Australia is a ‘common law’ jurisdiction. This means that Australian law is derived both from ‘statute’ (Acts and legislative instruments of the Australian and State and Territory Parliaments made in accordance with Australia’s Constitution) and ‘common law’ (the decisions of the Australian Courts and tribunals, also known as ‘case law’).
In Australia, the areas of law which are relevant to building works are as follows:
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Most state governments have enacted legislation which governs and regulates building work and who performs it. Generally, the focus of state governments has been on domestic and residential building which is characterized by many small contractors of limited liquidity, an imbalance in bargaining power between principals and contractors, and a high level of disputation as to time, cost and quality issues.
A number of states and territories also have legislation which requires residential builders to be licensed, imposes statutory warranties in relation to building work quality and imposes detailed requirements on the form and content of the residential building contract.
In general, the following regimes apply to non-residential construction in each state or territory:
Penalties are imposed on parties who contravene these requirements (usually in the form of fines and sometimes loss of registration or licence).
In addition, particular activities prevalent in the industry are also subject to specific regulations and licensing across Australia. These include working at heights, working with asbestos, welding, demolition, excavation, cranes and scaffolding.
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The Commonwealth (Federal Government) together with each state and territory has effected legislation to regulate occupational health and safety or work health and safety (OHS or WHS) in each jurisdiction. Each jurisdiction has a principal WHS Act which imposes general health and safety duties. These duties are performance-based obligations rather than highly prescriptive requirements. Most States and Territories have harmonized their legislation, except for Victoria and Western Australia. Western Australia has indicated that it will introduce harmonizing legislation, but Victoria has not made such an indication.
The primary WHS Act in each jurisdiction is supported by detailed performance regulations based on a risk management approach to safety as well as authoritative Codes of Practice applicable to particular industries or activities. Due to the high risk of serious injury associated with it, the construction industry and many activities within it are subject to tight statutory regulation.
The WHS legislation in each jurisdiction imposes duties on employees, those working at the workplace and those who have sufficient control of the workplace, to ensure the health and safety of any person who might be affected by their actions or what they failed to do. Generally speaking, in the construction industry, WHS duties are imposed on more than one duty holder at the site as the responsibilities are concurrent and overlapping. At a construction site, there are WHS duties on:
Each jurisdiction requires that the duty holder under the relevant WHS Act must ensure the health and safety of those who may be affected so far as is reasonably practicable. In order to gauge what steps are ‘reasonably practicable’, the responsible party must conduct itself in accordance with generally accepted risk management principles. These include the need to balance:
Failure to comply with WHS obligations leaves the person or company liable to criminal prosecution for which fines can be ordered to be paid by a court. For very serious breaches of WHS legislation, a term of imprisonment can be imposed.
Specific regulations deal with construction activities because of the inherent risk of personal injury associated with the industry.
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Water quality is protected by water-related State Acts and Regulations which control issues such as pollution, surface water, groundwater and discharge to sewers.
A wide range of duty-of-care legislation controls the generation, transportation and disposal of waste. Every business is legally obliged to ensure its waste is handled and disposed of safely. State environmental protection legislation requires that commercial construction projects have a site waste management plan, to be kept updated throughout the project.
Under state local planning legislation, a construction project likely to have significant effect on the environment by virtue of factors such as its nature, size or location may require an environmental impact assessment before planning permission is granted. There is also Commonwealth legislation (such as the Environmental Protection and Biodiversity Conservation Act) which regulates approvals required for projects which may have an impact on matters of national environmental significance.
Energy-efficient buildings are becoming an increasing focus for the government, developers, investors, builders and prospective tenants.
A number of green rating schemes currently operate in Australia across a range of development types. The two most prominent are:
Green Star is a national and voluntary environmental rating scheme. The main categories of Green Star rating evaluate the environmental design of buildings at a conceptual stage and at an as-built stage. The Green Star – Communities rating tool assesses the impact of operations on their local community. These rating tools assess a building or a development’s potential to reduce its environmental impact, rather than its operation.
