The re(new)ed Standard on the block: Exploring updates to the AS 4000:2025

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The General Conditions of Contract, otherwise previously known as AS 4000:1997 remains one of many fundamental and commonly sought after construct-only contract templates within the building and construction industry but who regulates the templates to ensure that the contracts deliver the desired outcomes and are consistent with industry practice?

Domestically, Standards Australia act as the primary organisation, [i] responsible for developing and adopting contractual standards that can be used to undertake commercial or residential projects.

As part of their latest update, in late June 2025, Standards Australia, the primary organisation which produces contractual standards, published a revised version of the Australian Standards 4000 (AS 4000:2025). This standard was released to ensure the General Conditions of Contract are clarified and consistent with updated legislation and the developing commercial landscape, whilst leaving risk allocation between parties untouched and balanced. [ii]

What is the AS 4000?

The AS 4000 or ‘General Conditions of Contract’ are a domestically utilised and uniform set of contract terms commonly used by negotiating parties within the construction industry. The primary purpose of the AS 4000 is to provide a predetermined and practical framework,[iii] to regulate and manage contractual relationships both up and down the contractual chain. However, these terms can also be amended to reflect the varied levels of risk allocation between the contracting parties.

The release of the AS 4000:2025 also represents an acceptance of rapid degree of advancement that has recently taken place within the construction industry towards engaging in project management that is flexible in its application yet compliant with key legislative instruments like the Personal Property Securities Act 2009 (Cth).

What key amendments were made, and what does this mean for you?

Primarily, amendments made to the AS 4000:2025 include the following:

  • Providing negotiating parties with the ability to customise how they approach dispute resolution. The renewed AS 4000:2025 lists and prioritises negotiation to occur before opting for litigation but simultaneously encourages and allows parties to arbitrate if the circumstances require it. Aside from arbitration, the AS 4000:2025 continues to offer additional dispute resolution mechanisms including:
    • Mediation
    • Expert Determination
    • Referral to a Dispute Avoidance board

Although the renewed AS 4000:2025 presents contracting parties with ample opportunity for flexibility and autonomy to engage in alternate forms of dispute resolution, this does not change the fact that parties must remain vigilant to the differing degrees of authority dispute resolution mechanisms have. For example, when parties choose to rely on arbitration to determine the outcome of a dispute they do so with the knowledge that the decision of the arbitrator is binding and requires strict compliance.

  • The addition of a newly drafted Formal Instrument of Agreement (FIA) and deed of novation annexed to the AS 4000:2025 represents a clear time saving mechanism for contracting parties, removing the need to separately prepare an FIA. These can be particularly useful for repetitive transactions between the same contracting parties. However, parties to an FIA or deed of novation should seek legal advice if amended versions of these terms are sought to be relied upon to minimise excessive risk allocation.
  • General updates to the AS 4000:2025 template to account for broad legislative amendments to the federal GST system and Personal Property Securities Act 2009 (Cth). The renewed template also focuses on remaining compliant with existing domestic work, health and safety (WHS) provisions to ensure all building and construction projects, regardless of scale remain subject to a regulatory landscape that accounts for:
    • transactions that require the payment of GST and generation of tax invoices;
    • in line with the updated model WHS laws and regulations, the renewed template now allows a contractor to be appointed to the position of ‘Principal Contractor’, giving the term an updated definition that mirrors the interdependent relationship between contractor’s responsibilities under the AS 4000:2025 and mandatory health and safety standards to be fulfilled when completing building and construction works;
    • insolvency events that may impact contractual relationships under the Bankruptcy Act 1966 (Cth); and
    • aligns with duties of payment mechanisms that continue to develop under the Building and Construction industry Security of Payment Act 1999 (NSW). [iv]
  • Altering requirements associated with determining practical completion. The AS 4000:2025 now allows the listed date for practical completion to arise before a certificate of Practical Completion is issued. This appears to be better aligned with practical developments in contract administration.
  • A continued preference for straightforward and plain descriptions when contract drafting including replacing “shall” and “will” with definitive terms within the AS 4000:2025.

Takeaways

Although only minimal changes have taken place to ensure the AS 4000:2025 remains compliant with legislative instruments as they present currently, it is still important that practitioners, principals and contractors continue to review and note any updates to ensure best practice techniques are used when entering into or drafting agreements between parties. Standards Australia’s media release can be found here, but if you or anyone else you know has questions about how this updated agreement may impact you, please contact Bradbury Legal on (02) 9030 7400 or at info@bradburylegal.com.au to see how we can assist you.

 

[ii] See https://www.standards.org.au/news/standards-australia-updates-as-4000-2025-general-conditions-of-contract

[iii] See https://www.standards.org.au/flagship-projects/general-conditions-of-contract

[iv] Ibid.

Bradbury Legal’s Back to Basics: Limitation Period

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Part 1: Defects and Contracts – Which Limitation Period Applies?

