Dealing with variations in building contracts

Variations to the scope of works, or variations to the services to be provided, under a construction project are common in the building industry.

A variation may be requested by either party or arise out of necessity, for example, due to changes required in legislation or because of a latent condition.

When negotiating a variation, it is important to follow the process required under the contract and to ensure that the variation is clearly documented.

What is a variation?

The scope of works to be provided under a building contract will generally be set out in attached specifications, plans, or a service brief, which together form the whole contract.

The scope of works is an integral part of the contract. It identifies those works for which the contractor will ultimately be liable and is the basis from which alterations or additions will be classified a variation. The categorisation of a variation is important as it affects a contractor’s right to claim additional costs and a principal’s obligation to pay them.

The following concepts are relevant in determining what constitutes a variation:

  • The variation must be requested and be something that is not already covered in the scope of works. If there is no request by a principal to vary the scope of works, a contractor will have difficulties in claiming additional costs.
  • Similarly, if higher quality materials are provided than what is specified in the scope of works, a contractor will not have a right to charge for the upgrade unless this was specifically requested.
  • Work that is indispensably necessary to complete the job, although not spelt out in the contract or scope of works, is not a variation. An example of work that is intrinsic to the job is the installation of hinges when hanging doors – although the specifications may not refer to ‘hinges’ per se, it is obvious that the provision and installation of doors cannot be completed without this component.
  • A complete change to the scope of works by the principal is not a variation and may give a contractor a right to terminate the contract.

Dealing with variations

Variations to the scope of works often lead to disputes in the construction industry. It is therefore important that both parties understand the significance of a variation and the processes required for requesting and claiming them.

A principal may require that the contractor undertake more or less work than that provided in the scope of works. Issues can arise where a contractor is not qualified for, or does not have sufficient resources to, undertake the additional work. Similarly, if work falling within the scope of works of a contract with one contractor is given to another contractor, this will be problematic for both parties and may result in a breach of the contract by the principal.

To avoid a potential breach which could allow a contractor to terminate the agreement, principals should ensure that their contracts contain provisions that enable them to request variations to the original scope of works. The contract should identify the circumstances under which a variation might be requested and set out clear processes for varying the scope of works or services.

Principals should also be aware of the difference between a variation and a complete overhaul of the scope of works which may entitle the contractor to terminate the contract.

Contractors should ensure that they will be adequately paid for works additional to the original scope and follow the processes outlined in the contract for applying for modifications.

A variation may be requested by a contractor who needs to carry out additional work to fulfil the scope of works. This may occur where latent conditions arise. Latent conditions are physical conditions on the development site that are materially different to those that would reasonably have been contemplated, notwithstanding a contractor having made all due inspections and investigations of the site.

The contract will generally provide a timeframe during which a contractor may notify the principal of a pending variation. The contractor will typically be required to set out reasons why the variation is required and the costs in carrying out the additional work. The contractor should always obtain approval before undertaking any variations.

Quantum meruit claims

In some circumstances, strict compliance with the variation procedures set out in the contract will not be commercially efficient. The need to make a variation may arise without adequate time to follow due process, particularly when it is necessary to avoid delays or wastage.

Even if they are refused payment for the variation on the basis that the correct process was not followed, a contractor may still have a quantum meruit claim. In this case, the amount of the claim will be a reasonable price for the work carried out by the contractor, often based on industry standards.

A principal that requests and supervises a variation, despite the fact that the formal process was not followed, will be prevented from benefiting from the additional or modified works.

To succeed in a claim, it must be shown that the principal received a benefit, the contractor incurred expenses in doing the work, and that it would be unfair for the principal to retain the benefit without paying for it.

A contractor who refuses to undertake work requested by a principal that falls well outside of the scope of works provided in the contract, may also have a quantum meruit claim. One example of this is work that is unexpected and that does not ordinarily fall within the principal’s area of construction. In this case, if the contract is terminated, the contractor may be paid for the work completed to date.

Conclusion

A clearly defined scope of works and detailed process for dealing with variations must be included in all construction projects.

The scope of works should be sufficiently detailed and cover additional matters that may arise during construction of the project. The clearer the scope of works, the easier it will be for both parties to recognise and deal with a variation.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

The cost of poorly-drafted building contracts

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

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

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

Case study

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

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

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

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

Original proceedings

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

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

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

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

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

Appeal

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

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

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

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

Key points

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

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

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

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

Conclusion

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

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

Implied conditions & warranties for home building contracts

Following changes to the Home Building Act 1989 (NSW) in early 2015, the statutory insurance scheme that was established to provide compensation for certain defined losses if a builder dies, becomes insolvent, disappears during a build or fails to comply with a money order from a Court or Tribunal was re-named and is now referred to as the Home Building Compensation Fund.