The Green Star Performance rating tool, introduced in October 2013, measures the potential environmental impact of a building in relation to nine building element categories, namely management, indoor environment quality, energy use, transport, water use, land use and ecology, materials, emissions, and innovation in process and design. The Green Star – Communities rating tool uses five categories – governance, liveability, economic prosperity, environment and innovation.
NABERS is a national performance-based, voluntary rating system for existing buildings, tenancies and homes. It rates an existing building on the basis of its measured operational impacts on the environment.
NABERS has been adopted as the tool for assessing the energy efficiency of buildings for the Commercial Building Disclosure scheme which requires mandatory assessments prior to the leasing, subleasing or sale of commercial buildings of more than 2,000m2.
Construction projects may also be required to meet any sustainable development objectives contained within the relevant regional/area development plan.
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Under the states' and territories' local planning legislation, the highways authority and a developer/landowner can enter into an agreement whereby the authority agrees to carry out works to the public highway which concern the development (eg junction improvements) subject to the costs being borne by the developer.
As a condition of development consent for a proposed development, the consent of the relevant authority (council) under state and territorial legislation will require that satisfactory arrangements be made for the payment of contributions and the provision of services to the new development.
Upon receiving a development application, the local authority will investigate the impact of the proposed development on its water and sewerage system. A response is then issued to the developer outlining the charges and/or works that the developer must pay and/or construct for the development. When all the contributions/fees are paid, and works complete and passed by council, then a Certificate of Compliance will be issued.
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The Building Code of Australia has been given the force of statute in each State and territory. The BCA is a performance-based document and contains technical provisions for the design and construction of buildings and other structures, covering such matters as structure, fire resistance, access and egress, services and equipment, and energy efficiency as well as certain aspects of health and amenity. All work carried out in Australia must comply with the BCA. This is usually assessed by one of the bodies responsible for signing off on the building works, such as the building surveyor.
Certain provisions are implied into construction contracts by case law and statute.
There is Security of Payment (SOP) Legislation in all states and territories which gives a party to a construction contract the right to refer a dispute in relation to payment to adjudication provided the relevant Act has been ‘triggered’ by the payment claim.
In some states, legislation operates to imply certain warranties that the contractor will use materials that are reasonably fit for the purpose for which they are to be used (whether or not that is a purpose for which the materials are commonly supplied) and of good quality. However, these warranties are limited to residential work.
Australian Competition and Consumer legislation also implies certain warranties into contracts for services (for example that the services must be fit for a particular purpose) but this only applies to smaller contracts or consumer arrangements.
If a contract is silent in relation to liability for design, there is an implied term that the services will be carried out with reasonable skill and care. The burden of proof falls on the party claiming that the supplier of the service (design and build contractor, design sub-contractor or consultant) has failed to use reasonable skill and care.
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The Australian infrastructure market is dominated by standard form contracts, which are prepared and issued by various industry bodies.
These standard forms are used by both government and the private sector, have a widely understood risk allocation and have in many cases been the subject of judicial comment.
The most commonly used standard forms are:
Some forms of contract more commonly used outside Australia are also occasionally used on Australian projects, such as:
While most standard forms are periodically updated and reissued, many of the commonly used forms are more than ten years old. As a result, they are typically amended by the insertion of special conditions in order to tailor or adjust the risk allocation, take account of legislative change or to address project-specific needs. It is now unusual for any major project to be delivered using a standard form contract which has not been extensively amended. Many large employers have their own ‘standard form’ contract which incorporates detailed special conditions to address project and risk requirements and specific commercial drivers.
Whilst some government agencies have now developed template contract forms and guidelines for delivery of alliance projects, there are no commercially available standard form contracts applicable to forms of delivery such as alliance contracting, public-private partnerships (PPP) or for hybrid forms such as ‘Early Contractor Involvement’ (ECI). These are generally prepared on a project-by-project basis. Some agencies which use these methods of procurement frequently will tend to use the same form of contract repetitively.
Most government agencies which procure infrastructure have suites of pro forma or standard contracts for use on their projects. For example, the federal Department of Defence has an extensive suite of contracts for use on the whole spectrum of defence infrastructure projects.
