Building, Construction and Procurement - Cautionary Tales

Tale No. 1

The Bartier Perry Building and Construction team was recently engaged by a New South Wales local council regarding a possible claim against a consultant providing design services for the construction of a public access facility.

Facts

Council invited tender submissions for design services including for the construction of a new public facility.

The design scope required the consultant to provide an options analysis with more than one design option to be submitted.

The contract stated that the design must minimise the health and safety risk to construction, operation, maintenance and service workers and all other users of the facility. This clearly included members of the public.

The contract also stated that the consultant must identify, assess and, where practicable, eliminate all reasonably foreseeable hazards and risks to the health and safety of all those who may use, maintain or repair the facility.

Issue

Designs were submitted by the successful consultant and a preferred design agreed on. The consultant prepared ‘For Construction’ drawings which were then issued by Council to the successful construction contractor.

Some months into construction, work was suspended when it became apparent that the design created a step hazard which presented a safety risk for anyone using, maintaining or servicing the facility.

Following an on-site inspection, review of the consultant’s design and a reconciliation of the design scope against the design, Council determined that:

• the consultant’s design failed to address safe management, maintenance, use and operation of the completed facility

• the consultant had failed to produce a design that minimised the risk to the health and welfare of construction, operation, maintenance and service workers and all other users of the facility

• the consultant had failed to exercise due skill and care in the preparation of the design.

Council further determined that the step hazard was a reasonably foreseeable risk to the health and safety of users of the facility.

Action taken

Working closely with Council’s project manager, Bartier Perry prepared a detailed letter of demand which:

• clearly set out the basis of Council’s claim, relying on the terms of the contract and the common law

• referred to the numerous ‘For Construction’ drawings prepared by the consultant

• set out the loss suffered by Council, which included additional costs incurred in the redesign of the asset, delay costs paid to the construction contractor, modification of materials already delivered to site and additional costs in retrospectively overcoming the step hazard.

Council demanded payment of loss and damage suffered, which included redesign of the facility, additional design costs to overcome the trip hazard, construction contractor’s delay, and modification of materials already ordered and delivered to site.

Result

Council received a settlement of 74% of its claimed amount without the need for formal legal proceedings.

Why does council need to know this?

When entering into an agreement for design or any other services, Council relies on the expertise of the consultant.

It is vital that the contract clearly and precisely defines not only the design scope stated or inferred from the project requirements, but also any responsibilities, obligations or warranties in relation to the design services which Council wishes the consultant to assume.

These may include that the consultant provide a design which is not only fit for purpose but that meets other requirements such as:

• health and safety requirements contained in WHS legislation

• all other legislative requirements

• Council’s policies (if so they should be annexed to the contract)

• all environmental requirements.

Furthermore, the consultant must carry out the design so that the related construction work will also comply with these requirements. The importance of this cannot be overstated. 

Time spent ensuring the contract reflects Council’s appetite for risk and narrows the scope for dispute often, as in this case, provides a smoother and easier path to resolution.

Tale No. 2

The Bartier Perry Building and Construction team was recently engaged by a subcontractor to help recover outstanding rental fees for equipment supplied to a construction contractor.

Facts

An equipment hire contractor entered into a contract with a construction contractor in which the hire contractor undertook to supply specialised hydraulic lifting equipment for a high-rise commercial construction project.

Issue

Partway through the contract, the builder alleged that the equipment was defective and stopped making the monthly hire payments. Yet the builder appeared to continue using the equipment.

At the end of the project the equipment was demobilised and returned to the hire contractor, as required by the contract. However, payment of the outstanding rental invoices were not made.

Action taken

Even though the hire contractor had issued monthly invoices to the builder for the hire fee, it had not issued a progress claim under the Building and Construction Industry Security of Payment (SOP) legislation.

After the return of the equipment, the hire contractor issued a progress claim under the SOP Act on the next ‘reference date’.

The SOP progress claim, which included the previously issued invoices, was served on the builder by fax, a permitted method under the construction contract.

The hire contractor expected to receive a payment schedule from the builder rejecting the progress claim and had determined to make an application for adjudication of the dispute under the SOP Act.

However, after 10 business days had passed the builder had not provided a payment schedule.

The SOP Act (section 15) provides that by not providing a payment schedule replying to the progress claim, the builder became liable to pay the amount claimed by the hire contractor in its progress claim.

The SOP Act also provides that if the builder did not pay the claimed amount by the due date (which it did not), the hire contractor could recover the amount in the appropriate court as a debt. Under section 15(4) of the SOP Act, the builder would be unable to bring any cross claim against the hire contractor or raise any defence based on matters arising under the construction contract.

In fact, the only basis available to resist the court application would be if the hire contractor had not strictly complied with the SOP Act (which it had).

