Upcoming Mallesons seminarsWith the large growth in the property development sector in recent times, property developers have turned to alternative project delivery methods over the traditional construct only contract. As a result, Design & Construct (D&C) Contracts have become increasingly used on large property developments, particularly high rise commercial and residential accommodation.
Under a D&C Contract, the Contractor is obliged to deliver a completed development to a developer. As its name suggests, this includes an obligation to prepare the detailed design of the development.
D&C Contracts have been widely used on large scale, complex engineering and infrastructure projects for many years and are generally the preferred project delivery method.1 While those sectors are very familiar with D&C Contracts, they have only gained widespread acceptance in the property development sector as an efficient project delivery method over the last decade. It is therefore timely to examine the use of D&C Contracts in the property development sector.
While this paper will focus on the property development sector, many of the issues raised apply to the use of D&C Contracts in other sectors.
Prior to examining property development D&C Contracts in detail, it is useful to explore the basic features of a property development project.
The Contractual Structure
The diagram below illustrates the basic contractual structure of a (project financed) property development project using a D&C Contract.
The detailed contractual structure will vary from project to project. However, most projects will have the basic structure illustrated above. As can be seen from the diagram, the Developer will usually enter into agreements which cover the following elements:
- An agreement under which the Developer acquires the land on which the project is to be developed. In most cases, this will be a Sale and Purchase Agreement under which the Developer purchases the land from another party. However, this is not always the case. In some cases, the land may be unalienated Crown land, ie, land that has never been the subject of a grant of freehold. In those circumstances, the Developer will acquire the land from the relevant Crown entity (Commonwealth or State government or local council) and the grant may contain conditions regarding the proposed development. For example, it may require the Developer to complete the development within a specified time frame.
- For a residential development, Sales Agreements between the Developer and a purchaser under which a purchaser agrees to purchase one or more of the apartments/dwellings forming part of the development from the Developer. Sales Agreements usually require the purchaser to give the Developer a deposit upon entering the agreement with settlement being concluded when the development or that part is completed.
To obtain finance from lenders to commence construction, the Developer will need to have sold the majority of the apartments or at least a sufficient number to satisfy the lenders that the development will be profitable. Even where the Developer does not require finance to develop the project, it is unlikely to proceed if it has not sold enough apartments for the development to be profitable. - For a retail/office development, Agreements for Lease between the Developer and prospective lessees, under which the lessees agree to enter into a lease at a future date with the Developer for the retail or office space to be constructed.
As in the case of a residential development, the Developer will need to have a commitment from prospective lessees for the majority of retail/office space to obtain finance from lenders. - A construction contract governing the construction of the property development. There are a number of approaches that can be taken. A D&C Contract is one approach. In addition to the traditional construct only contract, a project management contract is also an option available to the Developer. This involves a Contractor managing the construction of the development for a fee but with the Developer entering directly into a construction contract with each of the various trade contractors. The choice of contracting approach will depend on a number of factors including the time available, the lender’s requirements and the identity of the Contractor(s). The major advantage of the D&C Contract over the other possible approaches is that it provides for a single point of responsibility. This is discussed in more detail below.
- Consultancy Agreement - Agreements governing the design of the development. Although under the D&C Contract the Contractor is responsible for the design of the development, the Developer will be the party that initially engages the various design consultants such as the architects and engineers. During these formative stages of the development, the design consultants will prepare preliminary design documentation that will enable the Developer to be able to sell the proposed apartments or enter into Agreements for Lease in relation to the office/retail space. They will also prepare the Project Brief which forms part of the D&C Contract, and sets out the scope of works and the Developer’s specific requirements that the D&C Contractor must satisfy in designing and constructing the development. Upon the Contractor entering into the D&C Contract with the Developer, the Consultancy Agreements with each consultant are novated to the Contractor.
- Financing and security agreements with the lenders to finance the development of the project.
Bankability
A bankable contract is a contract with a risk allocation between the Contractor and the Developer that satisfies the lenders. Lenders focus on the ability (or more particularly the lack thereof) of the Contractor to claim additional costs and/or extensions of time as well as the security provided by the Contractor for its performance. The less comfortable the lenders are with these provisions the greater amount of equity support the sponsors will have to provide. Obviously price is also a consideration but that is usually considered separately to the bankability of the contract because the contract price (or more accurately the capital cost of the property development) goes more directly to the bankability of the project as a whole.