With the exception of FIDIC and NEC, other international forms of contract are rarely used in Australia.
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The main parties involved in a construction project are:
This is the party procuring the work (typically, a land owner or land developer). In relation to building contracts, this entity is usually referred to as the employer or the principal. In relation to the contracts of appointment of the professional consultants, this party is commonly referred to as the client.
A main building contractor is engaged by the employer to carry out and complete the works. This contractor will usually, in turn, engage sub-contractors to carry out and complete separate parts of the works. Contractors may also take responsibility for the design of all or part of the works they are to execute, depending on the procurement method and contract used.
This is the term used to describe the banks and other institutions and parties (for example, government or charitable organizations in the case of urban regeneration, infrastructure and cultural/sports projects) who provide finance to the employer towards the development (and require security in return). Depending on the size of the project, there might be a single bank or a syndicate of banks.
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In so-called ‘traditional’ procurement, the building contractor is responsible for the construction of the works, but not for their design. In design and construct (D&C) contracts, the building contractor also takes on responsibility for design of the works either by appointing the design consultants or assuming responsibility for design consultants procured by the employer. In the latter instance, the design consultants may be appointed by the employer in the usual way, even before the building contractor is selected; when the employer enters into the D&C building contract, the design consultants’ appointments are simultaneously transferred across (or ‘novated’) to the building contractor and this places single point design (as well as workmanship) responsibility on the contractor and gives the building contractor control of the design process.
Force majeure clauses are often included in D&C contracts. Sometimes the scope of a force majeure clause will be quite limited because most construction contracts will already provide a contractor with some relief for delay caused by third-party events in the form of an extension to the date for completion of the works.
Given that force majeure clauses are creatures of contract, their interpretation will be governed by the normal rules of contractual construction. Force majeure provisions will be construed strictly in the event of any ambiguity. In this context, it means that the clause will be interpreted against the interests of the party that drafted and is seeking to rely on it (‘contra proferentem’). The parties may contract out of this rule.
Importantly, parties cannot invoke a force majeure clause if they are relying on their own acts or omissions.
The underlying test in relation to most force majeure provisions is whether a particular event was within the contemplation of the parties when they made the contract. The event must also have been outside the control of the contracting party. There are generally three essential elements to force majeure:
There are two aspects to the operation of force majeure clauses:
The events which trigger the operative clause must be clearly defined. It is in the interests of both parties to ensure that the 'force majeure' is clearly defined in their contract.
The preferred approach for a developer is to define force majeure events as being any of the events in an exhaustive list set out in the contract. In this manner, both parties are aware of which events are force majeure events and which are not.
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The federal government defines a PPP as a procurement involving the use of private sector capital to wholly or partly fund an asset that would have otherwise been purchased directly by the public sector and which is used to deliver public sector outcomes. Australian Federal, State and Territory Governments will consider a PPP for any project with a capital cost in excess of A$50 million, in accordance with the National PPP Policy Framework.
PPP projects undertaken in the Australian market to date, the majority of which have been in New South Wales and Victoria, range from hospitals to courts to toll roads. In the case of toll roads, the government will usually hand over operation to the private sector participant for the period of the concession. In the case of social infrastructure such as hospitals and schools, the government will usually retain the obligation to provide the core services such as healthcare or education, although some projects have outsourced delivery of the core services to the private sector participant.
The Federal government (via Infrastructure Australia) has issued a set of National PPP Policy and Guidelines which now apply to all PPP projects released in the Australian market. . The various policies:
The current trend is towards harmonization and an increasingly standardized approach to risk allocation by state governments, which is likely to lead to commoditization of PPP project documentation in the medium term.
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There are three main factors in a typical construction contract which provide for an alteration to the price. They are:
Whilst it is theoretically possible to draft a construction contract where the price is fixed (by omitting the three factors just mentioned), the commercial reality is that both the employer and the building contractor will want to have some flexibility built into the contract. The employer will usually want to have the right to instruct variations and the contractor will certainly want the right to claim for losses suffered and expenses incurred for which it is not blameworthy.
