A Paper Prepared for the Civil Contractors Federation on the 14 September 2005 Speaker: Kim Lovegrove Principal of Lovegrove Solicitors, Commercial and Construction Lawyers.
2 Dispute Avoidance And Resolution For Commercial Builders Introduction In a perfect world, all possible disputes can be foreseen and avoided before they get out of control. But it is not a perfect world. The nature of building contracts can be the science of dispute resolution. Effective dispute resolution clauses can be the most important part of the contract. The goal is to avoid long days in Court and lining the pockets of lawyers unnecessarily. It can also avoid creating a situation where people can no longer sit in the same room. The Building legislation and insurance industry are consumer driven. So builders need to rely on contracts to settle disputes quickly and cost effectively. Effective dispute resolution clauses protect a builder s interests. Expensive Court litigation becomes the ambulance at the bottom of the cliff. Commercial Building Dispute Resolution These can involve large scale disputes, and blue chip sums. Clauses should be included in contracts so that the contract rules the relationship and not the threat of Court. Commercial building contracts are obviously not ruled by the Domestic Building Contracts Act 1995. So you VIC NSW ACT Lvl 2/405 Little Bourke St GPO Box 839 Lvl6/60 Marcus Clarke St Melbourne VIC 3000 Sydney NSW 2001 Canberra ACT 2601 Tel: (03) 9600 3522 Tel: 1300 662 869 Tel: 1300 662 869 Fax: (03) 9600 3544 Fax: 1300 662 893 Fax: 1300 662 893 E-mail: lovegrovesolicitors@bigpond.com www.lovegrovesolicitors.com can have Adjudication and Arbitration clauses, as well as Mediation clauses. Adjudication is relatively speedy dispute resolution. It is otherwise known as expert determination. The parties agree to appoint a mutually agreed Expert to resolve disputes under the contract. It involves binding rulings as governed by the contract. The potency of the clause will be that the determination of the Expert is binding on the parties. Because the parties have agreed to that in the contract, a party can rely on that later on. The Expert is located through the Law Institute listing or the Institute of Arbitrators and Mediators. A lawyer with a specialist background in building disputes, or even a building consultant can be used as an Expert. The Adjudication is not governed by any legislation. It is not strictly bound by procedural rules and rules of evidence. There can be written submissions and the Expert will generate a written determination. Arbitration can also be used. It is governed by the Commercial Arbitration Act and will be bound by those legal rules. An Arbitrator can be appointed by a trade association such as the MBAV or the Institute of Arbitrators. Arbitration is more like a formal Court hearing. There are extensive pleadings, cross examination and so on. If no dispute resolution clause is used, the commercial building dispute may go to Court. This will be the
3 Magistrates Court for disputes up to $40,000. For disputes over that amount the County Court is involved. Lovegrove Lawyers are proficient in drafting the clauses needed to help resolve disputes as speedily and inexpensively as possible. The right clause should be chosen for the right situation. Dispute Avoidance Know your Contract The duty to act honestly and fairly under the AS2124 form of Agreement A common form of the commercial building contract is the AS 2124. The AS 2124 involves a Superintendent in certifying payment claims, variations, extension of time claims etc. The Principal must ensure that the Superintendent acts honestly and fairly (Clause 23). Also, the Superintendent must: act within the time prescribed; arrive at a reasonable measure of value of work, quantities and time. There is a case: Abigroup v Peninsular [2001] NSWSC 752 The Principal had failed to disclose to the Contractor that it had signed an agency agreement with the Superintendent. (a) The Contractor wouldn t have gone into the contract if it knew that. (b) The contract would be void ab initio, with damages to the Contractor. (c) Misleading and deceptive under s52 of the Trade Practices Act, but the Court said the same consequences probably attach under clause 23 of the contract. Claims for payment Clause 42.1: the Principal must issue a payment certificate within 28 days of a payment claim, or the Principal shall pay the amount of the Contractor s claim. Claims can include amounts due to the Contractor arising out of or in connection with the contract. Even if an amount is deemed payable, it can be later disputed (clause 47).
4 Dispute Resolution in the Contract Clause 47.1: a Notice of Dispute must be issued to the other party. Copied to the Superintendent. All directions given by the Superintendent, that the Contractor opposes, should be disputed in this way. Some directions by the Superintendent may call for a time limit to dispute the direction. There are then 2 Alternatives to dispute resolution. Usually only one conference takes place, and then there is a referral to arbitration or litigation. What about the Final Claim? Traditionally the hardest to get paid on. Clause 42.7: within 28 days of end of Defects Liability Period the Contractor must issue a Final Payment Claim. If not claimed within the 28 days you could be time barred. Within 14 days of the Final Payment Claim, the Superintendent shall issue a Final Certificate. The Contractor or Principal can only challenge the Final Certificate within 15 days of its issue except in cases of fraud, calculation mistakes, later defects. The challenge is by Notice of Dispute. What if I m held up by others? Prolongation Claims Delay or disruption costs can be claimed under clause 36. The claim must be in writing and be based on an extension of time that is granted. The extensions of time are granted pursuant to clause 35.5 for various reasons. Be mindful of the reasons for which you are claiming delay costs. Some delay reasons may allow a reasonable payment for extra costs. Other delay reasons may have the extra costs stated in the Annexure. Beware the special conditions of contract Some contracts will have an army of special conditions changing or removing the general conditions. Beware of this as it will affect your rights. But where there is a conflict between the general conditions and the tender documents the general conditions prevail. Seek legal advice before signing some contracts. The Architect Factor A typical contract involving an Architect is the ABIC MW-1 2001 form of Agreement. An Architect administers the contract on behalf of the Owner. The Architect is the Owner s Agent for the purposes of giving instructions to the Contractor. However, when the Architect is assessing, valuing or certifying works, the Architect has a duty to act independently (and not as an Agent). The Architect s role is set out in section A5. The Owner has a duty to ensure that in acting as an assessor,
5 valuer or certifier, the Architect complies with the Contract and acts fairly and impartially. The Architect can issue instructions to the Contractor during the Works, provided that the instruction is given in writing. The Owner should not unduly influence decisions made by the Architect, as that may constitute a breach of the contract (section A5.3). governs dispute resolution. A written notice of dispute must be served by 1 of the parties on the other party. Representatives of the parties must then meet within a tight timeframe (5 working days) to attempt to resolve the dispute in conference. Should agreement not be reached the Agreement then provides for Mediation as a second step. As a third phase, the parties must refer the matter to either Expert Determination or Arbitration. The Contractor can dispute a certificate, notice or written assessment by the Architect, but only by giving the Architect a written notice under section R3 within 20 days after receiving the certificate, notice or written assessment. Should the parties find themselves in dispute, section P of the Agreement Practical Completion The Architect is the referee as to when Practical Completion is reached. In one situation we encountered with an Architect administered contract, the Architect issued a notice stating that Practical Completion had been reached. It was clear that this was a
6 fiction. The Architect then issued a further notice within the period saying liquidated damages would apply. The Timely Avoidance of Disputes With Architect administered contracts, make sure that you keep the paper trail. Ensure all variations and extension of time requests are documented. Issue timely notices of dispute to directions if the contract allows that. With contract administration, being pedantic with the paperwork can be a virtue. Kim Lovegrove, Principal of Lovegrove Solicitors, Construction and Commercial Lawyers Lovegrove Solicitors provide expertise in building and construction law, including representation in building disputes and front end advice on contract interpretation. www.lovegrovesolicitors.com