Large scale builds involve complex commercial contracts. The scope documents are inevitably convoluted and painful to work through. Clarifications and alternative tenders sometimes just confuse matters more.
Sadly, the result is often a contract that party A thinks does one thing, and party B thinks does another thing. This provides a foundation for things to go wrong from day 1 – and if the financial consequences are significant enough, disputes typically then arise.
Today we discuss one such case. While the Court dealt with a number of topics here, we’re focusing on just two: how to interpret a specification, and time bars for delay claims.
Contract Interpretation, Tender, and Works to be Done
Built Qld Pty Limited v Pro-Invest Australian Hospitality Opportunity (ST) Pty Ltd concerned an alternative tender and its effect on an amended AS 4902-2000 for the design and construction of the building to be known as the Holiday Inn Express Spring Hill Hotel.
The original design proposed by the developer included the installation of an air conditioning unit capable of not only temperature control, but also mode (i.e. heating and cooling) control in each room. That is the design which was put out to the market open for tender.
The builder won the contract in 2015 by alternative tender. Among other amendments, the builder proposed a change to the type of air conditioning. The design on which the builder tendered was ~$800,000 cheaper than the original design.
The developer accepted the alternative tender and works began on the project, which is about when things started getting a bit tense.
Despite accepting the alternative tender with its proposed different air conditioning system, a dispute arose regarding the appropriateness of the air conditioning units installed.
The builder received a comprehensive defects notice on the evening of 11 August 2016. That notice, among other things, directed the builder to remove and replace the air-conditioning system to one that had mode control in each individual room.
The builder argued that the defects notice constituted a direction to carry out a variation which also allowed it to claim significant extensions of time (EOT). So, much of the parties’ fortunes swung on the threshold issue of what the Contract actually required and whether the builder had delivered it.
Why Effective Contract Drafting is Important.
Large building contracts are not documents where “close enough is good enough”.
The expression of the parties’ intentions requires precision and clarity, or at least as much as it can possibly be achieved.
At its most fundamental, this dispute revolved around the same core problems that many contractors face: the process that resulted in the contract didn’t clearly capture both parties’ desired intentions.
But how could that possibly be, given the large cost difference and the extensive contracting process?
How a Builder’s “clarifications” can Interact with the Principal’s Project Requirements (PPR).
Because the builder had submitted for an alternative design in the tender, the Contract introduced “clarifications” regarding the alternative work to be performed:
“The Contractor’s alternative proposal for structural and mechanical systems on the basis that the Contractor meets the performance requirement of the tender drawings and specifications.”
So, with an alternative tender having been accepted, could the developer argue that the air conditioning system that had been installed was actually defective, because it still failed to meet the “performance requirement” of the original drawings and specifications?
Performance Requirement, or Prescriptive Requirement? – Whether Works are Defective
There are two types of recognised requirements a principal may contractually impose:
- a prescriptive requirement – where the principal chooses the exact system or equipment that it requires to be built and the desired result;
- a performance requirement – where the principal provides a description of the works to be done, while leaving it up to the contractor to determine the precise means by which they will achieve that result.
Here, although the principal had a subjective intention to have an air conditioning unit installed with temperature and mode control, the Court of Appeal considered the original specifications in detail and held that there was no prescriptive requirement to provide precisely that kind of air conditioning system.
The Court of Appeal’s view was that the original specification did not contain “performance requirements” requiring mode control in each room.
Therefore, the Court held that the defects notice was a direction to design and construct an air conditioning system other than that required by the Contract. Accordingly, “defects notice” was held to be a direction to carry out a variation.
When a Contractor “Should Reasonably have Become Aware” of a “Qualifying Cause of Delay”.
So, if the defects notice was actually a variation, was the builder entitled to an EOT as a result?
This was a subsequent issue for the Court to consider.
The Contract provided at Clause 34.3:
“The Contractor shall be entitled to such EOT for carrying out WUC (including reaching practical completion) as the Superintendent assesses, if:
(b) the Contractor gives the Superintendent, within 14 days of when the Contractor should reasonably have become aware of that qualifying cause of delay occurring, a written claim for an EOT evidencing the facts of causation and of the delay to WUC (including extent);”
The developer argued that the builder’s EOT claim was time barred as it was made on 26 August 2016, and the “defects notice” was received on the evening of 11 August 2016. In other words, the developer argued that the EOT claim was made outside of the 14 day time bar in the Contract.
However, nuances in contract language can make all the difference to the result.
In this Contract, the 14 day time bar started ticking when the builder “should reasonably have become aware of the qualifying cause of the delay”. This can be contrasted with, for instance, when the delay actually started.
In this case, after the defects notice was issued, site personnel from the builder had endeavoured to make enquiries about the notice, including:
- immediate consultation with a more senior personnel member, including the builder’s Commercial and General Manager; and
- seeking advice from the National Commercial Director;
- meetings with General Counsel of the builder; and
- issuing a notice on the following day confirming that the builder considered the notice was a variation direction.
The Court of Appeal found the builder’s conduct to be appropriate in the circumstances. Relevantly for the EOT, the Court considered that the builder could only reasonably have become aware that the notice constituted a qualifying cause of delay after enquiries were made as to:
- whether an engineer considered the defects alleged in the notice to be of any merit;
- legal advice concerning the contractual effect of the notice (specifically, whether it functioned as a defects notice or, in substance, it was direction to perform a variation);
- the contractual effect of the notice in terms of delay to completion, EOT, and the requirement for notices to be given under the Contract; and
- how the builder should have responded to the notice, as a matter of commerciality.
It was not until all the above information had been obtained that a builder could, or reasonably should, have become aware that the contents of the notice was a qualifying cause of delay.
Accordingly, the Court held that the builder could not have reasonably become aware of the qualifying cause of delay before 12 August (i.e. the following day). Therefore, the builder’s EOT claim was not time barred as it was given by 26 August 2016.
As it was not time barred, the builder was awarded significant EOTs and delay costs. These awards simply would not have been possible if the wording in the EOT clause was subtly different and time started ticking immediately on the giving of the defects notice/direction.
A Stitch in Time, Saves Nine
In the hustle and bustle of contract negotiations it’s easy to get pressured into the “let’s just get it signed” approach and begin the project on the assumption you’ll be able to deal with issues on the fly.
More and more, however, that’s not the case. Developers and principals regularly apply rigid contractual interpretations and are becoming far less willing to relax their stance.
Here we have seen a real world example of two common areas that can make or break your project:
- nailing down the nature of the specifications and scope requirements, so everybody is on the same page about what is being built; and
- the proper interpretation of your time periods to bring claims – in particular EOTs.
We’ve also seen how subtle language changes can make material differences to the outcomes, and shouldn’t just be glossed over.
A comprehensive contract review accompanied by a proper de-briefing and training system for your project helps put you one step ahead when it comes to these areas so that you’re going into your next contract eyes wide open.
If you want to start your next project the right way – give us a call before you sign.