In essence, what parties usually mean when they talk about a ‘fixed price contract’ is a lump sum contract where the contractor’s entitlement to additional money is limited or controlled, for example there are no fluctuation provisions, or the events which would usually entitle the contractor to recompense for loss and expense are restricted or the developer retains strict control over the circumstances in which a change in price or scope may be directed or given.
Parties may often refer to a ‘guaranteed maximum price’ contract which, again, is unlikely ever to truly mean this – ‘employer changes’ and other possible occurrences will be excluded from the guaranteed maximum price figure.
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In Australia some types of insurance are required to be taken out by statute for infrastructure projects. In addition, other types of insurance are taken out as agreed by the parties to a contract depending on the nature of the works and the requirements of those involved in the project.
There are four main types of insurance relevant to infrastructure work which are required to be taken out under statute:
Certain kinds of builders (for example demolition contractors) are required in some states to take out public liability insurance on specified terms.
The main types of insurances which may be required to be taken out under an infrastructure contract are:
There may also be project specific insurance which needs to be taken out.
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In relation to the construction activities comprised within a development project, the financier will usually require the benefit of all of the material contracts to which the employer is a party to be assigned to it by way of security. In this context, the employer is, of course, the borrower of finance from the financier. The type of security which the employer will usually obtain from a contractor (and which may then be assigned to the financier) includes the construction contract itself, the guarantee to the employer of the building contractor’s obligations under the construction contract (which is given by one of its parent companies or – exceptionally for large contractors – the ultimate holding company in the group) and the performance security from a third party surety to the employer.
Performance security can be either ‘on demand’ in nature (meaning that the surety would release bond monies on written demand from the employer) or ‘on default’ in nature (meaning that, broadly, a court judgement or adjudicator’s decision would be required to be presented by the employer before the surety would release bond monies). These bonds generally take the form of an unconditional undertaking from a bank or an insurance bond. The other type of security which may be obtained is retention monies, that is, monies which are deducted from a payment made to the contractor. Retention monies and performance security are usually limited to 10% (or less) of the contract sum.
On large projects it is also reasonably common to require the parent company of the contractor to provide a guarantee of performance. These guarantees often contain some type of limitation clause or financial cap limiting the guarantor’s liability.
Employers and third-party financiers will also require collateral warranty agreements from the building contractor, the key professional consultants and sub-contractors with design responsibility – giving them direct rights for poor performance. In addition, they will require contractual step-in rights in the main contractor’s collateral warranty agreement given to them (which is sometimes termed a ‘direct agreement’), giving them (or their appointee) the right either temporarily or permanently to assume the role of the employer under the construction contract where the employer is in breach, and/or while an attempt is made to remedy the breach.
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Methods of payment vary according to the works. The four main types of contract sum are calculated as follows:
For each of these methods, payment is usually made against the certification of completed works by the contract administrator. The inspection and certification of completed works can be made on a periodic basis (usually monthly) or a milestone basis (at pre-agreed specific milestones or stages).
Each Australian state and territory now has legislation dealing with security of payment for contractors, suppliers and subcontractors in the infrastructure industry and for those who provide related goods and services (such as engineers and architects).
While the detail varies from state to state, the SOP legislation has the following features:
Some SOP Acts (such as those enacted in the Northern Territory and Western Australia) give a party a right to claim payment in respect of the work or services only if the relevant contract does not contain any provision for payment.
In other SOP Acts, notably those in Victoria, New South Wales and Queensland, the statutory right exists regardless of the presence in the applicable contract of provisions giving a right to a party to claim payment for work and services. This statutory right sits in parallel with the contractual right to payment.
The SOP legislation enacted in Australia has the following important impacts:
Depending on the jurisdiction in which the works are being carried out, most construction and infrastructure contracts need to contain provisions dealing with SOP.
Such provisions will not be standard, as careful consideration needs to be given to the nature of the project and how the payment provisions are intended to work. For example:
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Construction contracts require the works to be completed by a specified date. Instead of the employer bringing a claim for general damages (compensation) for late completion of the works by the building contractor, it is standard for the contractor to be required to pay what are termed 'liquidated damages' (LDs).