Along with the re-naming of the scheme a number of other changes were made in respect of warranty insurance and implied warranties and conditions in building contracts entered into in NSW. These changes and the issue of implied conditions are discussed in further detail below.

What is covered by warranty insurance under a building insurance contract?

From 15 January 2016 an insurance contract issued in respect of building work in NSW must provide coverage and indemnity for losses or damage sustained by a beneficiary in respect of residential building work which has arisen because of the suspension of a contractor’s licence as a result of non-compliance by the contractor with an order.

Contracts entered into after 15 January 2016 in NSW only cover residential building work that is required under the Act to be covered by a certificate of insurance. This means that work such as built-in furniture and cabinetry which is done as standalone work and not part of a broader residential building contract is now exempt from the mandatory insurance scheme. For many would be renovators and home owners it is relevant to note that this category of work includes kitchen cabinets.

Statutory warranties

Builders must now provide a 2 year post completion warranty for their work. This period rises to 6 years in the case of ‘major defects’. Major defects are defined as being something that is a major element in a building AND which prevents all or part of the building form being either lived in or used for its intended purpose OR which threaten the collapse or destruction of the building as a whole of part of it. The concept of ‘major defects’ replaces the previous 6 year statutory warranty for ‘structural defects’.

Rectification orders may be issued by NSW Fair Trading Inspectors which require completion of rectification work in specified stages and by certain dates. These orders can also include an order for the payment of any money that is due under the contract.

Under the current legislation rectification work is specified as the preferred outcome of any proceedings before a Court or Tribunal for building claims.

Implied conditions and warranties

Section 18B of the Home Building Act 1989 (NSW) provides that all contracts for residential building work in NSW entered into by the holder of a contractor licence or a person required to hold a contractor licence before entering into a contract, will contain the following implied conditions and warranties:

  • All work will be done with due care and skill and in accordance with plans and specifications as set out in the contract;
  • All materials supplied will be good and suitable for the purpose for which they are being used and, unless otherwise specified in the contract, those goods will be new;
  • Work will be done in accordance with the legislation or any other law;
  • Work will be done with due diligence and within the time specified in the contract. If no time period is specified then work will be done ‘within a reasonable time’ ;
  • Where the work under the contract relates to the construction, alteration or additions to a dwelling the work will result in a dwelling that is reasonably fit for occupation as a dwelling (to the extent of the work conducted);
  • Materials used in doing the work will be reasonably fit for the specified purpose or the result being sought, provided the owner for whom the work is done expressly makes known the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the holder’s or person’s skill and judgment.

These statutory warranties cover both a principal contractor in respect of their relationship with the owner of land on which work is being carried out and are also implied into contracts where the principal contractor has contracted any part of the work to a subcontractor.

What if there has been a breach of a statutory warranty?

Previously the defence available to a builder or contractor to a claim of breach of statutory warranty was that any defective work was carried out on the instructions of the consumer and was done so contrary to the builder or tradesperson’s written advice.

Post 15 January 2016, a builder or tradesperson can also defend this type of claim on the basis that any defective work was carried out as a result of the builder or tradesperson acting on written instructions from a professional engaged by the consumer before the builder or tradesperson commenced work.

The professional in question can be an engineer, surveyor or architect or some other person with appropriate specialist or expert knowledge that was relevant to the building work in question. Critically that expert must be someone who is independent from the builder or tradesperson about whom the claim has been made.

In an ideal world construction projects would progress smoothly and the need to consider issues of insurance and implied conditions would not arise. Unfortunately this is not always the case and knowing where you stand with respect to warranty insurance as well as implied contractual conditions is likely to be an important part of successfully managing any build. It is always a good idea to seek legal advice before a situation becomes problematic as this can avoid costly unpleasant surprises down the track.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

Early release of retention money

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

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

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

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

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

The facts

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

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

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

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

‘Pay when paid’ provisions void

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

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

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

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

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

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

As a consequence:

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

Conclusion

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

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

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

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

The Building Code of Australia – compliance issues

The Building Code of Australia (‘BCA’) contains a series of technical provisions that dictate a range of minimum acceptable standards in respect of the design and construction of buildings and various other structures. It is produced and updated by the Australian Building Codes Board on behalf of the Commonwealth Government and all State and Territory governments.

