Professional Documents
Culture Documents
Avoidance of Construction Disputes Through Legal Knowledge
Avoidance of Construction Disputes Through Legal Knowledge
Queensland Roads – Edition 12, Department of Transport and Main Roads, October 2012 13
I am often reminded of the quotation of the French
philosopher and writer Voltaire who stated — ‘I have had two
Causes of construction disputes
bad experiences with the law. The first time was when I lost a case. A number of studies have attempted to identify or categorise the
The second time was when I won a case.’ causes of construction disputes (3,4). A research report (2) has
expressed the key causal factors contributing to construction
Indirect costs are perhaps even more significant and
disputes as follows:
detrimental than the direct costs. A recent report (2) has listed
these as: • Poor contract documentation that arise from the
organisational system (inadequate or incomplete design
• the costs incurred by the parties as a result of delays to the
information, ambiguities in contract documentation)
project
• Scope changes that arise from uncertainty that exists
• adverse performance of the project
within the project management system (variations due to
• distraction and over burdening of staff on the project client, design errors, site conditions)
• reduced morale • Educational and behavioral adaptations of individuals
• erosion of trust and confidence in working relationships within the system (poor communication, poor management,
• adverse impact on the reputation of the parties skill and experience, and personality traits).
• emotional impact on the people involved We could summarise these again as — design, contract
• lost opportunities for future work administration and personality issues.
• destruction of business relationships The importance of the need for construction contract
• loss of people to the industry because of wasted effort. administrators to have legal skills and appropriate training was
identified in the Western Australian Government report (5). The
One can see from this list the very non-pecuniary damage report notes in part that benefits of contracting out highway
to an organisation or the parties involved in a prolonged construction and maintenance can only be achieved where
contractual dispute. There have been attempts to quantify there is a proper understanding of contractual obligations
these indirect costs to gain a fuller understanding of the together with effective dispute resolution procedures.
impacts of a dispute.
A well respected author, TM McDougall (6), listed 38 common
causes of claims in construction projects.
Cost of disputes For brevity, I have selected nine of the more important causes
The Australian construction industry undertakes some $120 of claims:
billion of non-residential construction work annually and
1. ‘Inconsistencies in contract documents.
the Federal Department of Infrastructure Transport Regional
Development and Local Government has estimated that 2. U
nreasonable contract administration (usually relating
the industry wide value of “avoidable” non residential to what the contractor sees as insufficient experience on
construction dispute is approximately 5.9 % of the contract the part of the superintendent’s representative or his site
price. It was further stated in dollar terms, the estimated total staff, leading to excessive caution or too rigid adherence
cost of resolving these “avoidable” disputes ranged from $560 to the specification).
million to $840 million per year. 3. L
ate or inconsistent decisions by the superintendent
or the superintendent’s representative (particularly on
When the direct costs (legal services, experts, consultants) are
extensions of time claims).
added to these avoidable costs then the total waste exceeds
$7 billion dollars per year. 4. V
ariations to the works and extra works (whether the
work is a variation at all, whether it is the same nature as
There is also an additional cost which is the cost to the state work covered by existing items, what a reasonable direct
and community generally as a result of the inflation of future cost rate is, what is the applicable prolongation cost).
project costs through higher tender prices based on previous
5. Late payments by the principal.
experience with the cost of disputes. This figure can reach a
significant level. 6. Additional costs arising from requirement to accelerate.
7. D
isagreement over interpretation of specification
requirements.
8. Lack of formal contract agreement.
9. E
ffect of late approvals by the superintendent (of matters
such as drawings required to be submitted for his
approval prior to their being put into effect).’
14 Queensland Roads – Edition 12, Department of Transport and Main Roads, October 2012
Effective construction contracts • What events give rise to termination of the contract?
• Can we vary our obligations under the contract?
A construction contract is no different to any other
• With respect to time have all obligations been performed in
commercial agreement with perhaps the exception of the role
accordance with specified times?
of the superintendent. Put simply a contract is:
• Has practical completion been reached?
An agreement between two or more parties to perform agreed
• How do we determine the price to be paid for work carried
obligations and in the event of non performance by the parties, the
out under the contract?
innocent party intends to seek a legal remedy which flows from the
failure to perform. • Is there a dispute arising out of non-performance?
• How do we resolve the dispute?