Liquidated damages are damages that are fixed and the amount is agreed by the parties in advance. A typical clause requires the building contractor to pay or allow the employer to deduct liquidated damages at a rate per day or week of delay in the completion of the works. The rate is usually set out in an appendix to the construction contract.
Contractual provisions for the payment of such sums are common in building contracts and favoured because:
It is important to note that:
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Contractual mechanisms for dealing with variations to the works vary depending on why the variation is requested:
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Australian construction contracts commonly refer to completion of the works as ‘Practical Completion’ (in other words, substantial completion). By this point in time, the works must be complete ‘for all practical purposes’ so as to enable beneficial occupation; they may be practically complete even if there are latent defects, but a certificate should not be issued if there are any patent defects.
Practical or substantial completion is usually achieved to the satisfaction of a third party certifier such as the architect, superintendent or other employer’s agent who has the discretion to certify practical completion where minor items are incomplete.
Practical or substantial completion is often defined in detail in industry standard form building contracts such as the Australian Standards and state which requirements must first be satisfied before the works may be certified as practically complete.
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In each state of Australia, legislation imposes a time period by which proceedings must be issued for a claim or dispute arising out of a contract. There are also limitation periods applicable to proceedings arising out of the Australian Competition and Consumer Act (such as misleading and deceptive conduct). Generally, the limitations of action legislation in each state and territory provides that actions with respect to torts and simple contracts which are written or oral cannot be brought more than six years after the date on which the cause of action accrued. However, this limitation period ranges from 12 to 15 years in state and territories legislation for contracts which were created by being formally documented in what is known as a 'deed'.
Finally, in Victoria, causes of action which are defined as a 'building dispute' cannot be brought more than 10 years after the date of completion. Specific advice should always be sought in terms of the limitation period which applies to any particular cause of action.
In contract, the cause of action accrues when a breach of that contract occurs rather than when the damage or actual loss is suffered or discovered. In negligence, the cause of action usually accrues when the loss is suffered or incurred.
A failure to issue proceedings before the relevant time period expires is likely to result in that claim becoming 'time barred'.
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With regard to the liability of the land developer procuring the works to the end-users of the building, it is often the case that the development agreement (or contract of sale, if applicable) will limit its liability for the design and construction of the works to a stipulated period (usually ending on the expiry of the defects liability period under the building contract for the development, but depending upon the developer, the nature of the project and the stage in the economic cycle, sometimes for considerably longer than this period) after completion of the works – except either for claims that have been issued or where the intention to make a claim in respect of accrued and identified rights of action has been notified to the developer before the expiry of the period.
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In a typical development project, there is no contractual relationship between the parties employed in connection with the design and construction of the development (the architect, engineers, other consultants, main building contractor and sub-contractors) and the end-users of the completed building.
In such a case, assuming the subsequent owner does not have the benefit of any contractual warranties from the previous owner, the subsequent owner will need to rely on the law of negligence.
Over the last 20 years, Australian law has come to recognize that building owners who suffer loss because of defective building may have a cause of action against negligent builders and others, including municipalities who by negligent exercise of their statutory responsibilities (eg inspecting foundations) allowed defective building to take place.
An action in negligence offers a subsequent owner a right of recovery against the builder of, or a relevant consultant associated with the construction of, a building in circumstances where the subsequent owner suffers a particular kind of ‘economic loss’. That is, the diminution in the value of the building in that the plaintiff has acquired property of less value than was reasonably believed, and which required the expenditure of money to restore it to the contemplated standard.
It is also possible for end-users to require the main construction parties to provide them with separate collateral warranty agreements or ‘third-party-rights’. Such collateral warranties would contain exclusion and limitation clauses which restrict the damages which end-users could recover.
It is unlikely that a contractual exclusion in favour of a builder, which has the effect of excluding or modifying any duty of care between the builder and previous owner would operate to discharge the builder from a duty of care which would otherwise exist to third parties to the contract. This is because the builder’s duty of care in such circumstances is imposed by law. However there would be difficulty in holding that a builder owes a duty of care to avoid causing economic loss to a subsequent owner if performance of the duty would have required the builder to do more or different work than the contract with the original owner required or permitted.