The BCA is found in the first two chapters of the National Construction Code (‘NCC’) and has been in effect since 1 May 2011.

Why do we need a national building code?

The BCA was introduced as a means of ensuring that minimum construction standards around the country were consistent. Compliance with the BCA’s technical requirements is therefore mandatory in all States and Territories.

What does the BCA cover?

The BCA covers a broad range of building and construction related matters including standards for structural adequacy, fire resistance requirements, energy efficiency and sustainability, issues that affect the health and amenity of building occupants and matters concerning access and egress.

How do I know if my building complies with the BCA?

The technical requirements of the BCA are split into two volumes.

In order to ascertain whether your building is compliant, or the steps you need to take to ensure that it becomes compliant, the first thing you need to do is determine which volume your building comes under.

Technical requirements in the BCA depend on which class of building is involved. There are 10 possible classes of buildings and these are divided between the BCA volumes as follows:

  • Volume One – Commercial Buildings – covers requirements for all Class 2 to 9 buildings (commercial buildings) as well as access requirements for persons with a disability (Class 1b and 10a buildings) and Class 10b swimming pools which all have access requirements for people with a disability; and
  • Volume Two – Housing provisions – includes Class 1 and 10a buildings (save and except for access requirements for persons with a disability in Class 1b and 10a buildings), specified Class 10b structures (again, other than access requirements for persons with a disability in Class 10b swimming pools) and Class 10c private bushfire shelters.

Do the same standards apply to domestic and commercial dwellings?

Not surprisingly, the BCA provisions for housing differ significantly from those that apply to commercial buildings. If you are in any doubt as to what volume your construction will be covered by, especially if you are considering a mixed use development, then it is always prudent to seek legal advice prior to embarking on any construction rather than waiting and finding out at the end of construction that minimum standards have not been met.

Does the BCA prescribe all aspects of a build including mandatory materials?

The aim of the BCA is not to dictate that only certain materials or building methods will be permitted to be used if a building is to be compliant. Rather, the BCA is a performance-based building code. This means that the use of alternative materials, designs and even construction methods may be permitted provided the minimum standard requirements of the code are met.

In this way innovative materials and new construction methods can be allowed with designs being tailored to suit a particular build and flexibility of design is allowed provided the intent of the BCA is met. The aim of the BCA is to set minimum standards not to dictate what materials or designs can be used to achieve those standards.

How is compliance with the BCA assessed?

Just as no single building method or material is prescribed as being mandatory by the BCA there is also no single method of assessment applied to determine compliance. Under the BCA there are several acceptable assessment methods available including:

  • Evidence based assessment – which allows for the provision of a report from Registered Testing Authority, a current Certificate of Accreditation or Certificate of Conformity, a certificate prepare by either a professional engineer or some other appropriately qualified person, a current certificate issued by a product certification body provided that body has been accredited by the Joint Accreditation System of Australia and New Zealand or any other form of acceptable documentary evidence that is able to adequately demonstrate suitability for use;
  • Verification methods – including calculations or mathematical models or tests using a technical operation either on site or under suitable laboratory conditions;
  • Alternative method (sometimes referred to as any other method) – alternative methods may be used provided the relevant authority is satisfied that compliance with the BCA has been achieved. In making such a decision an approval authority may have regard to relevant deemed-to-satisfy provisions or verification methods provided for in the BCA;
  • Expert judgment – in situations where tests or modelling calculations are not available the opinion of a technical expert may be acceptable; and
  • Comparison – a comparison is made between the proposed building method and the ‘deemed-to-satisfy’ method set out in the BCA. Provided that it can be demonstrated to the approval authority that the proposed building solution is either equivalent or superior to the ‘deemed-to-satisfy’ provision, then the proposed method or material may be deemed to meet the relevant performance standard.

Although the BCA is designed as a plain English document navigating your way around the BCA does require a certain degree of prior knowledge and skill. If you have any questions or would like assistance in understanding the BCA or ensuring your building complies with the BCA requirements we would be happy to assist.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

Building Defects – Damage to Balconies

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

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

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

Causes

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

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

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

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

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

Case Study

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

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

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

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

Conclusion

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

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

No Builder’s Licence was no barrier to Work Order! What?

