Contracts and performance
Standard contract forms
What standard contract forms are used for construction projects in your jurisdiction? To what extent do parties deviate from these standard forms?
Examples of standard contract forms released by Standards Australia used in the construction sector include:
- AS 4000-1997 – General conditions of contract;
- AS 4902-2000 – General conditions of contract for design and construct;
- AS 4905-2002 – Minor works contract conditions (superintendent administered); and
- AS 4903-2000 – Subcontract conditions – design and construct.
Any deviation from the contract will depend on the unique circumstances of the transaction and is commonly reflected in:
- the formal instrument of agreement, which accompanies the contract;
- the body of the contract, as amendments; and
- parts (and annexures) to the contract.
In addition, standard form contracts for specific areas of construction have been made available by different agencies, such as the Royal Australian Institute of Architects, the Master Builders Association, the Property Council of Australia and the International Federation of Consulting Engineers. Agencies in each state publish standard form contracts for residential building work.
Definition of ‘construction work’
How is ‘construction work’ legally defined?
Each act which deals with construction work in an Australian jurisdiction will define 'construction work' differently with regard to its legislative intent and juridictional reach. An example is the following definition, from the Building and Construction Industry Security of Payment Act 1999 (NSW):
(b) the construction, alteration, repair, restoration, maintenance, extension, demolition or dismantling of buildings or structures forming, or to form, part of land (whether permanent or not),
(c) the construction, alteration, repair, restoration, maintenance, extension, demolition or dismantling of any works forming, or to form, part of land, including walls, roadworks, power-lines, telecommunication apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage or coast protection,
(d) the installation in any building, structure or works of fittings forming, or to form, part of land, including heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply, fire protection, security and communications systems,
(e) the external or internal cleaning of buildings, structures and works, so far as it is carried out in the course of their construction, alteration, repair, restoration, maintenance or extension,
(f) any operation which forms an integral part of, or is preparatory to or is for rendering complete, work of the kind referred to in paragraph (a), (b) or (c), including:
(i) site clearance, earth-moving, excavation, tunnelling and boring, and
(ii) the laying of foundations, and
(iii) the erection, maintenance or dismantling of scaffolding, and
(iv) the prefabrication of components to form part of any building, structure or works, whether carried out on-site or off-site, and
(v) site restoration, landscaping and the provision of roadways and other access works,
(g) the painting or decorating of the internal or external surfaces of any building, structure or works.
For residential buildings in NSW, the Home Building Act defines 'residential building work' under Schedule 1 as follows:
(a) roof plumbing work done in connection with a dwelling,
(b) specialist work done in connection with a dwelling,
(c) work concerned in installing in a dwelling any fixture or fixed apparatus that is designed for the heating or cooling of water, food or the atmosphere or for air ventilation or the filtration of water in a swimming pool or spa (or in adding to, altering or repairing any such installation).
Notably, the expanded defintion of 'dwelling' is quite broad and captures of a lot of different types of construction work.
Are there any rules or restrictions on the governing law of construction contracts?
Governing law clauses are particularly relevant in transactions where the parties operate in different states or territories. Generally, construction contracts in the Australian jurisdiction will contain governing law clauses which stipulate that the governing law is the state or territory where the project takes place.
However, despite the presence of a governing law clause, parties cannot contract out of certain legislation, such as certain provisions of the Competition and Consumer Act 2010 (Cth) and the security of payment legislation in each state or territory.
In certain states and territories, parties will also be unable to contract out of proportionate liability legislation. The only states in which parties can currently contract out of proportionate liability include NSW, Tasmania and Western Australia.
Are construction contracts subject to any formal requirements?
While the works for a construction project are often commenced prior to a formal contract being executed between the parties, it is best practice to reduce construction contracts to writing in Australia as early as possible. Letters of intent and preliminary agreements can be used prior to entry into the final written contract to facilitate the early stages of a construction project while the parties negotiate the remaining aspects of their legal relationship. Such documents may be capable of creating binding legal relations. In some contexts, such as for residential building work, a written contract is mandatory for construction work above a certain value.