Limitation periods are a foundational element of construction law claims, for all parties involved. In essence, a limitation period prescribes the time frame within which legal action must be initiated, such as a claim for defective work.

While the limitation periods applicable to various defects are clearly outlined in legislation (as detailed in the table below), complexities can arise in the context of construction contracts, particularly where multiple pieces of legislation may apply. This article examines several cases that help clarify these nuances.

To begin, it is useful to consider the basic limitation periods in New South Wales:

Limitation Act 1969 (NSW) For a breach of contract 6 years from the breach
For a breach of deed 12 years from the breach
Home Building Act 1989 (NSW) (HBA) For breach of statutory warranty resulting in a major defect 6 years from the date of completion
For breach of statutory warranty resulting in a minor defect 2 years from the date of completion
Design and Building Practitioners Act 2020 (NSW) For a breach of statutory duty of care 6 years from the discovery of the defect

A more complex issue arises in cases involving both a breach of statutory warranty and a breach of contract. The Supreme Court of NSW provided guidance on the appropriate limitation period to apply in such circumstances in Onslow v Cullen [2022] NSWSC 1257.

In January 2016, the builder (Onslow) entered into a contract with the owner (Cullen) to carry out residential building work under an HIA contract. Clause 39 of the contract expressly incorporated the statutory warranties prescribed by the HBA. In April 2017, Onslow ceased work prior to completion, and proceedings were subsequently commenced in August 2019 for a breach of contract, alleging both incomplete and defective works. Onslow contended that the defects in the completed works were minor defects, and therefore the two year limitation period was applicable. Conversely, Cullen maintained that the claim was in relation to breach of contract, meaning the 6 year limitation period should be applied.

The question posed to the Supreme Court was whether the breach of contract or the breach of statutory warranties applied, as the statutory warranties were incorporated into the contract. Justice Adamson drew attention to section 7(a) of the Limitation Act 1969 (NSW), which states:

Nothing in this Act (a) applies to an action or arbitration for which a limitation period is fixed by or under an enactment other than this Act or by an Imperial enactment (not being an enactment or an Imperial enactment repealed or omitted by this Act)…

This section clearly establishes that where legislation prescribes a different limitation period to that defined in the Limitation Act, this new limitation period will prevail. Accordingly, in the present case, it was determined that the claim would be for minor defects and so the two year limitation period displaced the six year limitation period for a breach of contract. Importantly, the incorporation of statutory warranties into the contract did not alter the fundamental nature of the owner’s claim.

The key takeaway from this decision is that, when dealing with limitation periods, one cannot rely solely on provisions of the Limitation Act in circumstances where new legislation has been enacted which dictates a differing limitation period.

For further analysis of limitation periods, the next Back to Basics article will examine the treatment of ‘tacked on’ defects and the relevant limitation rules that apply.

Bradbury Legal is a specialist building and construction law firm. Contact us on (02) 9030 7400, or at info@bradburylegal.com.au.

The Prevention Principle – A Balancing Act in Construction Law

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The Prevention Principle – A Balancing Act in Construction Law

The prevention principle most commonly arises in delay disputes where a principal seeks to claim liquidated damages for late completion, but has itself caused, or contributed to, the its simplest form, the prevention principle prevents a party from taking advantage of its own wrong.[i]  This maxim was established Holme v Guppy (Ex) (1838) 3 M & W 387, where the English Exchequer Court refused to let a party enforce a completion date it had made impossible to meet.[ii]  However, whilst seemingly straightforward, modern Australian courts have both refined its scope and clarified its reach, reshaping its application to present-day projects.

How EOT clauses affect the prevention principle

The conventional position, reflected in Gaymark Investments Pty Ltd v Walter Construction Group Ltd [1999] NTSC 143 (Gaymark), is that if a principal delays the works and the contract does not provide for an extension of time (EOT), time becomes “at large.”[iii]  An EOT clause is a contractual provision that allows a project completion date to be extended where certain events occur, such as variations to the works, unforeseen site conditions, or delays caused by the acts or omissions of third parties. When invoked, the contractor is then obliged only to complete within a reasonable period, and the principal loses the right to claim liquidated damages. Properly drafted, an EOT clause should adjust completion dates to reflect delays caused by the principal, potentially shielding the contractor from claims for liquidated damages.

Modern view – time at large persists

Courts have recently emphasised that the mere presence of an EOT clause does not automatically protect against time becoming “at large”. Gaymark illustrates the risk: if an EOT mechanism is too narrow or impractical to cover certain principal-caused delays, time could still be held to be “at large”.[iv]  Conversely, Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd confirmed that when the EOT clause explicitly allowed extensions for principal-caused variations, the contractor remained obliged to complete by the extended date, and the principal could thereafter enforce liquidated damages.[v]  These cases highlight that the practical effect of an EOT clause depends on its drafting and scope.

