Avoiding Adjudication Pitfalls with Construction Contracts

3 August 2015

As published in CK Momentum Issue 2  (Click here to download)

Litigation & Insolvency Partner, Tim Crumpton, looks at the importance of having the terms of a construction contract clearly set out and agreed between the parties, preferably in writing.

The security of payments legislation in the various States and Territories is designed to ensure those carrying out construction work receive progress payments as quickly as possible for goods and services they provide. The legislation achieves that aim by having an adjudication process within a short timeframe, thereby avoiding lengthy Court processes.

However, the legislation does not extinguish a party’s other legal rights, including the right to recover or “claw back” part or all of a progress claim. Indeed, the legislation specifically provides for the final rights and liabilities of parties to be reserved for determination in subsequent court proceedings.

CONTRACT OR OTHER ARRANGEMENT

A fundamental requirement to engage the jurisdiction of the security of payment legislation is that there exists between the parties a “construction contract”. This term is defined as a “contract or other arrangement” under which one party undertakes to carry out construction work, or to supply related goods and services, for another party. It can be written, verbal or a combination of both.

THE IMPORTANCE OF HAVING A LEGALLY BINDING CONSTRUCTION CONTRACT

Having a construction contract that is in clear and agreed terms is not only fundamental to invoke the jurisdiction under the security of payments legislation, but it will also reduce the possibility of a dispute which may lead to costly Court litigation. Recently, an architectural firm undertook extensive design work on a project for a multinational company. The firm provided a fee schedule on commencement and asserted it was accepted orally. However, the fee schedule was not countersigned by the multinational. When the decision was made not to proceed with the project, the firm issued a payment claim on its understanding that the fee schedule had been verbally accepted. The multinational denied the existence of a contract or arrangement on the basis that the firm had agreed to undertake design work on the condition it would not render any fees until it was appointed as the architect to the project.

Although the claim by the firm was settled, had a security of payments claim instituted by the firm resulted in an order for payment of its claim (in excess of $1 million), the multinational could have taken court action to claw back that amount, on the basis that whilst there may have been an “arrangement” which invoked the security of payments jurisdiction, there was not an enforceable contract at law. Had that happened, the firm would have needed to argue a “quantum meruit” entitlement to its fees (ie that it should be paid a reasonable amount for work performed, even in the absence of a legally binding agreement).

It’s easy to see how the costs associated with the dispute could have escalated quickly if Court proceedings were commenced. What’s worse, the firm would have an uncertain result, with the Court trying to assess the value of its work.

PAY NOW, ARGUE LATER

It is therefore critical for both parties to a construction contract to ensure that the terms of their agreement are clear and that they have been agreed on, otherwise you run the risk of “paying now and arguing later”. The terms of the agreement should, wherever possible, be in writing and signed by the parties or at least there should be some evidence of the terms and the parties agreement to them, such as an email exchange.

This bulletin is produced as general information in summary for clients and subscribers and should not be relied upon as a substitute for detailed legal advice or as a basis for formulating business or other decisions. ClarkeKann asserts copyright over the contents of this document. This bulletin is produced by ClarkeKann. It is intended to provide general information in summary form on legal topics, current at the time of publication. The contents do not constitute legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters. Liability limited by a scheme approved under professional standards legislation. Privacy Policy

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