Are there any mandatory or prohibited provisions in relation to construction contracts?
Construction contracts must have provisions which communicate each party’s capacity and intention to enter into contracts, the consideration provided and the agreement between the parties. These provisions must be stated with certainty. Examples of provisions which are considered mandatory (or at least best practice) include, but are not limited to, the following:
- scope of work of the construction contract, including timeframes and allocation of responsibilities;
- payment schedule (including the contract sum and any provisional sums);
- security required by the principal;
- indemnities; and
- provisions pertaining to dispute resolution, damages and relief available, and limitation clauses.
In contrast, any contractual provisions that purport to impose a penalty on the parties for non-compliance with the contract are prohibited from construction contracts. This particularly relates to excessive liquidated damages. Further, there is a prohibition under state and territory legislation on building standards which prohibits clauses that restrict or remove an individual’s statutory rights. Contracts for residential building work are heavily regulated by state agencies and minimum standards apply.
Can any terms be implied in construction contracts?
Terms can be implied in construction contracts by a court inferring the intention of the parties or by force of statue. These include terms that give contracts business efficacy, terms that were obviously intended by the parties and terms that are mandated in contracts of such sort by certain legislation.
The implication of terms into a contract may be excluded by the parties through the express terms of the contract itself. However, certain implied terms – such as the statutory warranties that apply to domestic building work – cannot be contracted out of by the parties. A range of national and state legislation constrains the ways in which parties may perform work under construction contracts, including through the implication of terms.
Common terms that are implied into construction contracts include the obligation of the principal (owner) to provide access to allow the construction work to take place, and a concept of good faith when taking work out of the hands of a construction contractor.
How are risks typically allocated between parties to construction contracts?
The allocation of risk between parties is best guided by the principle that the party who should bear a risk is the party who has control of the risk, or who is at least adequately compensated for having assumed a risk out of its total control. Parties to a construction contract use a variety of means to allocate risk between each other. Contracts will contain indemnities that make it clear who bears the risks associated with particular aspects of the construction work. In major construction projects, cash retention, bank guarantees, parent-company guarantees, insurance bonds and similar instruments are frequently used to secure obligations, protect against the insolvency of a counterparty and secure cash flow in the event of a contractual dispute.
Limitation of liability
How and to what extent can parties to construction projects contractually limit or exclude their liability?
Parties are generally free to limit or exclude their liability through the terms of the construction contract. Usually, contracting parties intend that only the remedies expressly provided in the contract should be available against one another. If a party breaches a contract that comprehensively sets out terms detailing the consequences of such a breach, the other party will often be precluded from seeking relief on some alternative legal basis.
Parties are unable to contract out of certain statutory obligations, such as the guarantees and warranties contained in the Competition and Consumer Act 2010 (Cth) and legislation pertaining to building standards. Parties cannot exclude their liability for claims by third parties through a contract.
How are liquidated damages typically calculated and to which liabilities are they usually applied?
Liquidated damages must be a genuine pre-estimate of loss that the aggrieved party is likely to suffer due to the other party’s breach of the construction contract. Importantly, they cannot be imposed as a penalty onto the contracting parties.
Liquidated damages may be lower or higher than the actual damage ultimately suffered, but will be applied so long as it can be demonstrated that they were a genuine pre-estimate of loss.
Liquidated damages often apply to disputes relating to the timing and delivery of construction works (eg, where there is an unjustifiable delay in completion of the construction work).
How are force majeure clauses treated in your jurisdiction? Is there a legal definition of force majeure events?
There is no prescribed designation of force majeure events in Australia, so contracting parties are free to set their own list. When a force majeure event occurs, the consequence for the parties depends on the extent to which the serious, unforeseen circumstances prevent the parties from fulfilling their contractual obligations. In many cases, a delay in performance caused by a force majeure event will not exempt a contractor from endeavouring to continue to perform its obligations as far as reasonably practical. When the event is prolonged or otherwise frustrates the contract, it may instead be in the interests of the parties to terminate. In addition to force majeure clauses, provisions for extension of time and delay costs and suspension and termination clauses are typically included in an amended form of the Australian standard construction contracts to deal with force majeure events.