Balancing perspectives – containment and middle ground

The tension between broad and narrow applications of the prevention principle can be distilled to scope versus equity. In many standard-form contracts, the principle is effectively displaced where EOT clauses already cover principal delays, as seen in Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504. Too generous an application undermines carefully negotiated risk allocation; too narrow, and principals avoid accountability. A balanced approach tests not just whether an EOT clause exists, but whether it grants time for principal-caused delays. If it doesn’t, the principle from Gaymark may still apply.

Conclusion

The prevention principle illustrates the dynamic nature of construction law. It shows how the traditional English-derived principles of equity continue to shape modern contracts while demonstrating flexibility in balancing fairness and risk allocation. Whether courts favour a “function over form” approach or a “contained to the gaps” view, the takeaway is clear: the prevention principle remains relevant, but its practical impact depends on careful drafting.

Practical implications

The following practical considerations may help both principals and contractors navigate potential disputes:

  • Principals should ensure EOT clauses are broad enough to capture all principal-caused delays and are operable in practice.
  • Contractors should assess whether the EOT regime also functions effectively from a contract administration perspective – if not, there may be grounds to argue time at large.
  • Both sides should remember that the prevention principle remains a live doctrine: Multiplex shows it can be displaced, but Gaymark shows it has not been extinguished.

For practitioners, understanding how the prevention principle interacts with EOT clauses can inform risk management and contract administration. For guidance on navigating its application, managing EOTs, or mitigating delay – related risks contact us on (02) 9030 7400, or email us at info@bradburylegal.com.au.

 

[i]  Alghussein Establishment v Eton College [1988] 1 WLR 587.

[ii] Holme v Guppy (Ex) (1838) 3 M & W 387, 389 (Parke B).

[iii] Beckhaus v Brewarrina No 2 [2004] NSWSC 1160, [47].

[iv] Gaymark Investments Pty Ltd v Walter Construction Group Ltd (1999) 16 BCL 449, [456–458].

[v] Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151, [115].

HBA Contracts – to sign or not to sign?

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In the decision of the Supreme Court, Dyjecinska v Step-Up Renovations (NSW) Pty Ltd [2024] NSWSC 159 (Dyjencinska), the Court considered the impact of an absence of signatures within a contract related to the performance of renovation works (the Works).

Facts

Dyjencinska (the Owner) requested Step-Up Renovations (NSW) Pty Ltd (the Builder) to perform the Works on the Owner’s property. Both parties negotiated a written residential building contract valued at $145,120 (the Contract), however neither party signed nor dated the Contract, which meant it could not be considered to have been ‘in writing’. After initial completion, the Owner suspended the Works and refused to pay the Builder $107,662.50 in invoices.

Decision

The Court determined that the absence of signatures within the Contract can be considered a breach under section 7 of the Home Building Act 1989 (NSW) (HBA) which requires a contract to be in writing, dated and signed by the parties. However, considering that the purpose of the HBA is to promote transparency and outline licensing and workmanship standards, section 7 does not need to be strictly complied with when considered simultaneously with section 10 of the HBA.

As such, the Court had found the Builder was able to enforce the Contract if it was written down and contained a ‘sufficient description’ of the Works to be completed.

Take home tips

Dykecinska highlights the importance of a clear contract exchange and that any contract must specifically outline exactly what is required for performance. Moreover, the case indicates that section 10 of the HBA requires strict compliance with section 7 to ensure a contract is in writing and contains sufficient descriptions of the work but does not require strict compliance with the latter half of section 7 which specifies the need for a signature.

This means that in the event of any action being brought against a builder for non-compliance with section 7, section 10 cannot restrict a builder from making a quantum meruit claim to uphold their right to payment of invoices for completed works.

A quantum meruit claim allows a builder or contractor to be paid for work completed or materials supplied that goes beyond the requirements listed in the original contract. For builders, this claim may arise where there is a variation to the contract or when property owners request performance of activities that are not covered by the contract.

Although, these claims cannot be made involuntarily, and a builder must prove that:

  1. The request was outside the scope of performance specified under the contract.
  2. The owner was aware that the variations were being completed by the builder and were outside the scope of specified contractual performance.
  3. The owner knew the builder was expecting payment for the variations.
  4. The builder had provided evidence that the amount claimed was fair and comparable to the variations performed.

The builder must also prove that the owner accepted the benefit that arose from the completion of the variations.[1]

Clearly, Dykecinska remains a good example of how builders must give thought to the contracts they enter into and be aware of how they are drafted to reduce liability and ensure performance of written obligations.

Comparatively, the Court expressed that even if the relationship between sections 7 and 10 of the HBA has been misconstrued, homeowners must comply with the determined payment schedules listed within a written contract.

We recommend that all builders:

  • regularly review your contractual obligations;
  • ensure your contracts are written down and contain reasonable and sufficient descriptions of the work required for completion of the contract; and
  • not commence work until the contract has been signed

If you or anyone you know requires assistance with preparing contracts or determining enforceability of a contract, please contact Bradbury Legal on (02) 9030 7400, or at info@bradburylegal.com.au to see how we can assist you.