At the same time we acknowledge that a construction
contract is a complex process. It involves:
• a large number of participants in the process — approval
Form of a construction contract
authorities, designers, contractors, principals, architects, The form of a construction contract is essentially the same
engineers, quantity surveyors, project managers, as any other commercial agreement. The essential features
superintendents and unions include the:
• economic conditions • date of execution
• fluctuating workforce • names of the parties to the agreement
• complex interaction of trades • scope of the works
• complexity and variation of materials • rights and obligations of the parties to the agreement
• procurement issues • contract sum
• participant skills. • time for completion of the works.
The contractual arrangements necessary to comply with such
issues is therefore also necessarily complex. One suggestion is Standard construction contracts
that a construction contract must clearly define (7):
While a construction contract may be “tailored” for each
• The scope of the work. individual project a large number of “standard” contracts
• The quality standards of the materials and workmanship. have been written over the years by various organisations.
• The time frame within which the work is to be constructed. The main ones we will be familiar with are the SAA General
Conditions of Contract — AS 2124 and AS 4000.
• The price which is to be paid to the contractor for carrying
out the work. The advantages of these standard contracts is that they
• A mechanism for varying all of these parameters. attempt to balance the risk in the project and their widespread
use means that the provisions are generally well understood
An omission from this list is an operative dispute resolution by all of the participants in the project.
clause. While not exhaustive, the following expanded list
gives some indication of the general legal issues arising in the If you examine a range of the standard contracts you will see
administration of a construction contract. that they essentially cover the same matters or issues. While
the specific wording may differ with respect to the individual
• Is the scope of the work clearly defined in the contract clauses, the legal issues underpinning the interpretation and
documents? application of the clauses are identical. Some of the features
• What documents constitute the “contract”? of Australian Standards are that they:
• Is the quality of materials and workmanship defined in the • have been designed to balance the risks with respect to the
documents? contract
• What happens in the event of non compliance with respect • are widely used and enjoy a high level of recognition
to quality and workmanship?
• allow a level of status of the bill of quantities
• Can the superintendent accept defective materials or
• allow for the provision of a superintendent to administer
performance not in accordance with the contract?
the contract
• Does performance have to be entire or is “substantial
• involve a lump sum price
performance” acceptable?
• have the option of staged practical completion
• What are the rights and obligations of the parties where there
has been a breach of one or more parties to the contract? • apply to construction in both the public and private sector.
Queensland Roads – Edition 12, Department of Transport and Main Roads, October 2012 15
Selecting a standard contract if we are the innocent party we want to know what our rights
are with respect to the appropriate remedy and how we go
The selection of the type of standard contract depends on the about enforcing our rights.
nature and scope of the works. By way of background, in the
Hopefully there will be an agreement which attempts to
housing sector there are no SAA Standard General Conditions
balance the rights and obligation of each of the parties to the
of Contract, but various organisations such as the Housing
agreement and each of the parties will perform all of their
Industry of Australia and the Master Builder Associations
respective obligations under the agreement. Additionally the
have produced standard contracts.
law will assume that the parties to the agreement have read
In the non-housing sector there are a range of contracts used and understood all of the terms of the agreement which set
in the construction industry. These include: out the respective rights and obligations of the parties to the
• PC1-1998 Project Contract agreement. Unfortunately we all know that in practice this is
far from the reality of the situation.
• ABIC BW-1 2002 Basic Works Contract
• ABIC EW-1 2002 Early Works Contract If there is a dispute arising from the operation of the contract
then the following issues will be relevant:
• ABIC SW-1 2002 Simple Works Contract
• NPWC3-1981 General Conditions of Contract • Who are the parties to the contract? (An issue of privity)
• AS 2124-1992 General Conditions of Contract • When was the contract entered into? (An issue of
limitations)
• AS 4000-1997 General Conditions of Contract.
• Is there a legally enforceable agreement? (Some agreements
The factors to be considered (7) in the selection of a standard in order to be enforceable must be in writing. Additionally
contract include: some agreement will be illegal)
• the type of project (engineering, commercial, residential) • Are there any issues which could give rise to a party
• the magnitude of the project (large, medium small) seeking to rescind the contract? (Mistake, undue influence,
unconscionable conduct, misrepresentation)
• the complexity of the project
• What were the “terms’ of the contract? (Express and implied)
• whether the work is principally alterations or principally
new work • Has there been performance of the terms or a breach
of one or more of the terms of the contract? (Does the
• who will administer or supervise the work
performance have to be entire or in the circumstances is
• will a bill of quantities be provided, whether it will form substantial performance acceptable)
part of the contract
• If so, what “loss” has the innocent party suffered as a
• whether there will be staged practical completion consequence of the breach and what is the appropriate remedy?
• whether payment to the contractor will be by a lump sum,
a schedule of rates or cost plus.