General performance obligations
What are the general performance obligations of contractors and employers?
There is a general obligation for contractors to provide a warranty that the construction works are completed:
- with due diligence, due care and skill, and in accordance with the contract; and
- in accordance with statutory requirements.
Further, construction works should be fit and proper for the specified purpose or result with which the contractor was engaged, using materials which are suitable for that purpose.
Similarly, there is a general obligation for employers to ensure that:
- safety standards are in place to protect employees (and contractors) against harm to their health, safety and welfare while at work; and
- minimum standards are enforced regarding hours, leave, public holidays and termination, in accordance with the National Employment Standards.
How are project delays typically handled? Do any set rules, restrictions or procedures apply in this regard?
Construction contracts contain a range of provisions to deal with project delays, including provisions for extensions of time, liquidated damages and termination. The contract will specify when a contractor becomes entitled to an extension of time for the completion of the project. Such circumstances may include adverse weather conditions and a suspension of works caused by conduct of the employer or subcontractors. The contract may also set a sum for liquidated damages per day, which the employer can recover in the event of the contractor’s delay beyond the date for completion, provided that the sum is a genuine pre-estimate of the employer’s loss and not a penalty. The contract may stipulate the point at which a delay gives rise to a party’s right to terminate (eg, when the liquidated damages amount reaches a maximum capped amount, which might be equal to seven days of delays).
To what extent can the parties make variations to the contract? Do any set rules, restrictions or procedures apply in this regard?
Construction contracts nearly always contain provisions that allow the principal to vary the contract to require the contractor to perform more, less or different work than originally agreed. Contractors usually have no such right of variation against the principal. However, when the principal has ordered a variation, the contractor will usually have the right to an extension of time for the practical completion of the project. Further, contractors will generally be entitled to payment for work beyond the original scope of works where the principal ordered such a variation – provided that this is stated in the contract – or otherwise if the principal consented to that additional work and knew or should have known that it would increase the overall cost of the work.
What are acceptable grounds for the termination of a contract?
A party’s breach of a fundamental term or repudiation of the contract will entitle the other party to terminate the construction contract. In the construction setting this can be a drastic measure for principals because of the complications that come with replacing a contractor midway through the project. Parties should strive to protect their commercial interests through comprehensive contractual provisions for damages and consider termination only for the most serious breaches. For a contractor, the security of payment legislation in Australia specifies when it may suspend works without giving the principal the right to terminate the contract (eg, if the employer fails to pay a scheduled amount before the due date for a progress payment).
It is also not uncommon for construction contracts to contain ‘no fault termination’ (or termination for convenience) provisions allowing one (usually the principal) or both of the parties to terminate with notice.
Remedies for breach
What remedies are available for the breach of construction contracts?
The following remedies are available:
- General damages are available for breach of contract, which compensate a plaintiff for breach of contract by seeking to put it in the same position it would have been in, but for the breach of contract. Any damages are always subject to the rules of mitigation.
- Liquidated sums in the form of a debt – where the sum sought is expressed within the contract, the plaintiff does not have to prove loss or damage, but the amount claimed must be a genuine pre-estimate of the loss.
- Restitution – stemming from principles of justice and equity, restitution is non-compensatory and aims to restore a plaintiff to the position had the contractual promise been fulfilled. This remedy is available only in specific circumstances that trigger the equitable relief.
- Specific performance – the defendant may be ordered to perform its obligations under the contract, although this is a rare remedy in a construction contract dispute, as damages would usually be an adequate remedy and forcing performance is not considered to be the best remedy where damages suffice.
- Injunction – injunctions can be used in construction contracts to prevent a party from breaching an obligation or enforcing a right that they may not have (eg, enforcing a guarantee or exercising rights of step-in).