With the new BIFSOPA reforms in QLD now in force, recent changes to the NSW SOP Act and several recent Supreme Court decisions changing the law regarding security and extension of time clauses (Growthbuilt), principals working in QLD and NSW must update themselves on what contract amendments best protect their risk position.
This article summarises what we see as the ten most essential amendments principals should implement into their standard form AS4902 head contracts.
- Conversion of security
In light of Saipem v GLNG, amend clause 5.2 recourse to security as follows:
- allow recourse to security for any amount “claimed to be” due as distinct from “amounts unpaid after the time for payment”;
- allow recourse to security for unliquidated amounts;
- include a statement to the effect that the purpose of the security is to allocate to the contractor the risk of being out-of-pocket in the event of the parties’ dispute as to the Principal’s entitlement to recourse;
- allow security to be converted “immediately” following the provision of notice;
- ensure the clause survives termination of the contract.
If the contract is drafted in accordance with the above, it will be extremely difficult for a contractor to obtain an injunction to restrain the Principal from having recourse to security.
The above amendments will also ensure that a principal can, in effect, immediately convert security after receiving an unfavourable adjudication decision. In Fabtech v Laing O’Rourke, the Court held this strategy was legally acceptable. Principals should set-off monies owing under progress claims and keep the security alive to negate an adverse adjudication decision. To do this, you will need to ensure you have a wide right to set-off (see point 7 below for our discussion on this).
- Other Agreements
Include a clause which provides that the Contractor in carrying out the works will ensure that it will not place the Principal in breach or default of any ‘other agreements’ which the Principal has entered into (for example, any AFLs with retail tenancies or sales contracts for residential units). Include an indemnity from the Contractor for any consequential loss (i.e. loss of profit or rent) suffered by the Principal.
- Termination for convenience
Ensuring that:
- a termination for convenience clause exists; and
- any termination for convenience clause survives termination.
This provides commercial flexibility to the Principal by permitting it to terminate the contract for any reason and regardless of the contractor’s performance in the unlikely circumstance of an unforeseen event that may result in the project becoming economically unviable.
- Release at PC and FC
Require a signed deed of release as a precondition to:
- the Contractor achieving PC; and
- release of PC and FC security.
This will prevent any unexpected ambush claims from a contractor after PC. In QLD, you can amend the reference date clause in the contract to limit reference dates accruing between PC and FC: Tailored Projects v Jedfire.
However, recent changes to the NSW Act removed the concept of a reference date. Instead, they introduced a statutory right for a claimant to lodge one payment claim per month for work carried out up to the last day of the month. This means that in NSW, it is no longer possible to limit the accrual of reference dates under a construction contract. This change emphasises the importance for a principal in NSW to require a deed of release as a precondition to PC to stop unwanted claims after PC.
- How to ensure your Time Bar is Valid
Last week, in Growthbuilt Pty Ltd v Modern Touch Marble, the Supreme Court of NSW held that there is no room for a reasonableness or good faith obligation to be imposed on a Superintendent in deciding whether to award an EOT in circumstances where the contract expressly states:
- that the Superintendent’s unilateral power to grant an EOT is in its “sole and absolute discretion”;
- that power is only for the benefit of the Principal; and
- there is no obligation imposed on the Superintendent to exercise or consider whether to exercise that power.
Growthbuilt has now confirmed that these amendments will ensure that an adjudicator or court cannot exercise the Superintendent’s discretion (known as the reserve power) in favour of a contractor to award time-barred EOT claims.
- Liquidated Damages
Exclude the operation of the prevention principle as an additional safeguard of the entitlement to liquidated damages. If a contractor does not lodge an EOT on time and the Superintendent rejects it, the Principal can apply liquidated damages even if it is alleged that the Principal was the cause of the contractors delay (per CMA Assets v John Holland).
- 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 claim certified by the Superintendent or a single project. The decision in Hutchinson v Glavcom taught us that without a clear right of set-off in the contract, an adjudicator cannot consider or determine a deduction of monies for liquidated damages or defects.
- EOT amendments to defend delay claims
Amend your EOT clause so that as a precondition to an EOT, the contractor must demonstrate that the alleged qualifying cause of delay:
- has impacted the critical path as shown on a revised construction programme, including clearly identifying any concurrent delays; and
- will prevent practical being achieved by the date for practical completion.
This puts the contractual onus on the contractor to demonstrate that:
- the delay is attributable to the Principal and has actually impacted the contractor’s ability to complete the works by the date for practical completion;
- the contractor has no available float in its programme; and
- there are no concurrent non-qualifying delays within the period that the EOT is claimed.
- Amend your delay costs clause
Remove the unamended words “time-related costs” from clause 36.2 referring to costs and amend clause 34.9 to state that clause 34.9 is the sole source of the contractor’s entitlement to costs in connection with delay or disruption.
This will shut down any attempt by a contractor to characterise delay costs claims as ‘time-related costs’ under a variation claim to avoid the limitations and preconditions imposed by clause 34.9.
- Amend Clause 42.1!
Clause 41.2 of the unamended Australian standard states:
“The failure of a party to comply with the provisions of subclause 41.1 or to communicate a claim in accordance with the relevant provisions of the Contract, shall, inter alia, entitle the other party to damages for breach of Contract but shall neither bar nor invalidate the claim.”
Most principal amended AS4902 contracts will contain valid time-bars in clause 34 (EOTs) and clause 36 (variations); however, clause 41 (Notification of claims) is often forgotten about and left unamended. By leaving clause 41.2 unamended, a contractor will argue that on a proper construction of the contract, no time bar is imposed in the contract, and the Superintendent is obliged to consider all EOT claims regardless of when they were submitted.
- Warranties to a Body Corporate or Subsequent Purchaser
As a consequence of the Multiplex Case, if latent defects arise years after construction, a body corporate or subsequent purchaser is unable to sue the contractor or Principal in negligence for damages to rectify those defects. The NSW Government has responded by enacting the Design and Building Practitioners Act 2020 (NSW) which imposes an automatic duty on all persons who carry out construction work, to exercise reasonable care to avoid economic loss caused by defects in or related to a building.
In Queensland, there are:
- statutory warranties under the QBCC;
- a principal’s contractual rights against the contractor are subrogated to body corporate under the Body Corporate and Community Management Act 1997 (Qld).
However, these avenues for recourse expire after six years from practical completion. We have another way that principals can protect their reputation and protect owners corporations and subsequent purchasers from economic harm as a result of latent defects discovered after six years.
We recommend principals require the contractor to execute a deed of warranty annexed to the contract with the body corporate or subsequent purchaser as a precondition to release of final security at the expiry of the defects liability period.
This deed should contain a warranty from the contractor that the building will be free from defects and have a stipulated design life (i.e. 30 years). The advantage of a deed is that the time period in which a claim can be brought for a breach of the deed is 12 years. This means that if a latent defect causes a body corporate or subsequent purchase economic harm within 12 years of the date of the deed, it may sue the contractor to recover the damage under the deed.
Key contacts:
