Civil contractors' legal guide · Civil contractors' legal guide ... and interdependent web of...

Contractors guide to construction law

Civil contractors' legal guide

Civil Contractors Federation - WA Branch70 Verde Dr, Jandakot WA 6164

P: (08) 9414 1486www.ccfwa.com.au

HHG Legal Group Level 1, 16 Parliament Place, West Perth WA 6005

(branches in Albany, Mandurah and Mt Barker)P: 1800 609 945www.hhg.com.au

Civil contractors' legal guide PAGE 3

ContentsIntroduction 4Quality 5Timing 9Payment 14Conclusion 20

This handbook is intended as a practical guide for CCF WA members to use when making decisions about their business. It is a general guide only and should not be regarded as a substitute for legal advice. The information in the document is based on the law as at November 2016.

Civil contractors' legal guideNovember 2016

Civil contractors legal guide

INTRODUCTIONCivil works and construction projects pose unique challenges for contractors and their legal advisors. Perhaps no other industry involves such a complex and interdependent web of contracts between suppliers of materials, plant, equipment, labour and intellectual property, together with the need for careful sequencing and coordination of supplies to site.

The purpose of this guide is to explain in general terms how, in common situations, the law in Western Australia* applies to contractors and to give contractors some tips about how the law may best work to your advantage.

This guide is organised under three main headings that cover most legal issues that arise:• quality;• timing; and• payment.

Throughout this guide the term “principal” refers to the party who has engaged you as contractor to undertake civil or construction works and may include (depending on the context) an owner, head contractor, or subcontractor.

*Most of the legal principles also apply in other jurisdictions.

QUALITYStandard of workmanshipMost standard-form contracts provide that a contractor’s works are to be carried out in a “proper and workmanlike manner”. Different words may be used but the general concept is the same.

Even if the contract does not expressly provide for any standard of workmanship, the common law (that is, the law that develops over time through precedents set by the courts) says that this standard of workmanship is implied into every works contract.

Because it is the contract that sets the standard, the law treats work which falls below this standard as a breach of contract.

Your rights if a subcontractor does defective workUnder the common law, this breach of contract will entitle the contractor’s principal or employer to be compensated for the loss and damage suffered as a result of poor workmanship.

Such loss and damage will usually include one or more of the following:(a) the cost to engage other contractors to rectify the faulty workmanship;(b) the delay and disruption costs incurred while the contractor’s principal or employer waits for those defects to be rectified;(c) if the works are part of a production process (for example, a factory or a power plant), the contractor’s principal or employer may suffer loss of profits as a result of the structure’s loss of productive capacity; and(d) if the contractor is engaged in a landmark project or a project that has received a lot of public attention (for example, Elizabeth Quay and the new Burswood Stadium), the contractor’s principal or employer may suffer loss of reputation.

Traditionally, the law only allowed principals to sue for a sum of money to compensate them for the loss and damage caused by a contractor’s poor workmanship. However, in WA and in some other Australian states, specialist tribunals have been created with the power to order the contractor to go back on site and remedy defects.


Other rights under WA legislationIn WA, the Building Commissioner and the State Administrative Tribunal (SAT) share this power.

However, their power to order rectification of building defects is limited.

Who can deal with defect claims?The Building Commissioner can only order rectification works of a value up to $100,000.

The SAT can only order rectification of defective building works up to a value of $500,000.

If the defects will cost more than $500,000 to rectify, the affected principal or employer must sue for compensation in a court or take the dispute to arbitration (provided that the contract requires or allows arbitration, or the parties agree to refer the dispute to arbitration).

How is compensation for defects worked out?Compensation is generally to be calculated in one of three ways:(a) the cost to bring the standard of workmanship up to a proper and workmanlike standard;(b) the difference between the market value of the works “as is” and the market value the works would have had if they had been done properly; or(c) in extreme cases, where there is no way to make the defective works fit for their intended purpose, the courts may award an amount in compensation reflecting the cost of demolishing and redoing either the affected part of the works or, if necessary, the whole of the works.

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When are experts needed?Judges and lawyers are not experts in how construction work is done and therefore often need the help of expert witnesses, to explain:(a) how the works were done;(b) how the works should have been done, and why;(c) why the works are defective; and(d) what needs to be done to fix the works and bring them up to the required standard.

These experts may include:(a) geotechnical engineers;(b) structural engineers;(c) mechanical/electrical/hydraulic engineers;(d) quantity surveyors/estimators;(e) experienced builders and contractors;(f) property valuers; and(g) forensic accountants.

Obtaining and using expert evidenceThere are strict rules governing which kinds of expert evidence a court can consider in working out whether construction works are defective and what is to be done about it. For this reason, you should not attempt to brief an expert yourself, without first taking legal advice, even in simple cases.

The other reason to avoid briefing an expert yourself is that if a lawyer instructs the expert to express an opinion which contains information you do not want disclosed or which turns out not to be helpful to your case, then is protected that report from being disclosed to the other side. This is because of a special duty of confidentiality that your lawyer owes to you, called lawyer-client privilege. Privilege is like a bond of secrecy, whereby communications which take place between you and your lawyer and in some cases, your lawyer and third parties on your behalf, are never to be seen by anyone else (including a court or tribunal). You may not have any right of privilege if you instruct an expert directly, rather than through a lawyer.

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Time limits for defect claimsMost but not all claims arising from faulty or defective workmanship must be made within a certain period of time. Otherwise, they become barred by statutes of limitation. In most cases, these claims need to be made within six years of the date of practical completion of the works that are said to be defective.

There is one important exception to this rule. This exception applies in particular to earthworks contractors, which are more likely than most other kinds of contractor to encounter latent conditions under the ground. That exception specifically concerns latent defects, that is, defects which at the time of practical completion and for some time afterwards, are hidden from plain view and only show up later. Common examples include:(a) excessive settlement of building foundations laid on poorly compacted ground;(b) more civil-oriented works: eg, incorrect levels, excavation fault, water table engineering;(c) damage to concrete and other porous structures caused by moisture ingress;(d) rusting of ungalvanised metal components under the surface of a structure;(e) slow leakage of chemicals and contaminants from components of mechanical parts; and(f) termite damage.

Such defects may not show any signs for many years after the works have been practically completed. In these circumstances, the six-year period that the principal has in which to take legal action for defective workmanship against the contractor starts to run from the time when the defect was or should have become known to the principal.

For example, in a recent case a principal took legal action about 15 years after the affected structure had reached practical completion in Brookfield Multiplex Ltd (ACN 008687063) v Owners Corporation Strata Plan 61288 [2014] HCA 36.

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TIMINGBasic principlesThere are two basic principles to remember about timing:(a) time is virtually always of the essence of a construction or works contract; and(b) the contractor almost always takes the risk of liability for delayed completion of works.

Interesting legal implications flow from these two basic principles.

Implication: time bars apply strictlyThe first legal implication is that the agreed time for completion or date of completion is generally fixed unless it is varied by agreement.

Watch out, because in most construction and works contracts, including the Australian Standard forms of contract, strict time limits apply to the steps that need to be taken for a contractor to claim and be granted an extension of the time to completion.

There is a reason for this: the head contractor and superintendent need to be notified as soon as possible of any event that is likely to delay the works, so that they can notify their principal (and so on, up the contractual chain) and take necessary steps to avoid or minimise any resulting loss or damage.

Changes to the Australian Consumer Law (found in Schedule 2 of the Competition and Consumer Act 2010 (Cth)) that took effect on 12 November 2016 may make it harder for principals to impose time bars on contractors that are not reasonably unnecessary to protect the principal’s commercial interests.

Courts are generally reluctant to allow contractors to have more time to complete the works if they do not comply with those requirements strictly.

Avoiding time barring through back-to-back contractingBecause it is so important for notice of events causing or likely to cause delay to be given promptly by each party up the chain of contracts, proper back to back delay and timing clauses are essential. This is sometimes dealt with in standard form subcontracts by a clause to the effect that the subcontract is to have the same effect as the head contract except:

(a) every time the word “principal” is used in the head contract, it is to be substituted with the word “head contractor”; and

(b) every time the word “contractor” is used in the head contract, it is to be substituted with the word “subcontractor”.

These sorts of provisions will often not work in practice.

Here is a simple case study, to illustrate the point:

The principal (‘A’) engages the head contractor (‘B’) to build a power station. The head contractor (‘B’) in turn engages subcontractor (‘C’) to perform earthworks.

Under the head contract, B has to notify A of events that have caused or are likely to cause a delay in the performance of B’s works (which include C’s earthworks).

The subcontract simply provides for all of A’s rights and obligations under the head contract to apply to B and for all of B’s rights and obligations under the head contract to apply to C.

It follows that C has the same notice obligations to B, regarding qualifying causes of delay, as B has to A, under the head contract.

This means that C must notify B and B must notify A, of a delay event, within 28 days after it happens.

What happens, then, if C waits until the end of the 28th day after a particular delay event to notify B of it? In that event, B will have no time at all left to give the same notice to A. It will follow that B, perhaps through no fault of its own, may be in breach of its notice requirement under the head contract.

Careful back-to-backing will take account of this by, in this example, giving C only 14 days from the date of a delay event, to give the required notice to B.

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Liquidated damages: introductionIt is generally quite easy for a head contractor or principal to get compensation for loss or damage caused by delayed completion of construction works, absent any agreed variation or extension of time.

However, working out the amount of compensation owing to a principal for losses caused by delayed completion of works, and proving which particular delay event caused which particular delay, is usually fraught with difficulty and very expensive.

To get around this, lawyers have developed a concept called “liquidated damages”. Liquidated damages can be recovered under construction contracts as compensation at a pre-agreed fixed rate for delayed completion of works.

Liquidated damages are an effective way to avoid much of the complication and expense otherwise involved in proving precisely how much the principal has lost as a result of the contractor’s delayed completion and precisely which events caused what faults of the overall delays.

Contractors should be aware that under many of the Australian Standard forms of contract, contractors are subject to unlimited liability including on account of liquidated damages. You should seek legal advice to help contain and manage this exposure.

As effective as they are, liquidated damages provisions are also vulnerable to being challenged in the courts as unenforceable. There are two reasons for this:(a) the doctrine of penalties; and(b) the prevention principle.

Liquidated damages and the doctrine of penalitiesThe doctrine of penalties basically says that contracting parties are not free to impose penalties for breaches of contract and are only able to agree compensation that does not penalise or punish either party. Principals should not be allowed to constantly recover a windfall from the contractor’s breach.

The purpose of the liquidated damages clause is to save the parties (and taxpayers) the time and expense that would otherwise be involved in

TIMING

proving in court how much per day the principal has lost as a result of the contractor’s delays. Because of this, the rate of liquidated damages must represent a genuine pre-estimate of the loss that the principal expected to suffer as a result of the contractor’s delays, at the time when they made the contract with the contractor.

Liquidated damages are not to be used to punish the contractor or to give for the principal a windfall gain.

Liquidated damages and the prevention principleA liquidated damages clause may also be unenforceable because of the prevention principle. The prevention principle applies when the principal has done something or failed to do something that has caused part or all of the contractor’s delay in completing its scope of works.

If the principal prevents the contractor from completing its scope of works on time (even if what the principal has done or not done has only contributed in a minor way to the overall delay), then the principal cannot recover any liquidated damages for that delay at all.

Overcoming the prevention principle through extension of timeThere is an exception to this rule, based on extensions of time. Basically, the courts have said that if:(a) completion of works is delayed; and (b) the principal has caused or contributed to that delay; but(c) the principal has extended the time for completion (whether by granting an application for an extension of time by the contractor or of the principal’s own initiative); and(d) that extension of time is enough to cover the whole of the delay that was caused by the principal,

then, for any additional delay over and above the extended time for completion, the contractor remains liable to pay liquidated damages to the principal.

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If no extension of time, or an insufficient extension of time, is granted to the contractor, then the liquidated damages clause will fail in its entirety and the principal will be left to prove its losses, in a court or arbitration.

Causation issuesDifficult causation issues can arise in establishing each party’s contribution to a delay event and, where there are several overlapping delay events, which events caused which particular delays. However, most contracts do provide a way to deal with these issues.

Whether and how the contractual provisions apply will depend on the precise circumstances of any delay event. You should seek legal advice about how the contract provisions apply and how to deal with causation issues arising from a delay event.

What if the principal has prolonged the contractor’s works?There may be occasions where it is the contractor, rather than the principal, that is entitled to be compensated for the delayed progress of its works. This kind of compensation, which is also based on a breach of the construction contract, is often known as “prolongation costs”.

Where “prolongation costs” are available to a contractor, it is generally because the principal has engaged the contractor’s services without first ensuring that site was ready to receive the contractor’s work. In that event, the contractor may have to pay for plant and equipment hire, labour hire, wages, salaries, overheads etc., during idle time, which is obviously unproductive to the contractor.

Many construction contracts provide for the contractor to be compensated in these circumstances and the obligation to pay compensation may be implied into the contract, if it is not expressly provided.

Contractors who believe they may be entitled to prolongation costs should seek legal advice.

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PAYMENTBasic principle: the right to be paid what your work is worth and lump sum contractA contractor is entitled to be paid for the works that they carry out for the principal:(a) where the principal agrees to pay a certain sum of money to the contractor for a specified scope of work; or(b) where a contractor does work on behalf of a principal and the principal freely accepts that work (in the sense that they have an opportunity to reject it but do not reject it).

Some of the most common payment regimes for civil works or construction projects include lump sum contracts, schedules of rates, cost-plus or a combination of these.

In this guide we will focus on lump sum contracts. You should seek advice on the most advantageous contract payment regime for your business.

Implications of basic principlesProgress payments in lump sum contracts are interim payments on account only. They are not payments that the contractor earns where only part of the works under the contract are complete. Progress payments are only payable to the contractor at certain intervals while the work is still being done, to ensure that the contractor has enough money to continue doing its job.

However, if something goes wrong, the contractor is not guaranteed the right to keep those payments because they are not parts of the lump sum contract price but payments payable only under the contract. The only payment that the contractor actually earns for carrying out its works under the contract is the final payment, due upon practical or substantial completion of the whole of the scope of works (and which takes into account progress payments made “on account” to that point). Because of this, if the contract no longer allows the contractor to be paid for its works before practical completion (and there are several reasons why this might happen), the contractor will no longer be entitled to payment of the lump sum contract price unless the contractor can find another basis in law for payment.


Where this happens, the contractor may be entitled to the fair value of the work that it has done rather than the amount that the contract said would be payable upon practical completion (which was never achieved). This fair value amount may be more or less than the agreed lump sum contract price. Usually, expert evidence is required to help the court work out this amount.

Under the law as it is right now, a contractor can only recover the fair value of the work that they have done up to the point where the construction contract has failed, if that failure was not the contractor’s fault. So, for example, if a contractor cannot for whatever reason finish the job that they have started, and the principal then terminates the contract so that it no longer gives the contractor a right to be paid for the work that they have done, the contractor cannot make a “fair value” claim for that work.

Daniel Morris, a Senior Associate and Construction Law Expert at HHG Legal Group, has published an authoritative paper that argues that even where the contractor is at fault, they may still be entitled to be paid the fair value for the work that they have done. Until the High Court definitively determines this issue in a specific case, the law in this area will remain uncertain.

Varying the lump sum contractAnother reason why it is important to understand that only one contract price is paid for only one scope of works is that this affects how the law deals with variations. Contractors often try to take legal action against their principals for failure to pay extra on account of variation works. However, a variation in itself is not a legal basis for a contractor to be paid. Rather, the effect of a variation, if it is made in accordance with the contract, is:(a) to change the contractor’s scope of works; and(b) to change the lump sum contract price that is payable upon practical completion of those works.