Conclusion
Again you can see that this list is non exhaustive and there
This paper has addressed only a few elements of construction
may be other factors to be considered.
contracts and disputes. Hopefully it will inspire contract
protagonists to gain further knowledge in contract law.
Contract knowledge Turning engineers or project managers into lawyers is
certainly not the aim. The more knowledge we have about
Apart from the obvious costs arising from a lack of contracts the more that can be done to avoid contract
understanding of contract administration, it is hard to disputes. These disputes are very frequently caused by a
imagine any other area of “law” which has such an influence general lack of knowledge not by would-be lawyers.
on our private or business life other than contract law. Every
day we enter into agreements, either orally or in writing, Unfortunately despite its critical importance there has
which result in certain rights and obligations on the parties been little construction law education either by way of
to the agreement. If we do not perform our obligations under undergraduate or post graduate construction law training.
the agreement then the innocent party will be entitled to a In response to this need, two Australian universities have
remedy that places them in the position they would be in developed and currently offer post graduate construction
had the other partly properly performed their obligations. law training programs — the University of Melbourne
As you are aware these obligations, particularly with respect and Murdoch University in Perth. Both courses have been
to a large construction contract, will be significant and designed to allow persons with undergraduate qualifications
unfortunately ignorance of the law is no excuse. Additionally in engineering, architecture or construction related disciplines
16 Queensland Roads – Edition 12, Department of Transport and Main Roads, October 2012
to enrol in the course. It is interesting to note that in the
Murdoch course 80% of the graduates from the Post Graduate
References
Certificate in Construction Law come from engineering 1. Scope for Improvement - A Survey of Pressure Points in
backgrounds and employment with state statutory authorities. Australian Construction and Infrastructure projects. Published
by Blake Dawson Waldron Lawyers, Sydney. 2006
This paper has touched on but a few of the many types
of contracts that are currently being used on construction 2. The Guide to Leading Practice for Dispute Avoidance and
projects. New contract types are continually being introduced Resolution. CRC for Construction Innovation report. 2009
because of the complexity of projects and their often short 3. Love P, Davis P, Evans P. Prometheus unbound: Unraveling
delivery timeframe. It should be abundantly clear that the underlying nature of disputes. Proceedings of the RICS
legal disputes should be avoided and differences settled Legal Research Symposium COBRA, University of Cape
as quickly as possible to avoid escalation. Many contracts Town. Sept 2009
employ relationship contracting to help build rapport
between the parties to free up lines of communication and 4. Kumararaswamy M. Conflicts, claims and disputes.
generally overcome personality impediments. However Engineering, Construction and Architectural Management
while relationship contracting is an excellent way of 4 (2). 1997
improving the delivery of projects, it has no legal status in 5. Maintaining the state road network. WA Auditor General’s
a contract. I am not trying to diminish the importance of Report No 6. June 2009
relationship contracting but merely pointing out that it is not
a replacement for a contract but its purpose is to facilitate a 6. McDougall T M. How to go about the complex and arduous
contract in a harmonious and productive manner. claims process. Building and Construction Law 216 at 218-
219. 1986
All parties should have an in-depth contract knowledge so that
their personal obligations and the obligations of others within 7. Goldfayl G. Construction Contract Administration. UNSW
the contract are known. This is the first step toward avoidance Press, second edition. 2002
of disputes. In this way the contract can be interpreted in a
more knowledgeable fashion. As a contract document cannot
possibly cover every permutation of events that may occur, it
is imperative that there is a strong basic knowledge base so
that interpretations can be made, leading to fair and equitable
decisions. At the same time, this should be occurring in a
relational way. Participating in a project or contract is not
just a robotic response. It requires personal interaction and
interpretation based on a sound working knowledge. This
sound knowledge gives the various protagonists confidence to
make informed decisions and not hide behind or argue over
various clauses in a contract because of lack of understanding.
Again, keep in mind the previously mentioned quotation by
Voltaire as it will save you considerable time and expense — ‘I
have had two bad experiences with the law. The first time was when
I lost a case. The second time was when I won a case.’
Summary
The administration of a construction contract entails serious
legal obligations. Unfortunately, despite the importance
of the role of the superintendent or administrator, current
engineering education, with some exceptions, only involves
a cursory treatment of the legal issues if at all. The
development and offering of programs as described above
and the recognition by statutory authorities of the need for
contemporary and relevant construction law education and
knowledge will hopefully reduce the incidence of costly and
in fact unnecessary disputes.
Queensland Roads – Edition 12, Department of Transport and Main Roads, October 2012 17