Before examining the requirements for bankability it is worth briefly considering the appropriate financing structures and lending institutions. The most common form of financing for large property development projects is project financing. Project financing is a generic term that refers to financing secured only by the assets of the project itself. Therefore, the revenue generated by the project must be sufficient to support the financing. Project financing is also often referred to as either “non-recourse” financing or “limited recourse” financing.
The terms “non-recourse” and “limited recourse” are often used interchangeably, however, they mean different things. “Non-recourse” means there is no recourse to the project sponsors at all and “limited recourse” means, as the name suggests, there is limited recourse to the sponsors. The recourse is limited both in terms of when it can occur and how much the sponsors are forced to contribute. In practice, true non-recourse financing is rare. In most projects the sponsors will be obliged to contribute additional equity in certain defined situations.
In assessing bankability lenders will look at a range of factors and assess a contract as a whole. Therefore, in isolation it is difficult to state whether one approach is or is not bankable. However, generally speaking the lenders will require the following:
- a fixed completion date
- a fixed completion price
- liquidated damages for delay
- security from the Contractor and/or its parent
- large caps on liability (ideally, there would be no caps on liability, however, given the nature of D&C contracting and the risks to the contractors involved there are often caps on liability), and
- restrictions on the ability of the Contractor to claim extensions of time and additional costs.
A D&C Contract delivers all of the requirements listed above in one integrated package. This is one of the major reasons why it is becoming the predominant form of construction contract used on large scale project financed property development projects.
1 They are more commonly referred to as engineering, procurement and construction contracts. The difference is that for most of these projects they include a testing and commissioning regime to ensure to facility produces the guaranteed amount and quality of the product (e.g. for power or process plants).
2 For example, the lease of retail or office space.
3 For example, the sale of an apartment or other residential accommodation.
The key clauses in any construction contract are those which impact on:
- time
- cost, and
- quality.
The same is true of D&C Contracts. However, D&C Contracts tend to deal with issues with greater sophistication than other types of construction contracts. This is because, as mentioned above, a D&C Contract is designed to satisfy the lenders’ requirements for bankability.
A single point of responsibility. The Contractor is responsible for all design, construction and commissioning activities. Therefore, if any problems occur the Developer need only look to one party - the Contractor - to both fix the problem and provide compensation. As a result, if the Contractor is a consortium comprising several entities the D&C Contract must state that those entities are jointly and severally liable to the Developer.
A fixed contract price. Risk of cost overruns and the benefit of any cost savings are to the Contractor’s account. The Contractor usually has a limited ability to claim additional money which is limited to circumstances where the Developer has delayed the Contractor or has ordered variations to the works.
A fixed completion date. D&C Contracts include a guaranteed completion date that is either a fixed date or a fixed period after the commencement of the D&C Contract. If this date is not met the Contractor is liable for delay liquidated damages (DLDs). DLDs are designed to compensate the Developer for loss and damage suffered as a result of late completion of the property development. To be enforceable, DLDs must be a genuine pre-estimate of the loss or damage that the Developer will suffer if the property development is not completed by the target completion date. The genuine pre-estimate is determined by reference to the time the contract was entered into.
DLDs are usually expressed as a rate per day which represents the estimated extra costs incurred (such as extra insurance, supervision fees and financing charges) and losses suffered (revenue forgone) for each day of delay.
On a residential property development, the Contractor may also be liable, in addition to DLDs, for other losses suffered by the Developer, as a result of late completion. For example, if Sales Contracts are terminated or if the Developer has to refinance the project as a result of late completion. These losses are difficult to quantify at the time the D&C Contract is entered into and are therefore generally not included as part of DLDs. A D&C Contract in such circumstances will usually provide that those types of losses can be recovered in addition to the payment of DLDs.
The D&C Contract must also provide for the Contractor to be granted an extension of time when it is delayed by the acts or omissions of the Developer. The extension of time mechanism and reasons why it must be included are discussed later.
