Construction and infrastructure projects in Australia invariably involve many parties—government, equity funders, debt funders, designers, builders, operators, subcontractors and users, among others. In the common law tradition, relations between all of these parties are almost always regulated by contract. Usually such contracts are reduced to writing. Provided certain formalities are satisfied, the parties’ agreement in such contracts is binding on them and their counterparties and is enforceable through the courts.
Building contracts in Australia vary in many ways; however, a key manner in which they differ is the level of risk and control which is passed to the contractor. The agreements vary, ranging from fixed time and cost, lump sum, design and construct, engineer, procure and construct turnkey contracts, through to cost-plus, contract management and contractual alliances. Moreover, principals may have one contract with a contractor who then subcontracts out the work (with the contractor bearing integration, coordination and interface risk), or the principal may retain integration, coordination and interface risk by contracting out various portions of work to a number of contractors.
Key issues which frequently occupy significant time and effort when negotiating building contracts in Australia (and which are more likely to lead to dispute) include:
- responsibility for site conditions;
- responsibility for planning consent;
- circumstances entitling variations;
- circumstances entitling time and cost relief;
- level of contract price, performance security and liquidated damages;
- completion requirements;
- the principal’s ability to complete works warranties, including a fitness for purpose warranty;
- indemnities and insurance;
- any liability exclusions and limitations; and
- consequences of and circumstances entitling termination.
Building and related contracts will frequently include the requirements of other project stakeholders (even though those stakeholders are not parties to the building contract), such as banks, government or offtakers (such as the party to whom a power station’s electricity is contracted to). These requirements must also be complied with by the parties.
The most common contractual remedies pursued by parties in Australia are:
- Termination—this enables a wronged party to regard the contract as at an end (for example, where the principal has not provided the contractor access to the site within a maximum prescribed period). Termination may be used in conjunction with other remedies. In 2018 the Federal Government introduced an ipso facto regime through the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth), which restricts a party from exercising any contractual right (including to terminate a contract) solely on the basis that its counterparty has entered into certain types of restructuring or insolvency procedure (see discussion in Chapter 9 of this publication, ‘Restructuring and insolvency’ for more detail). This new regime applies to the majority of construction contracts entered into on or after 1 July 2018 (but note that there are a number of contract types excluded from this regime, including certain arrangements that involve a special purpose vehicle in a public-private partnership).
- Damages—the general principle behind contractual damages in Australia is to as closely as possible restore the wronged party to the position it would have been in pursuant to the contract had it not been wronged, provided that the wronged party has not also breached the relevant contract and that other formal requirements are satisfied.
- Specific performance—this also aims to restore the wronged party to the position it would have been in pursuant to the contract had it not been wronged by requiring the breaching party to perform its contractual obligation (for example, supply a transformer or complete construction of a building), and is typically used where damages are regarded as an inadequate remedy.
- Injunctions—this is used to restrain a party from carrying out a certain act where that act is or may be prohibited by contract.
Contractual remedies are further supplemented in Australia by:
- equitable remedies, which include specific performance and injunctions (although different to those under contract) and rescission, rectification, estoppel and constructive trusts;
- tortious remedies, such as damages, specific performance and injunctions (although again different to those under contract and at equity) for torts such as negligence and nuisance; and
- statutory remedies, such as those under the Australian Consumer Law for misleading and deceptive conduct or fines and penalties under other statutes.
Contractual counterparties are entitled to liquidate their losses by contract in Australia, provided that such liquidated losses are a genuine pre-estimate of the loss which will be suffered by a party if the given circumstance occurred, and that such losses are not penal in nature and therefore unenforceable. Delay and performance liquidated damages are typically provided for in construction contracts in Australia.