An appeal in the New South Wales Civil and Administrative Tribunal has confirmed the limited circumstances in which the Tribunal will make a money order rather than a work order for rectification of defective building works.

In Precise Builders (NSW) Pty Ltd v Jones & Krel [2018] NSWCATAP 112 the Tribunal Appeal Panel, having regard to s 48MA of the Home Building Act 1989 (NSW), determined that defective building work should be remedied by way of a work order, as opposed to a money order, even though the contracting builder did not hold a licence to complete such works.

The relevant provision of the Act reads:

A court or tribunal determining a building claim involving an allegation of defective residential building work or specialist work by a party to the proceedings (the ‘responsible party’ ) is to have regard to the principle that rectification of the defective work by the responsible party is the preferred outcome.

Background

The owners (Jones and Krel) contracted the builder (Precise Builders Pty Ltd) to carry out residential building work. The owners subsequently applied to the Tribunal seeking a money order for $28,000 against the builder as damages for cracking to a brick parapet wall above the garage. The cracking was caused by a defective steel beam which supported the wall – the beam was neither designed or manufactured by the builder.

The Tribunal ordered rectification works to the owners’ property as opposed to the money order sought.

The builder appealed, seeking to have the work order replaced with a money order for $18,845.84, being the rectification costs assessed by an expert quantity surveyor and provided in evidence during the Tribunal hearing. The grounds of appeal included that:

  • the Tribunal’s decision was not fair and equitable;
  • the parties preferred a damages award rather than the work order (notwithstanding that the owners initially sought $28,000);
  • the builder did not hold a licence to carry out the remedial work nor could it provide Home Warranty Insurance for the work – a money order would facilitate rectification by licensed / insured builders who specialised in remedial work;
  • the defect arose because of the engineer’s specifications and was not attributable to the builder;
  • a work order would exacerbate an already-tense relationship between the parties.

The decision

The appeal was dismissed, and the work order upheld.

The Tribunal determined that although ‘it does not have to order the preferred outcome [set out under the Act] … in order not to do so some persuasive reason or evidence is required … to rebut the presumption. Such an assessment is objective ‘and the Tribunal must weigh up the factors in each case and make the decision accordingly.’

To challenge a deviation from this preference requires evidence of a significant error or injustice in exercising the discretion, such that the decision-maker has acted upon an incorrect principle or been guided by irrelevant or superfluous matters.

Although the builder’s licence lapsed in 2014, the Tribunal noted that it was properly licenced at the time the work was undertaken and that the defect constituted a ‘major defect’ under s 18E of the Act.

Whilst the builder was not ‘itself responsible for the defective beam and the resulting damage there was a breach of the statutory warranty in s18B(1)(e) of the Act.’

The Tribunal upheld the order for the builder or licensed contractors on its behalf, to return to the owners’ property and carry out the rectification work.

The Tribunal’s reasoning

The Tribunal reiterated the policy objective of the Act, namely to ensure that owners are afforded the benefit of the statutory warranties contained therein. Consequently, if a contracting party enters into a contract with a licenced third-party builder to carry out remedial work, it satisfies the obligations contained in the Tribunal’s orders and the owners retain the protection of the implied warranties under the Act as non-contracting owners pursuant to Schedule 1.

Both parties in this case were in favour of a money order, the owners clearly stating that they would prefer not to have the builder return to carry out the rectification work. Despite this, and the fact that the builder had allowed its licence to lapse and was not properly licensed to perform the rectification work, the Tribunal considered it appropriate to uphold the work order.

Conclusion

The case reiterates the Tribunal’s approach in preferring a work order over a money order for rectification of defective building works.

Builders who have contracted to do work that is found defective (whether or not the defect is attributable to the builder) will likely need to stay around to carry out the repairs (or at least supervise them) rather than paying out an aggrieved owner. Owners and builders may therefore need to extend a period of tolerance whilst remedial works are performed.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

What are Latent Conditions and how do you manage the risk?

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

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

What is a ‘latent condition’?

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

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

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

Who is responsible for latent conditions?

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

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

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

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

Managing the risk of latent conditions?

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

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

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

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

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

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

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

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

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

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

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

Construction contracts and unfair contract terms

As reported by us at the time, in November 2016, the Australian Consumer Law (ACL) extended its unfair contract term provisions to certain small businesses. These provisions, which previously only applied to consumers, were introduced in an effort to level the playing field between small and large enterprises.

This article is intended to remind industry participants about the scope of the unfair contract term provisions and their relevance in business-to-business transactions within the construction industry.