 

 

[1] Goodacre v Trinder Alpine Constructions Pty Ltd [2013] NSWCCT 124.

 

Set-off what?

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Making sense of ambiguous contracts

The primary concern for a developer and builder closing a development agreement is to reach a commercial deal on mutually agreeable terms. If you reach a deal, do the precise words in the contract really matter? What was the real deal struck if the words of the contract are ambiguous?

In Tomkins Commercial & Industrial Builders Pty Ltd v Pacific Diamond 88 Pty Ltd [2024] QSC 321, the Supreme Court of Queensland considered how to interpret a contract with terms that were clearly ambiguous, in a dispute about the Principal’s claim to liquidated damages and right to set-off.

Facts

The applicant (Tomkins) was a family owned and operated construction company. In December 2021, Tomkins entered into a contract as builder, with the respondent (Pacific Diamond) as principal, for construction works which was later varied by a deed of variation in August 2022.

Disputes arose between Tomkins and Pacific Diamond, which culminated in Pacific Diamond issuing three certified notices to Tomkins under the contract:

  • a certificate for liquidated damages due and payable in the amount of $2.6 million;
  • a payment certificate crediting to Tomkins $394,343 for work done, but setting off $2.6 million in liquidated damages, leaving a balance payable from Tomkins to Pacific Diamond of over $1.9 million; and
  • a notice that Pacific Diamond intended to have recourse to bank guarantees provided by Tomkins under the contract as security.

Tomkins applied to the Court seeking declarations that Pacific Diamond was not entitled to set-off liquidated damages in the way it had sought to do, that notices issued by Pacific Diamond were invalid, and injunctions against Pacific Diamond preventing their recourse to the bank guarantees.

Ambiguity in the Contract

The questions before the Court required an interpretation of the clauses in the contract relating to the timing of the principal’s rights to liquidated damages, set-off and recourse to security.

When Tomkins and Pacific Diamond had originally negotiated the contract, the first drafts of the contract exchanged were an amended standard form AS4300–1995 contract. Notably, Tomkins did not agree to allow liquidated damages to be payable on demand, nor for liquidated damages to be deducted from certified amounts payable to Tomkins or from security, and deleted relevant clauses from this draft contract.

In the midst of negotiations, the parties then opted to switch and use the standard form AS4902–2000 contract as the basis of their negotiations. After further negotiations, subclause 37.2(b) was deleted from the standard form contract. The deleted subclause would usually have provided for certificates the principal could issue evidencing the assessment of retention and other moneys due to the principal from the contractor.

While subclause 37.2(b) was removed from the contract, references to subclause 37.2(b) remained. This resulted in ambiguity in the contract, particularly regarding whether Pacific Diamond had an immediate right to set-off for certified liquidated damages, or whether a claim for liquidated damages was only on account until the final payment claim at the conclusion of the contract.

Filling in the Missing Pieces

The Court found that the contract was ambiguous, and in this case was required to determine the actual legally binding agreement formed from the intention of the parties.

The Court uses an objective standard to determine the agreement that parties reach. This means the Court will assess the words and text exchanged between the parties through the eyes of a “reasonable businessperson” to determine the precise bargain of the parties.

Where there is an ambiguity in the contract, the Court will also consider relevant context (including prior negotiations) through the lens of a “reasonable businessperson” to determine the text, context and purpose of the contract.

The Court concluded that the correct and commercially sensible interpretation of the contract as amended by the removal of subclause 37.2(b) was that Pacific Diamond’s right to liquidated damages was not payable until after the final certificates had been issued, and that they could not set-off against security or against the certified payments due to Tomkins under the contract in the way they had attempted.

The Court also concluded that the balance of convenience favoured granting Tomkins the injunctions sought restraining Pacific Diamond from having recourse to the bank guarantees.

Consequently, the Court made the declarations sought by Tomkins that Pacific Diamond did not have a right to set-off liquidated damages against payments certified as due to Tomkins. Additionally, the Court ordered that Pacific Diamond could not have recourse to security on the basis of the notices it had issued, which the Court also found invalid under the contract and set aside.

Takeaway

Having ruled, the Court also recognised that Pacific Diamond’s claim to liquidated damages had not been extinguished entirely but simply delayed until a later time, with the expectation that Tomkins and Pacific Diamond might continue their dispute using the arbitration clauses in their contract.

In this case, it seems the commercial dispute between the parties had been exacerbated with a legal dispute arising from ambiguity in the drafting of the contractual terms of their agreement.

It is important when negotiating a contract, well before a commercial dispute arises, that the parties carefully and unambiguously decide on the proper contractual processes and risk allocation that will define their business relationship throughout a project. Doing so will help avoid unnecessary legal disputes when commercial resolutions are difficult to find.

