Business Law Articles
By Murray Thornhill, Director & Daniel Morris Special Counsel
HHG Legal Group
West Perth, Australia
For small businesses looking to enter the construction market, the hurdles can appear insurmountable. How can a small to medium sized company contend with the buying power, connections and reach of international Goliaths? Should we rely on commercial enterprise to self-regulate the market or do we seek our government’s intervention?
International markets have achieved a self-regulated balance in the construction industry through well established contract suites, such as NEC and FIDIC. On the other hand, Australia predominantly relies on a domestic contract suite called the Australian Standards (AS).
In 2016 Australia’s Federal and State Governments have sought to empower small businesses through legislative change. The new legislation, which has been incorporated into the Australian Consumer Law, focuses on limiting the ability of the corporate giants to strong arm small businesses into accepting unfair and unreasonable terms and to provide an avenue for them to fight for a more balanced contract.
This article looks at the most popular standard form contracts being used by the international construction community, compared to what is being used domestically in Australia.
What are the NEC and FIDIC contract suites?
NEC and FIDIC contract suites are two of the most popular contract packages in the world, offering contracting parties a wide range of standard form contracts for projects of varying complexity.
FIDIC is often hailed as the ‘traditional contract suite’ and is favoured by large corporations, including financial institutions. It adopts a more adversarial approach to contracting and its provisions have been judicially considered and elucidated in many case authorities.
The NEC contract suite continues to gain popularity throughout the world. It offers simple, non-legal language and promotes a collaborative approach to project management. This style of contracting requires all contracting parties to participate actively in the delivery of the works, relying on early warning notifications and resolving issues before they become disputes. In Australia, proposals to introduce a similar degree of collaboration and a similar early warning procedure in the AS 11000 suite of contracts were shelved after being met with extensive resistance from industry stakeholders.
NEC contracts are used by the UK Government for its projects and recently, the suite has been adopted by the Honk Kong Government as the contracting package for all its government projects. It is also recommended by the South African Construction Industry Development Board for its public sector works.
Both FIDIC and NEC are supported with user guidelines, including claim flowcharts. At the same time, the packages allow the parties flexibility to incorporate project specific requirements, including risk allocation, changes in law and payment process.
The result is greater certainty and a reduction in disputes arising out of miscommunication between parties, particularly where there is a power imbalance.
What is the Australian Standard contract suite?
AS contracts are an Australian based standard form contract suite and operate generally as other standard form contracts do. However, AS contracts are rarely used in their standard form. In practice they are heavily amended by their users.
This level of flexibility can be very advantageous for some contracting parties but at what cost? The benefits gained by using a familiar form of contract are generally lost as the contract no longer resembles its standard form and can introduce a much higher level of uncertainty for the parties.
In our experience, the areas in which construction contracts are most frequently amended often by imposition from the party with a bargaining advantage and which therefore present the greatest degree of uncertainty to contracting parties, include:
payment, including security;
time, including time bars, variations and delay damages;
site conditions and warranties; and
limitation of liability.
Have the legislative changes introduced a greater degree of certainty in these areas?
The legislative changes: what are they?
To correct the perceived imbalances in the market the Australian Government made (or are considering) changes to the following:
Competition and Consumer Act 2010 (Cth) (Act)
Construction Contracts Act 2005 (WA) (CCA);
Code for the Tendering and Performance of Building Work 2016 (Cth); and
Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill.
The changes included in the Act extend the rights and protections the Government normally reserved for individual consumers to small businesses. The purpose behind these changes is to recognise that small businesses, especially those in the construction industry, can be just as powerless in a negotiation room as an individual consumer.
The new provision in the CCA change the landscape for adjudicating payment disputes between parties and extends the timeframe for the parties to make claims up to 90 business days (far longer than the previous 28 days).
Below are the six of the more contentious provisions found in construction contract which are likely to be impacted by these changes:
Termination for convenience without reciprocal compensation or notice
A contractor typically has to spend a lot of time and money tendering for and then mobilising to commence a construction project. For a principal or head contractor to take the benefit of that expenditure and simply dismiss the contractor from site, without reasonable cause, compensation or notice, would, in our view, very likely attract the court’s censure.
Time bars that do not reasonably reflect upward obligations
The courts continue to reaffirm the importance and reasonableness of time bars under construction contracts, with respect to extension of time and price variation claims.
This does not mean that short timeframes for time barring claim will be classed as unfair. It will focus on ensuring where head contract has a long notification timeframe, that benefit is transferred down the contracting chain.
Prior works liabilities
We expect it to become more difficult in most cases for a contractor to justify to a court, why it would hold a sub-contractor liable to rectify or to compensate for a defect in works that were undertaken by another sub-contractor, prior to the liable sub-contractor’s commencement of their own works.
In other words, if you did not do the defective work yourself, why should you be exposed to liability for their defective state? Despite the inherent unfairness in imposing such a requirement on sub-contractors in most circumstances, this kind of provision sometimes appears in sub-contracts for major works.
Bad progress payment profiles
The rates of progress payments should in general reasonably reflect the proportion of total expenditure that the contractor expects to incur, at each point in the life of the project.
Unnecessarily complex notice provisions
The courts have consistently regarded it as reasonable to require a contractor, to provide information that is reasonably necessary to enable the parties sitting above them in the contractual chain, to make certain adjustments and decisions based on that information. However, if a construction contract imposes an obligation on a contractor to notify facts or circumstances that do not appear necessary to enable those that sit above the contractor to make relevant decisions or adjustments, then this may be regarded as unfair.
Unfair exclusions of liability
Finally, if your contract unreasonably excludes your entitlement to take action against your head contractor or principal for disruption or prolongation of your works, where this has resulted from the head contractor’s failure, for example, to manage the site or the project properly, we expect that in some cases, this will be considered unfair.
So are these legislative interventions necessary? Do the above issues align with the amendments normally sought through contract negotiations in the market? Or does the market self-regulate through these amendments? The usefulness of these legislative changes will become evident over time but in the meantime Australian contractors and those doing business in Australia should more readily adopt the best form and not automatically adopt the AS domestic forms if another form is better suited to the circumstances and better takes account of the issues the legislative changes seek to address.
Recognising the need to reform the AS contracts, the responsible body Standards Australia has attempted to introduce concepts of early warning and collaborative contracting in the proposed AS 11000 suite. However, following widespread resistance from conservative industry stakeholders, the proposed reforms have for the moment, been shelved.