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The construction process produces a built environment which has potentially adverse implications for future owners and occupiers. There are serious consequences for these parties, who have no control over the design and construction of their buildings, if the original building team gets it wrong.
Australian law recognizes that building owners who suffer loss because of defective building have a cause of action against negligent builders and others.
It is also possible for end-users to require the main construction parties to provide them with separate collateral warranty agreements or ‘third-party-rights. Such collateral warranties would contain exclusion and limitation clauses which restrict the damages which end-users could recover.
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Courts operate at both federal and state government levels in Australia. The separation of powers means that courts are independent of and separate to parliament and the executive government.
In most cases the jurisdiction of a court is governed by the amount in dispute or, in the case of the federal Courts, the subject matter of the dispute. In Australia, the highest level Court in each state – usually called a Supreme Court – has inherent jurisdiction to resolve a dispute.
In some jurisdictions industry-specific tribunals have power to hear disputes (for example the Land and Environment Court in New South Wales and the Domestic Building List in the Victorian Civil and Administrative Tribunal).
Unless the parties specifically and expressly agree to refer a dispute to arbitration, a claim must be pursued in a court.
In many jurisdictions specific lists have been established to manage building disputes. These lists are managed by a judge with experience in hearing such disputes, and are intended to enable prompt hearing of interlocutory or preliminary arguments, assist with the quick identification of the issues and enable a hearing date to be obtained at the earliest possible time. These specialist lists may incorporate a number of special features to enable prompt and timely settlement of disputes, such as:
While some courts will grant a trial date at the first directions hearing, in other courts there may be a time delay of up to two years until the trial commences.
Decisions of the Supreme Court for each State and Territory can be appealed to the Court of Appeal Division of the Supreme Court. The ultimate court of appeal in Australia is the High Court of Australia.
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Arbitration is regulated in each state in Australia by domestic arbitration legislation (known as the uniform Commercial Arbitration Acts). Arbitration is private – the outcome remains confidential and the awards which are handed down by an arbitrator are not published. This makes it an attractive form of dispute resolution to parties like government agencies or those involved in sensitive disputes.
Because the relevant court would otherwise have inherent jurisdiction over a dispute, parties must expressly agree to use arbitration as the means of resolving their dispute. This agreement usually takes the form of a clause in the project contract setting out an agreement to arbitrate any dispute which arises under the contract.
In Australia, domestic commercial arbitration is now usually conducted on a very similar basis to litigation, with similar procedures, legal representation, and costs. In addition to confidentiality, another significant difference between litigation and arbitration is that an arbitrator charges a fee to hear the claim and prepare the award. The arbitrator’s fees and room hire costs can be significant.
Arbitrators are often lawyers. In the construction industry experienced engineers, architects and other building professionals with arbitration expertise are also often used.
Critics of the arbitration process allege a lack of availability of good arbitrators, and the fact that the cost of and time expended in an arbitration is in many cases the same as for litigation. Historically, domestic arbitration has also tended to attract more collateral court proceedings than does international arbitration. This is partly due to the fact that the Australian courts arguably have wider powers to intervene in domestic arbitration procedure.
International arbitration is governed by the International Arbitration Act 1974 (Cth) (IAA). The IAA provides that an arbitration is international if any of the circumstances set out below apply:
Currently in Australia, the types of projects which tend to involve foreign contractors are mining and dredging and other civil infrastructure works.
In July 2010 the IAA was amended to incorporate the 2006 version of the UNCITRAL model arbitration law and to streamline and expedite procedures.
Sydney and Melbourne operate as centres for international arbitration. The Australian Centre for International Commercial Arbitration (ACICA) provides international arbitration services. The ACICA rules are based on the UNCITRAL arbitration rules. Other providers used by Australian parties are the International Court of Arbitration, the London Court of International Arbitration and the Singapore International Arbitration Centre.