Righting the Wrong in Wrongful Termination

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

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

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

Let’s start with a review of the statutory warranties

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

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

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

Hometeam Constructions Pty Ltd v McCauley [2005] NSWCA 303

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

Patel v Redmyre Group Limited [2021] NSWCATAP 132

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

THINGS TO CONSIDER

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

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

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

Legal advice should always be sought before terminating a contract.

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

The DBPA: when defects are just not enough

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OXFORD (NSW) PTY LTD V KR PROPERTIES GLOBAL PTY LTD TRADING AS AK PROPERTIES GROUP ABN 62 71 068 965 [2023] NSWSC 343

 

FACTS

 

On 8 October 2015 the first and second defendants (AK Properties Group), the ‘Owners’, entered into a contract with the plaintiff, the ‘Builder’, whereby the Builder was to construct a six-unit apartment building. The third and fourth defendants, Mr Eswaran and Mr Sharma, entered into a Deed of Guarantee and Indemnity with the plaintiff, where they guaranteed the fulfilment of the Owners’ obligations under the contract.

The plaintiff brought proceedings against the four defendants to recover amounts claimed in nine separate invoices. However, the Owners sought a cross claim against the director and the shareholder of the Builder, Mr Kazzi, and the architect of the Building, Mr Mahedy. Here they claimed that the works were incomplete, the work was defective, and that there was interest that had to be paid on borrowing that was used to fund the completion and rectification of the works. Furthermore, the first and second defendants also sought damages from the plaintiff under section 37 of the Design and Building Practitioners Act (DBPA), alleging that there were defects in the work that had occurred from the act of negligence by the Builder.

The DBPA establishes, under Part 4, that individuals and companies owe a statutory duty of care to the owner and subsequent owner of land where construction is being carried out in order to avoid economic loss caused by defects. This duty of care applies to a person who carries out construction work in or related to a building, where building is defined by section 1.4 of the Environment Planning and Assessment Act 1979 as “any part of a building and also includes any structure or part of a structure”.

 

ISSUES

 

The issue that was to be decided by the Court was the “extent to which the costs admittedly incurred by the Owners should be attributed to rectification of defects, rather than the completion of the work” [287]. As the DBPA states, economic loss may be incurred where there is a cost for the rectification of defects, including damage caused by defects, rather than work completion. Additionally, with respect to s37 of the DBPA, there was debate as to whether there was a ‘personal’ breach of duty that had occurred.

Another issue that the Court had to consider regarding the cross claim of the Owners was their entitlement to Hungerfords v Walker (1989) 171 CLR 125 damages. Here it notes that there may be an interest on damages following the time of the breach due to the fact that the plaintiff in this case incurred an economic loss by being deprived of the use of money and, thus, an opportunity to invest. This case brought forward the issue of whether the interest that was paid in order for the works to reach a stage of completion should also be included in the amounts recoverable.

 

HELD

 

The Court held that the Builder did not complete the works and that much of the work that had been completed was defective. Hence, while the Builder had originally sued for their entitlement to the invoices, it was the Owners of the property who were entitled to their cross claim for the incomplete and defective works. Importantly, the Owners made a claim based on Hungerford v Walker damages, stating that they had to take out additional loads to fund the building works in order for them to reach practical completion by a certain date which they were unable to repay. The Owner’s claim was for Hungerfords interest alone and the Court found that they were entitled to this interest.

Regarding the owners claims against Mr Kazzi personally under the DBPA, the Act provides that “a person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects”, going on to define construction work as the “supervising, coordinating, project managing or otherwise having substantive control over the carrying out of” the building work. While the Builder “offered the formal submission that Mr Kazzi was not a ‘person’ for the purpose of s 37 of the DBP Act” [332], it was determined by the Court that, due to the affidavit that noted Mr Kazzi to “attend the Property on a weekly basis… to oversee the construction of the Building” [330], he was therefore a person who had substantive control over the work in this instance; Stevenson J citing Boulus Constructions Pty Ltd v Warrumbungle Shire Council (No 2).

The Court then sought to establish whether Mr Kazzi acted in a breach of a duty to exercise reasonable care. The Court considered the findings in The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068 at [59] and noted that “it is not sufficient simply to assert a defect and allege that the builder was required to take whatever precautions were needed to ensure that the defect not be present”, reiterating the notion that the Act was developed to establish that a duty of care is owed. Should a party seek a breach of the duty, the other elements of negligence must be proved i.e. that a duty exists, the duty was breached, and the breach caused loss. The judge here determining that a defect is not enough to establish a breach of duty.

 

TO CONSIDER

 

With regard to this case, what is of central importance is that while the DBPA is highly influential in its purpose of protecting owners through the establishment of a duty of care, a defect alone is not enough to establish a breach of that duty.

 

Rise and Fall Clauses in Construction Contracts

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Overview

Rise and fall clauses (also referred to as cost escalation clauses) in construction contracts have been a highly discussed topic in the past few months, given prices for material such as timber, steel and concrete have been on the rise since early last year. There are various contributing factors as to the reason why these price increases have been observed, including the effects of the COVID-19 pandemic on the global commodities supply chain.