Where the contractor says it has been underpaid because of variations to the work scope and contract price, this means that the contractor’s claim for extra payment will not succeed unless the contractor can prove that:(a) it has completed or practically completed the whole of the contractual scope of works as varied; and(b) it has not been paid the whole of the lump sum contract price as varied.

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Why contractors are vulnerable under lump sum contactsThere is an important implication to the fact that ordinarily only one lump sum contract price is payable when one contractual scope of works is practically complete. That is, contractors often rely on the goodwill of their principals to make sure that they are paid adequately along the way, so that they have enough money to finish their work. This makes contractors vulnerable, particularly where:(a) strict time bars apply to progress payment claims; and(b) a contractor’s entitlement to a progress payment depends on certification of a payment claim by a superintendent which is employed also as the agent for the principal.

Changes to the Australian Consumer Law which took effect on 12 November 2015 may be used to overcome time bars, notice and certification processes that are unnecessarily complicated, strict, or onerous in a way that is not necessary to protect the principal’s commercial interests.

Protecting contractors’ payment rights: security of payment legislationTo try and prevent principals from exploiting contractors’ vulnerability, security of payment legislation was enacted around the country.

In WA, that legislation appears in the Construction Contracts Act 2004 (“the Act”).

The Act empowers decision-makers called adjudicators to review decisions made by principals and their superintendents, in relation to contractors’ payment claims, during the course of, and after completion of, construction works. If the adjudicator determines that the payment claim was not dealt with as the contract requires, then they can substitute their own decision for the decision of the principal or superintendent, as to whether and in what amount a progress claim is payable.

In WA, the adjudicator cannot look outside the contract for a basis to award a payment to a contractor. Their only role is to enforce the contractual payment regime.

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Adjudications can mean the difference between a contractor becoming insolvent and them having enough money to complete the works under their contract. It is therefore very important for contractors to be aware of their rights to apply for adjudication under security of payment legislation.

Strict time limits apply in adjudicationsAt present, contractors (and principals) only have 28 days from when a payment dispute arises to apply for adjudication of that payment dispute. Once that 28-day period ends, so does the right to adjudicate a payment dispute under the Act.

It is not always clear, and depends on the precise facts of each case, when exactly a payment dispute arises. Therefore, as soon as a contractor has any indication whatsoever that a principal is not going to pay on time, or as soon as the contractual payment term has expired (whichever is earlier), the contractor should take legal advice about its right to adjudicate.

Parliament is debating changes to the Act that will give a contractor 90 working days (18 calendar weeks plus any public holidays) to apply for adjudication. The proposed changes are due to take effect on 15 December 2016. However, this date is not set in stone and contractors are advised not to take the proposed changes, or their timing, for granted until they actually become law. Until then, the deadline for applying for adjudication will remain 28 days.

Adjudicators’ determinations are not final but they are bindingThe adjudicator’s decision is not final and binding on the parties but it is still enforceable. This means that:(a) if the adjudicator makes a payment award in the contractor’s favour and the principal still does not pay the amount of that award (or any part of it), the contractor can, with the Supreme Court’s permission, enforce the award in the courts in the same way as it would enforce any judgment of a court; however(b) if there are other issues to be decided between the contractor and the principal or if the contractor is simply not happy with the adjudicator’s

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decision, the contractor still has the same rights in relation to arbitration and litigation in a court, as if there had been no adjudication. Neither party is allowed to rely on the result of an adjudication, or even the fact that there has been an adjudication, in any court or arbitration. The whole issue is determined afresh.

Other legal grounds to get paid for the work you do under a construction contractIf for some reason, you lose all your rights to payment under the contract, the law recognises other grounds for payment, which include:(a) restitution;(b) implied promise; and(c) estoppel.

These legal doctrines are beyond the scope of this guide.