International arbitrations are usually run on the following basis:
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State and territory SOP legislation has introduced a relatively new dispute resolution process; a procedure known as 'adjudication', which is designed to help parties obtain a speedy decision. Parties to construction contracts now have a statutory right to adjudication. Contracts may also make express provision for adjudication, but the terms must comply with the legislation; if they do not, a statutory scheme will automatically apply.
The adjudicator must reach a decision within 10 business days of the referral, but this period may be extended with the consent of the both parties. This flexibility has allowed more complex disputes to be dealt with by adjudication which, otherwise, would have been referred to arbitration or litigation.
Mediation is a form of alternative dispute resolution which requires the participation of a third party, a mediator, whose role is to assist the parties to a dispute to reach agreement on the resolution of that dispute. A mediator does this by seeking to align the parties' interests where possible, identifying the possible outcomes of the litigation or arbitration, and examining what options might be available to the parties to settle the dispute.
A mediator does not make a binding determination on the dispute, although he or she may make observations on the strength or weakness of the parties' respective positions. Mediation is usually conducted on a confidential basis. In Australia mediators tend to be senior lawyers.
A key element of mediation is its consensual nature. If both parties sincerely want to mediate their dispute, then the prospects of settlement are probably higher.
Recently in Australia there has been a marked trend towards court-ordered mediation. This trend has developed in response to pressure on court resources and is particularly acute in the context of infrastructure disputation.
Mediation has been so successful that many infrastructure contracts contain a clause requiring the parties to mediate their dispute prior to taking any formal steps in litigation or arbitration.
Expert determination plays a valuable role where the issue in dispute is narrow and specific eg a pure valuation dispute (where the answer can be determined by a chartered accountant, a quantity surveyor or some other such professional) or a dispute concerning whether a piece of equipment meets its performance criteria (where the answer can be determined solely by an appropriate technical expert). The expert does not act in a judicial capacity and there is no general obligation on an expert to apply the rules of natural justice (this should be contrasted with adjudication, arbitration and litigation where, unquestionably, rules of natural justice apply). Expert determination will generally be regarded as final and binding; the court will not interfere with an expert determination, even if it is plainly wrong (provided the expert has purported to answer the right question). It is, therefore, inappropriate as a general form of dispute resolution.
Dispute Resolution Boards (DRB) are now being used on some larger projects. DRB’s involve the appointment of a board usually of three people at the start of the project which is empowered to deal with disputes as and when they arise. The DRB does not use formal procedures and generally acts quickly and cost effectively. The advantage of the DRB is that it is project specific and can apply its working knowledge of the project to cut through issues.
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Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?
In relation to the construction activities comprised within a development project, the financier will usually require the benefit of all of the material contracts to which the employer is a party to be assigned to it by way of security. In this context, the employer is, of course, the borrower of finance from the financier. The type of security which the employer will usually obtain from a contractor (and which may then be assigned to the financier) includes the construction contract itself, the guarantee to the employer of the building contractor’s obligations under the construction contract (which is given by one of its parent companies or – exceptionally for large contractors – the ultimate holding company in the group) and the performance security from a third party surety to the employer.
Performance security can be either ‘on demand’ in nature (meaning that the surety would release bond monies on written demand from the employer) or ‘on default’ in nature (meaning that, broadly, a court judgement or adjudicator’s decision would be required to be presented by the employer before the surety would release bond monies). These bonds generally take the form of an unconditional undertaking from a bank or an insurance bond. The other type of security which may be obtained is retention monies, that is, monies which are deducted from a payment made to the contractor. Retention monies and performance security are usually limited to 10% (or less) of the contract sum.
On large projects it is also reasonably common to require the parent company of the contractor to provide a guarantee of performance. These guarantees often contain some type of limitation clause or financial cap limiting the guarantor’s liability.
Employers and third-party financiers will also require collateral warranty agreements from the building contractor, the key professional consultants and sub-contractors with design responsibility – giving them direct rights for poor performance. In addition, they will require contractual step-in rights in the main contractor’s collateral warranty agreement given to them (which is sometimes termed a ‘direct agreement’), giving them (or their appointee) the right either temporarily or permanently to assume the role of the employer under the construction contract where the employer is in breach, and/or while an attempt is made to remedy the breach.
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