This article will outline the nature of rise and fall clauses and how these clauses may affect your construction contract as well as outline the elements to keep in mind when drafting a rise and fall clause to suit your construction contract.

Rise and Fall Clauses at a Glance

Rise and fall clauses essentially increase or decrease the price of a fixed-price or lump sum construction contract depending on the varying price of the materials to be used in completing the works under the contract. For example, if the price of timber rises during a construction project, and timber is a material that is to be used to complete the works under the contract, a rise and fall clause in the contract could mean that the contract price would increase correspondingly to accommodate for this rise in timber prices. Surveying the “price” of any given material is therefore crucial and, in Australia, is often done by reference to the indexes published by the Australian Bureau of Statistics (discussed below).

Rise and fall clauses were at their height during the inflation of the 1970s and 1980s. Since then, we have seen their relevance recently after the effects of the COVID-19 pandemic and the Russian-Ukrainian war.

Putting Together a Rise and Fall Clause

If you are considering a rise and fall clause to be included in your construction contract, you should first be aware of relevant legislation that may impact its legality.

The following table sets out whether a rise and fall clause in your residential or domestic building contract can be implemented based on the State or Territory in which the construction works are to be performed:

Legality of Rise and Fall Clauses in Different States
NSW Yes
QLD Yes
WA No, if the contract for works is less than $500,000
SA Yes
NT Yes
TAS Yes
VIC No, if the contract for works is less than $500,000
ACT Yes

 

 

Constitutive Elements

Rise and fall clauses implement mathematical formulas to calculate the change in contract price. The following are some of the more common elements implemented in rise and fall formulas:

a) Affected Material and Price

The affected material is essentially the specific material or commodity which is subject to fluctuating price. Considering rise and fall clauses typically do not apply to the entirety of a contract sum, the clause will apply to parts of the contract. The critical component of this element is to ensure the affected material is defined clearly and precisely.

b) Applicable Price Index

Price indexes record the value in the fluctuating price of a certain material/commodity. In the Australian setting, the price index most often referred to is the Producer Price Indexes (PPIs) published quarterly by the Australian Bureau of Statistics (ABS). The ABS provides a measure of the movement in the prices of the materials/commodities over a period of time. Other price indexes which are published by the ABS, and that may be of relevance to construction contracts, include:

  • the Consumer Price Index (CPI) which measures inflation;
  • The International Trade Price Indexes (ITPIs) which measures fluctuations in the prices of goods imported into Australia and exported from Australia; and
  • the Wage Price Index (WPI) which measures changes in Australian employee wages.

Visit the link below for the ABS factsheet with further information on each of these indices.

Use of Price Indexes in Contracts

c) Risk Buffer

A risk buffer functions to apportion the risk of increasing material prices between the owner and the contractor. For example, a risk buffer may operate such that the first 3% increase in a commodity or material is borne by the contractor, any percentage above this amount will be subject to the rise and fall clause.

d) Reference and Adjustment Dates

Reference (or base) dates concern the specific date from which the rise and fall of price of a specific commodity or material is to be calculated under the contract. The reference date may be any of the below:

i. the date of tender;

ii. the contract date; or

iii. a date some months following the date a Contractor is given access to a site.

Adjustment dates, as the name suggests, concern the date at which the price of any given material/commodity is to be adjusted under the contract. This may be monthly or yearly, depending on the scope and timeline of the construction project.

To Consider

If you are considering including a rise and fall clause in your construction contract, it is important to take into account all constitutive elements of a rise and fall clause, particularly reference dates and jurisdictional limitations. A rise and fall clause must be certain and specific in order to avoid ambiguity and operate correctly. If you are contemplating including a rise and fall clause in your contract, consider the specific requirements of your project and seek legal advice.

 

Striking a balanced construction contract to ensure successful project delivery

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The construction industry is still grappling with the impacts of COVID-19 on the supply of materials, equipment, and labour due to delays in procurement and long lead times. These impacts have been coupled with a significant increase in the cost of construction materials (including increased procurement costs) as a result of inflationary pressures, rising transport costs, and the increased costs of critical resources such as oil, gas, and coal.

Parties to a construction contract are therefore faced with a significant challenge to ensure that successful projects can be delivered. This is a complex balance that needs to be negotiated and dealt with by parties to construction contracts to mitigate risks.

We have been advising both our developer and builder clients on the need to enter into construction contracts with clear allocation of both time and cost risk and relief. When it comes to risk allocation under a contract, our view is that a party who has better control of a risk ought to bear the risk. For those risks outside the control of either party, they should be shared equally.

Where there are uncertain risks allocated under the contract to the contractor, they will often price tenders with an excessive margin which in effect passes this cost to the principal. The principal bears that higher cost regardless of whether the risk actually materialises. In some cases, the principal may be better served by balancing that unquantifiable risk in whole or part to avoid an inflated tender price that covers these contingencies. One example is by using a hybrid contract where some of the scope is lump sum and some is cost-plus.