The important thing to remember is that, however well you know your own contract, there may still be other payment rights that you have, but do not know about. Whatever the circumstances, if you have not been paid what your work is worth, you should take our advice about your payment rights.

Use the Personal Property Securities Act to protect yourself against your principal’s insolvencyOf course, all the payment rights in the world will mean nothing to you if the principal or head contractor that owes you the money is insolvent and unable to pay you. Beyond conducting some basic checks into your principal’s credit-worthiness before accepting a contract from it or having a good working relationship with your principal, there is nothing you can do to ensure the future financial viability of your principal. Fortunately, though, there is a way that you can protect your rights to payment, in the event of your principal’s insolvency, to some extent.

You can do this by establishing a system for the proper and timely registration of what are known as Personal Property Security Interests on the Personal Property Securities Register. These security interests basically give you a right to take back your own property from an insolvent head

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contractor’s or principal’s site and to take back material which you have delivered to site but have not been paid for at the time of the insolvency. This right to take back materials extends to the proceeds of the sale of that material by your principal, even ‘if’ the material itself can no longer be taken back because it has been incorporated into the construction works.

If you do not register security interests in relation to your own plant, equipment and materials on a construction site (and its proceeds), then in the event of your principal’s insolvency, the liquidator of that principal may be entitled to seize your property, sell it and pay the proceeds to other creditors of the insolvent principal.

Please note that the liquidator can seize and sell your property and pay the proceeds to other creditors of the insolvent principal, even though you own those assets.

This is because ownership no longer matters, as a result of the Personal Property Securities Act 2009. As long as your assets are in the insolvent principal’s possession, if another creditor has registered their Personal Property Security Interests properly and you have not done so, that other creditor may take the proceeds of the sale of your property.

It is therefore very important that you take advice about the proper use of Personal Property Security registrations to protect your assets in the event of your head contractor’s or principal’s insolvency.

HHG serving the construction industry through law reformHHG Legal Group is investigating and assisting the WA Building Commissioner to inquire into and implement law reforms which will further protect contractors’ rights to payment for the work that they do.

HHG Legal Group will keep the construction industry informed of developments in relation to these initiatives, designed to make sure that construction contractors get paid what their work is worth.

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CONCLUSIONConstruction law is a rich and varied area of the law and can become complex, despite being based on very simple general principles, relating to the quality and timing of construction work and the contractor’s right to be paid for it.

This booklet is intended as a general guide to Civil Contractors Federation members only, courtesy of HHG Legal Group. It should not be relied on as comprehensive advice, covering every conceivable circumstance that may arise in the course of a construction project.

For example, we have barely even scratched the surface of the issues that can arise, where it is sought to vary the contractual work scope or contract price, which often involves various steps, including:(a) the principal’s direction;(b) the contractor’s quotation for the directed variation;(c) the principal’s assessment and certification of the quoted contract price adjustments;(d) the making of a payment claim for a progress payment, as adjusted or varied;(e) dispute resolution, where the variation scope or variation price adjustment is contested.

Whilst our intention was to provide general guidance to the industry in relation to at least the most common circumstances that tend to arise in the course of a typical construction project, our ability to do so has been limited, because of the infinite variety of circumstances that might potentially arise, and possible legal solutions to any particular situation.

For this reason, the best advice that we can give in a guide like this is to understand the importance of taking good, expert and early legal advice before you make any decisions which might affect:(a) your right to be paid;(b) your exposure to liability for any defect in your own works or another contractor’s works; or(c) your exposure to liability for delayed completion of your works.


HHG Legal Group’s specialist service offering to civil contractorsWe at HHG Legal Group have the expertise, experience and passion to provide such specialist assistance to our fellow CCF WA members.

For more information, please do not hesitate to contact Murray Thornhill, Director on (08) 9322 1966 or 0402 782 802 or Daniel Morris, Senior Associate on (08) 9322 1966 or 0419 390 076.

HHG Legal Group looks forward to a long and fruitful relationship with each and every one of you.


NOTES

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