2017 saw an increase in the rate of contractor default and insolvency as market and regulatory conditions continue to tighten, culminating in the introduction of the Building Industry Fairness (Security of Payment) Act 2017 (BIFSOPA) and project bank accounts. It has become increasingly important for developers to update their construction contracts to keep pace with changes in legislation and case law. Some of those changes include:
Security
Amending the conversion of security clause in standard contracts:
- to allow security to be converted “immediately” following the provision of notice;
- to allow conversion for any amount “claimed to be” due; and
- to survive termination,
so that recourse to security is as broad as possible and not limited to claims certified by the superintendent, so as to minimise a right to an injunction.
Termination for convenience
Ensuring that:
- a termination for convenience clause exists; and
- any termination for convenience clause survives termination.
This will allow a principal to terminate for any reason, including without fault and limit any future BIFSOPA claims.
This is particularly important in view of reforms to the Corporations Act 2001 (Cth) taking effect from 1 July 2018, which will render ineffective any clauses in a construction contract that allows a party to terminate in the event that the counterparty becomes insolvent, has a managing controller appointed, or goes into administration.
Keep in mind that it is likely that the BIFSOPA will legislate a final reference date to exist after any termination, which will be the date of termination.
Adjudication Decisions
Amending the contracts per paragraph 1 to ensure a developer can, in effect, immediately convert security after receiving an unfavorable adjudication decision. This strategy can negate an adverse adjudication decision. To achieve this, the developer will need to set-off monies owing from progress claims and keep the security alive.
Preconditions to Payment
Obtain legal advice on the validity of any preconditions on the right to lodge a payment claim, or to reference dates arising (for example, the provision of a statutory declaration or other documentation required to assess the claim). Preconditions as to the validity of a claim or a reference date under BCIPA will be normally be invalid.
Release at PC
Requiring a signed deed of release as a precondition to a contractor achieving PC and FC, to prevent contractors from lodging an adjudication application after PC.
Time Bars
Amend the contract so that the superintendent has the right to grant EOTs at the superintendent’s absolute discretion (whilst being under no obligation) so that an adjudicator or court cannot exercise discretion (of the superintendent) in favour of the contractor to award time-barred EOT claims.
Liquidated Damages
Excluding the operation of the prevention principle, as an additional safeguard of the developer’s entitlement to liquidated damages. This means that if a contractor does not lodge an EOT on time and the superintendent rejects it, the developer can apply liquidated damages even if they have caused the delay.
Warranties
Protect and define the parties’ rights (especially those belonging to Body Corporates, lessees and subsequent purchasers) and liabilities in relation to pure economic loss for latent defects, by requiring the contractor to provide a warranty in their favour at PC. This is important because subsequent purchasers and tenants are unlikely to be able to sue the builder in negligence for economic loss.
Claims after PC
Amending the reference date clause in the contract so there are no reference dates between PC and FC and so no right to lodge an adjudication after PC, other than at FC.
Set off
Amend the set off clause to:
- include amounts “claimed” to be due;
- include monies owing under other contracts between the parties; and
- to survive termination.
This gives a wider right to set off any “claimed” amounts which is not restricted to a developer’s claim certified by the superintendent or a single project.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader’s specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.
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