It’s our experience that parties may have different objectives that may guide which party is willing to take on which kinds of risk and the contract can be negotiated with this in mind. Also, more balanced contracts are often easier to administer during the life of the project as there are palatable outcomes for both sides avoiding disruptions and excessive claims. A balanced approach may also be enough to minimise the complications caused by parties breaching contracts or becoming insolvent due to increased costs and an inability to claim under the contract.

Fixed-price contracts are widespread in the industry and do not always provide the full range of adjustment mechanisms that are needed to fairly distribute time and cost risks between the parties. Many of these mechanisms only exist by virtue of the contract granting rights to the parties and industry participants cannot rely on legislation and common law to cover these risks.

These mechanisms include:
• extension of time clauses;
• delay costs clauses;
• variation clauses;
• rise and fall clauses;
• force majeure clauses; and
• provisional sum and prime cost items.

Extension of time clauses

An extension of time clause extends the time a party has under the contract to reach practical completion. Ordinarily, the clause will operate where a specified event occurs and a party must provide details of the legal and factual basis of the claim. A common requirement is that the contractor must prove the delay will impact works on the critical path and must not have caused or contributed to the delay.
Common examples of qualifying causes of delay include inclement weather, force majeure events, variations, industrial action, and legislative changes.
There are strict mechanisms requiring claims to be submitted within a certain timeframe of the event and sometimes ongoing requirements to notify for continuing delays. Our contractor clients should be mindful of any time bars in construction contracts.
Receiving an extension of time ensures that parties who are delayed are not exposed to liquidated damages or terminated. Additionally, failing to obtain an extension of time may prevent a party from obtaining delay costs depending on the structure of the contract.

Delay costs

Delay costs (delay damages under AS contracts) are the recovery of extra costs incurred by a contractor due to an increase in the duration of the programme. Usually, an act or breach of contract by the other party is not necessary to establish an entitlement to delay costs, merely the existence of a qualifying cause of delay.
Contractors who obtain an extension of time will avoid the risk of liquidated damages or termination but remain on the hook for the costs they have incurred due to delay. It is crucial to promptly submit a claim these costs.
For further insights into delay costs, please see our article here.

Variation clauses

Variation clauses allow the principal or its representative to positively or negative adjust the scope of works and services, often with associated adjustments to time or cost under the contract.
Variations can also arise out of neutral events not caused by either party such as latent conditions or new legislative requirements.

A positive variation request is made by either party where it considers that the works being carried out fall outside the previously agreed scope of works. Many contracts have strict procedures and timeframes in place for a variation to be formally approved under the contract with the consequence that an invalid request will not provide time or cost adjustments.

Parties should carefully consider the interplay between the extension of time, delay damages/costs, and variation regimes under the contract to ensure they are making the right claims.

Rise and fall risk

Rise and fall clauses account for increases and decreases in the costs of materials or other construction inputs such as labour over the life of the contract with the effect that the contract price remains aligned with prevailing market rates. More special cases may address fluctuations in economic conditions such as exchange rates and taxes.
There are many ways to draft rise and fall clauses. For example, the clause can be drafted so that the parties split the difference in increases or decreases or otherwise introduce percentage or amount caps to provide more certainty. It can also be limited to specific materials or trades.

Including these clauses in your contracts may spark discussions prior to commencing the project to consider alternative materials and solutions that achieve the performance requirements of the project without breaking the bank. It can also lead to less conservative fixed tender prices that are designed to cover the volatility of the market. The upshot is that market conditions have forced contractors to be creative with pricing and solutions to be competitive.

Force majeure clauses

Force majeure clauses (also known as “Acts of God”) exist in recognition of unpredictable events outside the control of either party that have the effect of preventing contractual obligations being carried out. Depending on how the clause is drafted it may either suspend the works or provide an extension of time for the period of the delay. In some cases, it may also provide rights to terminate the contract.
Examples of force majeure events include industrial disputes, pandemics, natural disasters, acts of war, and government action or interference. Our view is that COVID-19 is a special case and should be dealt with separately in contracts as arguably it is no longer an unforeseeable risk.

Force majeure clauses often are listed as qualifying causes of delay or compensable causes under both extension of time clauses and sometimes delay costs/damages clauses.

For more detail on force majeure clauses, please see our article here.

Provisional sum and prime cost items

A provisional sum is an allowance in the contract price for specific items of work or services which cannot be quantified at the time of contract entry such as signage, structural elements not yet designed, and soft landscaping options not finalised. Once they are quantified the Principal or its representative will issue a direction.

Provisional sums can be structured to include a cap on items to provide cost certainty. For example, a clause that states a contractor must notify the principal where the actual cost is likely to exceed 125% otherwise risk being barred from recovering those costs. Alternatively, more contractor-friendly is a clause stating a contractor can claim the difference and margin where the total amount of the provisional sum work is higher or lower than the aggregate of the provisional sum values included in the contract without any cap.

