Con­struc­tion con­tracts are more than just a doc­u­ment — remove con­trac­tu­al claus­es at your peril

Your con­struc­tion con­tract will map out the path­way to your build­ing project com­plet­ing on time and with­in bud­get and detail­ing how any loss­es and risks are handled. 

It is an essen­tial tool in man­ag­ing and shift­ing risk dur­ing the con­struc­tion phase and impor­tant­ly, lays out the rules if a dis­pute aris­es. The chances of a dis­pute are great­ly reduced if both par­ties under­stand what the par­ties are agree­ing to.

How can you mit­i­gate and man­age con­struc­tion risk?

It is essen­tial that you:

• select the appro­pri­ate type of con­struc­tion con­tract for your project; and
• analyse and con­sid­er the inter­play between the ordi­nary con­trac­tu­al claus­es, indem­ni­ties, war­ranties (either statu­to­ry or con­trac­tu­al) and representations.

The unique knowl­edge of our con­struc­tion and stra­ta law team mem­bers, across both new builds and reme­di­al works, allows us to advise you as to the appro­pri­ate con­struc­tion con­tract, and to tai­lor that con­tract for your con­struc­tion project. 

Under­stand­ing the essence of each clause is essen­tial in craft­ing a well-drawn con­tract applic­a­ble to the project at hand. 

Why select one type of clause over another? 

Answer­ing this ques­tion requires under­stand­ing of each type of clause and apply­ing that to the spe­cif­ic project.

Ordi­nary Con­trac­tu­al Clauses

• These claus­es spec­i­fy the gen­er­al oblig­a­tions and promis­es of the par­ties to the con­tract set­ting out a broad range of mat­ters, includ­ing: detail­ing the per­for­mance expec­ta­tions, pay­ment terms, dis­pute res­o­lu­tion mech­a­nisms and oth­er oblig­a­tions and rights of the par­ties; they set the frame­work and lay the path­way of how the con­tract will be admin­is­tered, per­formed and finalised.
• Breach­es of ordi­nary con­trac­tu­al claus­es lead to breach of con­tract claims where the injured par­ty seeks to enforce per­for­mance of the con­tract oblig­a­tions of the oth­er par­ty, may lead to ter­mi­na­tion of the con­tract and/​or allow a par­ty to seek dam­ages for its loss­es suffered.
• The bur­den is on the par­ty alleg­ing the breach to prove that the con­tract was breached at the fault of the oth­er par­ty, and that they suf­fered a loss as a result.

Indem­ni­ties: use­ful when you want to ensure com­pen­sa­tion for cer­tain risks or loss­es, inde­pen­dent of any fault or neg­li­gence by the oppo­site party

• These claus­es increase lia­bil­i­ty beyond what is usu­al­ly required by law and oper­ate on a no-fault basis. They are used in con­tracts to place an oblig­a­tion on one par­ty (indem­ni­fy­ing par­ty) to com­pen­sate the loss of the oth­er par­ty (indem­ni­fied par­ty). We use these claus­es to allo­cate risk. As explained by Kir­by J in Andar Trans­port Pty Ltd v Bram­bles Ltd (2004) Indem­ni­ty claus­es are pro­vi­sions that pur­port to exempt one par­ty from civ­il lia­bil­i­ty which the law would oth­er­wise impose upon it. They shift to anoth­er par­ty the civ­il lia­bil­i­ty oth­er­wise attached by law to the first par­ty. Self-evi­dent­ly this is a seri­ous thing to do or to attempt to do.
• Draft­ing an indem­ni­ty is use­ful when you want to ensure com­pen­sa­tion for cer­tain risks or loss­es, inde­pen­dent of any fault or negligence.
• Breach of an indem­ni­ty is a breach of con­tract but does not usu­al­ly lead to ter­mi­na­tion of the con­tract. Rather this breach of con­tract usu­al­ly results in a claim for dam­ages for the loss suf­fered. The indem­ni­fied par­ty does not need to prove fault or neg­li­gence by the oppo­site par­ty, rather only that the indem­ni­ty event occurred and that a loss was suf­fered. This is often an eas­i­er breach of con­tract to prove than for breach of an ordi­nary con­trac­tu­al clause; specif­i­cal­ly because one is not required to prove fault or neg­li­gence on the part of the oppo­site indem­ni­fy­ing party. 

War­ran­ty Claus­es: these are used to assure and promise the oth­er par­ty of the truth of a cer­tain fact

• War­ranties are con­trac­tu­al promis­es about the truth of cer­tain facts or con­di­tions, often which may be dif­fi­cult to ver­i­fy or which may occur in the future. These promis­es are made with the inten­tion of per­suad­ing the oth­er par­ty to enter into the con­tract, for exam­ple mak­ing promis­es about exper­tise, expe­ri­ence, qual­i­ty, con­di­tion or per­for­mance of goods or services.
• Breach of war­ran­ty is a breach of con­tract and typ­i­cal­ly leads to a claim for dam­ages result­ing from the breach but does not usu­al­ly allow for ter­mi­na­tion of the contract.
• The par­ty claim­ing breach of war­ran­ty must prove that the war­ran­ty was breached and that the breach caused loss. One need not specif­i­cal­ly prove that but for the war­ran­ty the oppo­site par­ty would not have entered into the contract.

Rep­re­sen­ta­tion Clauses

• Rep­re­sen­ta­tions are state­ments of fact made to induce the oth­er par­ty to enter into the con­tract. They are not con­trac­tu­al promis­es (like war­ranties) but are con­sid­ered mate­r­i­al to the deci­sion-mak­ing process. One must specif­i­cal­ly prove that the rep­re­sen­ta­tion was the mate­r­i­al rea­son which lead the oppo­site par­ty to enter into the contract.
• If a rep­re­sen­ta­tion is proven to be false, unlike war­ranties, mis­rep­re­sen­ta­tions do not involve breach of con­tract but rather breach of the duty of good faith. The inno­cent par­ty can pur­sue reme­dies for mis­rep­re­sen­ta­tion, such as rescis­sion of the con­tract or dam­ages under tort principles.
• The bur­den of proof rests on the par­ty claim­ing the mis­rep­re­sen­ta­tion to prove that the rep­re­sen­ta­tion was false and that it induced them to enter the con­tract which result­ed in that par­ty suf­fer­ing a loss.

How can we help you mit­i­gate and man­age con­struc­tion risk?

Our con­struc­tion and stra­ta lawyers under­stand the nuances of each con­struc­tion con­tract, how these claus­es func­tion and the mar­ket con­di­tions in the con­struc­tion industry. 

We can assist you to:

• select the cor­rect con­tract to use for your con­struc­tion project or con­struc­tion reme­di­al project;
• analyse the dif­fer­ent types of claus­es select­ing which to amend, include or remove;
• under­stand the ram­i­fi­ca­tions of, for exam­ple, how and when to use each type of clause and how to shift your risk, get your con­struc­tion com­plet­ed on bud­get, and increase prof­itabil­i­ty; and
• ensure you meet your oblig­a­tions under applic­a­ble leg­is­la­tion, and new­ly intro­duced or amend­ed leg­is­la­tion such as the Design and Build­ing Prac­ti­tion­ers Act 2020 (NSW) or the Aus­tralian Con­sumer Laws – Unfair Con­tract Terms pro­vi­sions as set out in Sched­ule 2 of the Com­pe­ti­tion and Con­sumer Act 2010 (Cth). 

By giv­ing you a con­struc­tion con­tract that is tai­lored to you, we can set you, and your con­struc­tion project up for suc­cess and profitability.