The hire contractor drafted a statement of claim to recover the claimed amount from the builder in court.

However, before filing it, the hire contractor sent the builder a copy of the draft advising of its intention to file, and stating that as the builder had not provided a payment schedule, it was prohibited by the SOP Act from bringing a cross claim or raising a defence in the proceedings.

Given that, the hire contractor invited the builder to pay the claimed amount immediately and avoid not only its own legal costs of any proceedings, but also those of the hire contractor’s in the likely event that the contractor was successful and costs were awarded against the builder.

Result

Under sufferance and over significant objection, the builder realised its error in not providing the payment schedule and paid the hire contractor the claimed amount.

Why does council need to know?

This successful result for the hire contractor clearly illustrates the consequences to a principal or head contractor of not responding to a progress claim by providing a payment schedule.

Councils enter into many contracts under which contractors undertake to carry out construction work or supply related goods and services to Council in its capacity as principal.

These construction contracts are subject to the provisions of the SOP Act.

Council must ensure it has processes and procedures to respond to all contractor progress claims issued under the SOP Act by providing a payment schedule.

The payment schedule:

• must be provided within 10 business days (or sooner if required by the construction contract)

• must indicate the amount of the payment that Council proposes to make

• if the amount is less than claimed by the contractor, the payment schedule must indicate all the reasons why.

Failure to issue a payment schedule within the required time frame has dire consequences, as experienced by the builder in this cautionary tale.

A progress claim made under the SOP Act used to be easily identifiable, as it carried the warning that it was “a progress claim made under the Building and Construction Industry Security of Payment Act 1999”.

However, SOP progress claims are no longer required to carry this warning. This raises the question: how will Council know it has been served a progress claim under the SOP Act?

Our advice is that Council should now regard any claim made by a contractor under a construction contract as a claim made under the SOP Act.

Council must also be aware that the period for providing a payment schedule cannot be extended by the court or by agreement between Council and its contractor, and the 10 business day period must be strictly complied with. Failure to do so may see the contractor entitled to recover payment through the Court under the SOP Act, with Council having no opportunity to raise a defence or cross claim.

Tale No. 3

A member of the Bartier Perry Building and Construction team assisted an asphalt contractor who had entered into a contract with a NSW council.

Facts

An asphalt contractor successfully tendered for and entered into a contract with a council for the supply and laying of asphalt. The contract contained an option clause which stated the agreement was ‘for the period: 1 August 2011 to 31 July 2013 with a further 12 month option available’.

In 2012 the contractor carried out asphalt works, which showed signs of failure. The council alleged that the contractor had not complied with the specifications contained in the contract; specifically, that it had not carried out testing for in situ voids, which the council asserted was required under the specifications.

Issue

On 11 March 2013, Council advised the contractor that it would not exercise the option to extend the contract and that a new tender would be advertised.

On 4 April 2013 the contractor gave notice of its exercise of the option to extend the contract for a further 12 months.

The council responded by asserting that the option could only be exercised by the council or by mutual agreement.

The council invited tenders for the period after 31 July 2013, identifying different specifications to be included in the new contract.

The contractor did not participate in the second tender.

Action taken

The contractor instead brought proceedings against the council in the NSW Supreme Court, seeking damages for breach of the contract.

The Supreme Court found that the contractor was, on the proper construction of the contract, able to exercise the option unilaterally and that the council had breached the contract. The contractor was awarded damages for lost profits for the option period and the loss of opportunity to successfully tender for two further contracts with the council.

The council was ordered to pay the contractor’s costs of the proceedings.

Result

The council appealed to the NSW Court of Appeal, arguing that the primary judge’s findings as to construction of the contract were incorrect and that the award of damages was incorrect.

The Court dismissed the appeal and held that the primary judge was correct in his construction of the contract, agreeing with his finding that the option clause conferred a unilateral right on the contractor to exercise the option.

Payne JA explained that:

• the language ‘12 month option available’ indicated that the extension was offered by the council to the successful tenderer

• the option clause did not qualify the right to exercise the option, whereas several other clauses in the contract did contain qualifications.

Why does council need to know this?

The decision highlights the need for Council to exercise great care and precision in the drafting of contractual terms. In relation to options to extend the term of the contract, the drafting should be clear and unambiguous as to how and by which party the option is to be exercised, the preconditions to exercise of the option, and the price to apply during the extended option period.

As the council learned in this case, the simple wording “option to extend” did not protect its interests and ultimately cost it financially when damages were awarded against it.

Council should ensure that option clauses regularly found in contracts, such as for waste collection, should be drafted with precision and clarity and expressly state by which party and in what circumstances the option can be exercised.

If you have any questions regarding this article, please contact David Creais.

Author: Mark Glynn

Contributing partner: David Creais