A prime cost item is an allowance in the contract price for an item such as a fixture or fitting not specified at the time of contract entry such as tapware, door hardware, or kitchen appliances.
The advantage of these mechanisms is that any amount above and beyond what is allowed can be the subject of a variation depending on the drafting of the contract.

For an additional overview on some of these issues, please see our article here.

Bradbury Legal is experienced in advising parties on drafting and reviewing construction contracts to ensure that risk and relief is properly balanced. For specialist and tailored advice, please contact a member of our team by phone on (02) 9030 7400 or by email at info@bradburylegal.com.au.

Remember your umbrella! Drafting umbrella contracts for a rainy day.

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This article focuses on risks for construction contractors and suppliers when agreeing to standing, purchase order or umbrella contracts and provides some tips on how to avoid or mitigate those risks.

“Standing”, “purchase order” or “umbrella” contracts are frequently used where:

  • the client engages, or intends to engage, a contractor or supplier across in multiple projects; or
  • where the quantity of works, goods or services or time when those works, goods or services are required is unclear or subject to change.

Umbrella contracts aim to settle a set of standard terms and conditions with which both parties are comfortable, with the variables such as quantities and time for performance set out in the purchase order later.

Purchase order contains additional adverse terms or terms that conflict with the umbrella contract

A risk in using umbrella contracts is that the client issues a purchase order which includes or appends an additional set of terms and conditions which are not agreeable to the contractor and/or conflict with the umbrella contract.  If the contractor commences performances in accordance with that purchase order or otherwise does not raise objection within a reasonable time:

  • a “battle of the forms” may occur, where which terms and conditions prevail becomes debatable; and/or
  • the client’s purchase order terms may be considered accepted due to the contractor’s performance of the works or services the subject of the purchase order[1].

Some ways that the risk can be avoided or mitigated include:

  1. Prevent inconsistency: Ensure that the umbrella contract contains a term which states that it will apply to the extent of any inconsistency with the purchase order.
  2. Settle form: Ensure that the umbrella contract contains a term which requires any purchase order issued to be in the form appended to the contract as an annexure (and ensuring that the purchase order issued aligns to that form).
  3. Minimise variables: Minimise the amount of variable information that will be subject to the purchase order. The parties should agree as many terms as possible via the umbrella agreement and leaving the purchase order less work to do.
  4. Contractor’s acceptance: Include a term in the umbrella contract that the purchase order will not become operative (i.e. an agreement on its terms reached) unless the contractor accepts the purchase order in writing. Then, do not accept the purchase order in writing unless the variable terms included in it (such as the time for delivery of goods) are achievable.
  5. Limits on liability: Ensure the umbrella agreement contains all necessary limits on liability – e.g. a cap on liquidated damages.

Creation of multiple contracts

It is not uncommon for an umbrella contract to contain a term to the effect that a separate contract is created upon issue (or acceptance) of each purchase order.  This is generally desirable when the umbrella contract is intended to operate as a standing agreed set of terms governing the parties’ relationship across multiple projects.

However, where such a term is included and multiple purchase orders are issued on the one project, such a term can:

  • create general difficulties in administering the contracts and enforcing rights under those contracts; and
  • impact the operation of security of payment legislation.

On the first issue, the parties would need to issue contractual notices with reference to various purchase orders.  For example, in the event of a delay event occurring which impacts multiple purchase orders a notice would need to be issued to the client with reference each separate purchase order, satisfying all relevant criteria under the umbrella agreement for such a notice.  By way of another example, a dispute between the parties may arise due to non-payment of various purchase orders or defects in goods or services supplied under various purchase orders that may need to be individually pursued using the relevant contractual dispute mechanism.

On the second issue, the security of payment legislation in NSW (and other States and Territories) does not permit a payment claim being served (and adjudication application being made) across multiple contracts.

If there is a clause in the umbrella contract stating that each purchase order will give rise to a new contract, the contractor must submit separate payment claims in relation to each purchase order and pursue separate adjudications on each payment claim.

This was highlighted in a case where Holcim pursued an adjudication application against Acciona for work on the Sydney Light Rail project where some 12,500 purchase orders had been issued.  The New South Wales Supreme Court determined that Holcim’s payment claim which encompassed several purchase orders was not a valid payment claim[2] and Holcim lost out on the benefit of an adjudication determination worth nearly $3M.  In this type of case, the issuing of purchase orders which created separate contracts resulted in commercial and administrative unworkability and prejudiced the subcontractor’s ability to pursue a large adjudication against the head contractor.

Whether or not the umbrella contract should contain a clause which provides that each purchase order issued will give rise to a new contract should be considered on a case-by-case basis.

[1] Both of these risks are discussed in our previous article on Samios Plumbing Pty Ltd v John R Keith (QLD) Pty Ltd [2019] QDC 237.

[2] Acciona v Holcim [2020] NSWSC 1330 at [40].