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

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

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

·         Consider who bears the cost of suspension under the contract

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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

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

Where it began: the Shergold Weir Building Confidence Report

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

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

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

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

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

What to expect in 2020 and beyond

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

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

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

Pillar Actions Outcomes
Building a better regulatory framework

 

 Implementing legislation and regulation and transforming the focus of the regulator

 

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

 

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

 

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

 
Building skills and capabilities

 

 Improve accreditation of construction related programs through improved standard modules

 

 Shared minimum learning content and open source resources for all institutions

 
Building better procurement methods

 

 Establish clear standards for engagement and outputs

 

 Viable risk allocation and performance accountability

 
Building a digital future

 

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

 

 Shared industry wide platforms that build confidence

 
Building the reputation for quality research

 

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

 

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

 

 

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

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

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 info@bradburylegal.com.au.