Large businesses using standard form contracts to engage smaller operators should have reviewed their contract terms to ensure compliance and small contractors should be aware of what should and should not be included in a small business contract.

If you are unsure whether your business-to-business contracts comply with the unfair contract term provisions or whether a term would be considered unfair you should seek legal assistance.

The provisions apply to ‘small business contracts’

The unfair contract term provisions relate to ‘small business contracts’. These are business transactions when at least one of the parties is a small business (defined as a business employing fewer than 20 people), and the contract is a ‘standard form contract’.

The term ‘standard form contract’ is undefined but would essentially capture precedent contracts prepared by one party and offered on a ‘non-negotiable’ or ‘take it or leave it’ basis. The provisions apply to contracts for any type of goods or services with an up-front value of up to $300,000, or $1,000,000 where the contractual terms run for more than 12 months.

An unfair term contained in a small business contract will be unenforceable. The offending term will be struck out and, if possible, the remaining contract will remain in place.

The provisions took effect on 12 November 2016 however any contracts entered into prior to that time that have been varied will also be caught.

What is an ‘unfair contract term’?

A term is unfair if it:

  • creates a substantial imbalance between the parties’ rights and obligations; and
  • would cause a significant detriment (financial or otherwise) to the business if it were relied upon by the advantaged party; and
  • is not genuinely necessary to protect the interests of the advantaged party.

Factors generally considered in determining whether a term is unfair include:

  • the respective bargaining power between the parties;
  • the transparency of the unfair term and the way it is expressed (whether it is obvious and easy to understand);
  • the entirety of the contract and the surrounding circumstances.

Application in the construction industry

Builders and head contractors should ensure that when using standard form contracts to engage ‘small business’ subcontractors or independent contractors such as surveyors and architects that they comply with the unfair contract term provisions.

The provisions under the ACL have wider scope than previous legislation in most jurisdictions that prohibit onerous payment conditions such as ‘pay when paid’ terms. The ACL captures terms that may have previously been considered ‘the norm’ in the construction industry.

Recurring terms in standard construction contracts that might be deemed unfair when contracting with a small operator include:

  • Variation provisions which allow the head contractor to unilaterally vary the terms of the contract or the scope of works at any time. Unconstrained variation terms could be seen to cause significant detriment to a subcontractor. These terms should be redrafted by including provisions that enable the subcontractor to terminate if the variation is excessive or provisions that require the head contractor to give reasonable notice of variations.
  • Indemnity clauses that excessively extend liability to the subcontractor beyond what would reasonably be necessary to adequately protect the head contractor against loss or damage.
  • Liability clauses that exclude or disproportionately limit the liability of the main contractor even if they are partially at fault.
  • Termination clauses allowing the head contractor to cancel the agreement at any time ‘for convenience’ and without reason or default by the other party. Contracts should consider a fairer process for termination and set out the subcontractor’s rights or entitlements on termination. Reasonable notice of defaults or potential defaults and providing a timeframe for these to be remedied before terminating might also be more reasonable.
  • Entire agreement clauses or terms that imply that the subcontractor has no recourse to remedies outside the terms of the contract. These clauses could constitute misrepresentation.
  • Time bars which may provide onerous timeframes and notification procedures for subcontractors to claim for variations or an extension of time under the contract. The shorter the timeframe and more onerous notification requirements, the more likely the term will be considered unfair.
  • Principal discretion clauses which purport to give the head contractor the exclusive power to determine certain terms of the contract, for example, whether a term has been breached or whether work is considered defective.

Conclusion

If contracts have not already been reviewed, head contractors should ensure their small business contracts do not contain unfair terms which may be deemed unenforceable. Such clauses may attract unnecessary attention and could potentially affect the reputation of the business.

Rather than delete a potentially unfair clause entirely, terms may be redrafted so they are more even-handed whilst still protecting the legitimate interests of the business. Consideration should be given to ‘tiered’ clauses allowing an alternative clause to be adopted in the event that a more severe clause might be considered unfair.

If you are a small business contractor and believe you have entered into an agreement with unfair terms, you could request to have the term removed or try negotiating for a fairer replacement clause.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

Construction contracts and changes to insolvency laws

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

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

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

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

What is an ipso facto clause?

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

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

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

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

How do the reforms change ipso facto clauses?

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

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

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

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

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

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

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

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

Why make these reforms?

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

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

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

What should those in the construction industry do?

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

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

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

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.