Standards Australia proposes to replace the current suite of general conditions for constructions contracts (AS 2124: 1992 and AS 4000: 1997) with a new suite of Standards, including AS 11000: General conditions of contract (Head Contract) and AS 11002 (Subcontract).
The current suite of contracts are widely used in Australia in construction, engineering, health, manufacturing and infrastructure. A major criticism of the current standard form contracts has been that contracting parties heavily amend the standard form significantly shifting the risk allocation between them and often making the standard form unrecognisable. The process itself can be, and is most contract negotiations is, time consuming and expensive.
The objective of the new suite of Standards is to provide a balanced approach to risk allocation using language that is concise and certain with a view to assisting contracting parties when disputes arise. It remains to be seen whether AS 11000 will achieve its objective in an industry where each project carries with it a unique risk profile and the parties’ views as to how that risk should be allocated up and down the line.
There are a number of significant changes to the current suite of contracts that are proposed to be incorporated into AS 11000. Some of the notable changes include (summarised from Standards Australia):
1. Subcontract (Clause 12)
The Main Contractor will be required to use AS 11002 subcontract conditions, containing no other amendments or additions to those subcontract conditions except those necessary to reflect the Head Contract between the Principal and the Main Contractor. Failure to comply with this requirement is proposed to be a substantial breach by the Main Contractor under the Head Contract.
2. Good Faith and Early Warning Procedure (Clause 2)
Each party is required to act in good faith towards the other and initiate an early warning procedure whereby events and circumstances, which may impact upon time, cost, scope or quality under the contract and may become an issue, are required to be notified by either party or by the Superintendent to assist with prompt resolution of the issue.
There are more specific notification requirements for issues such as the notification of delays and anticipated extensions of time claims and claims for and assessment of extensions of time.
3. Causes of delay entitling extension of time claims (Clause 37)
The Main Contractor is entitled to an extension of time if practical completion is or may be delayed:
a. for events beyond the reasonable control of the Main Contractor which cause delay and which occur before the date for practical completion (including but not limited to inclement weather and industrial conditions); and b. by a variation or by a Principal’s ‘act of prevention’ (which no longer includes a variation as it did in AS4000) occurring after the date of practical completion.
4. Delay damages and delay cost (Clause 37)
There is now a distinction between:
a. “delay damages”, which are payable to the Main Contractor for delays to practical completion caused by a Principal’s acts of prevention; and b. “delay costs”, which are payable for delays to practical completion due to a variation.
5. Security of Payment Legislation (Clause 40)
Provisions have been included to enable compliance with the various “Security of Payment” Acts of the States and Territories. In particular, payment claims and payment certificates under AS 11000 are deemed to be payment claims and payment schedules respectively under the relevant Security of Payment Legislation.
We note however that payment claims and payment schedules will only be considered such under the relevant legislation if each payment claim and payment schedule meets the criteria set out in the legislation of each State and Territory.
6. Personal Property Securities Act 2009 (Cth) (Clause 40)
Provisions have been included regarding payment for unfixed plant and materials to enable a Principal to obtain ownership upon payment free of any security interest under the Personal Property Securities Act 2009 (Cwlth). As in AS 4000, if the parties agree to allow payment for unfixed plant and materials, the Main Contractor will be required to provide additional security prior to payment.
7. Variations (Clause 39)
If the Main Contractor considers a direction to be a variation, the Main Contractor, may notify the Superintendent within 5 business days that the direction constitutes a variation and the Superintendent is required to respond within 5 business days. If the Superintendent disagrees that it is a variation, the matter may be resolve under the dispute resolution procedures.
8. Dispute Resolution (Clause 45)
There are multiple options and procedures for dispute resolution including conference, followed by arbitration or expert determination or separate options for Facilitation or Dispute Resolution Board.
At this stage it is uncertain whether Standards Australia will release the final version of AS 11000 in formats that can be amended. In any event, Part B (deletions, amendment and additions) appears to allow parties to amend AS 11000 in the traditional way, namely, with a schedule of amendments.
In our view, AS 11000 proposes a number of changes that have been necessary in Standard form contracts and which parties have incorporated into the Standards by way of amendment to bring them in line with legislative changes in the last 15 years, particularly with respect to Security of Payment and Personal Property Security. There are also other changes, some of which are described above, which head contractors will no doubt embrace and principal’s will seek to amend, particularly with respect to causes of delay, delay damages and delay costs which are likely to be considered fair by head contractors and too broad by principals.
From our discussions with head contractors, it is clear that there is reluctance regarding the limitation on the use of one subcontract (AS 11002) and the restriction on amending that subcontract other than to mirror the Head Contract provisions. This is particularly so where head contractors have been using bespoke Subcontracts for years.
With AS 11000 and its counterparts, will we see a more efficient and cooperative approach to contractual negotiations? Or will old habits take over with parties amending AS 11000 or simply using the older Standards or seeking to develop other bespoke forms of contract?
In the authors’ opinion, the process of negotiation between parties to achieve an acceptable and balanced risk allocation profile in a construction contract, which each party inevitably perceives and accepts based on their respective bargaining and bottom line positions, is not something that can simply be overcome with a new standard form.
Whilst AS 11000 goes a long way to showing parties a balanced approach to risk allocation in simple and clear language, it is difficult to teach an old industry, with entrenched perceptions and current economic pressures at all levels, new tricks. Such perceptions, to some extent, also derive and have developed from some of the very same standard forms (and their predecessors) that are now being replaced. Perhaps with this first step towards a different approach to contracting, and provided that the approach gains some traction in the industry, over time, perceptions will change.
In any event, there is certainly value in making construction contracts clear and concise no matter how the risk is allocated within them. Parties need to keep in mind that when a dispute arises, it is often the common law that will ultimately determine parties’ rights based on established principals of interpreting contracts. If contracts are unclear and ambiguous, the outcome of a dispute will be uncertain but no doubt costly, which is an inherent risk that parties fail to factor in when drafting longer and more complicated contracts in an attempt to allocate and control the various categories of risk.
The draft form AS 11000 can be downloaded and is open for comment here until 27 March 2015.
Building and construction law and how it applies is a complex and technical area.