Caps on liability. As mentioned above most D&C contractors will not, as a matter of company policy, enter into contracts with unlimited liability. Therefore, many D&C Contracts for property development projects cap the Contractor’s liability at a percentage of the contract price. This varies from project to project, however, an overall liability cap of 100% of the contract price is common. In addition, there is normally a sub-cap on the Contractor’s liquidated damages liability. For example, DLDs might be capped at 20% of the contract price.
There will also often be a prohibition on the claiming of consequential damages. Put simply consequential damages are those damages which do not flow directly from a breach of contract but which were in the reasonable contemplation of the parties at the time the contract was entered into. This used to mean heads of damage like loss of profit. However, loss of profit is now usually recognised as a direct loss on project financed projects and, therefore, would be recoverable under a contract containing a standard exclusion of consequential loss clause. Nonetheless, care should be taken to state explicitly that liquidated damages can include elements of consequential damages. Given the rate of liquidated damages is pre-agreed most contractors will not object to this exception.
In relation to both caps on liability and exclusion of liability it is common for there to be some exceptions. The exceptions may apply to either or both the cap on liability and the prohibition on claiming consequential losses. The exceptions themselves are often project specific, however, some common examples include cases of fraud or wilful misconduct, losses which are insurable and breaches of the intellectual property warranties.
Security. It is standard for the Contractor to provide performance security to protect the Developer if the Contractor does not comply with its obligations under the D&C Contract. The security takes a number of forms including:
- a bank guarantee for a percentage, normally in the range of 5-10%, of the contract price. The actual percentage will depend on a number of factors including the other security available to the Developer, the payment schedule (because the greater the percentage of the contract price unpaid by the Developer at the time, the more likely it is to draw on security ie: to satisfy DLD obligations the smaller the bank guarantee can be), the identity of the Contractor and the risk of it not properly performing its obligations and the price of the bank guarantee
- a parent company guarantee - this is a guarantee from the ultimate parent (or other suitable related entity) of the Contractor which provides that it will perform the Contractor’s obligations if, for whatever reason, the Contractor does not perform.
Variations. The Developer has the right to order variations. If the Developer wants the right to omit works either in their entirety or to be able to engage a different Contractor, this must be stated specifically. In addition, a properly drafted variations clause should make provision for how the price of a variation is to be determined. In the event the parties do not reach agreement on the price of a variation, the Developer or its representative should be able to determine the price. This determination is subject to the dispute resolution provisions. For some larger variations the Developer may also wish to receive additional security. If so, this must also be dealt with in the variations clause.
Defects liability. The Contractor is usually obliged to repair defects that occur in the 12 months following the Date for Practical Completion. Defects liability clauses can also be tiered. For example, on a residential development project, there may also be an Initial Defects Liability Period and a Purchaser’s Defects Notification Period.
The Initial Defects Liability Period will usually be an 8 to 12 week period commencing on the date Practical Completion is achieved. Its purpose is to ensure that the Contractor attends to the rectification of all defects within that shorter period rather than over the usual 12 month Defects Liability Period. Upon expiry of the Initial Defect Liability Period and the rectification of any defects, a portion of the security held is returned to the Contractor with the balance being returned at Final Completion.
The Purchaser’s Defect Notification Period will usually be a 4 to 6 week period commencing at a specified time after Practical Completion in which a purchaser of an apartment may notify the Contractor of a defect or omission in that apartment. The Contractor will usually be obliged to rectify that defect or omission promptly.
There may also be a separate Defects Liability Period for different parts of a project. This will usually occur where the project will be completed in stages. On such projects each stage is a “Separable Portion” under the D&C Contract and will have a separate Defects Liability Period. Separable Portions/Staged Completion is discussed in more detail below.
Intellectual property. The Contractor warrants that it has rights to all the intellectual property used in the execution of the works and indemnifies the Developer if any third parties’ intellectual property rights are infringed. The Contractor is also obliged to use reasonable endeavours to procure from each author of the design documentation express agreement that they will not enforce any of their moral rights in the design documentation.
Force majeure. The parties are excused from performing their obligations if a force majeure event occurs. This is discussed in more detail below.
Suspension. The Developer usually has the right to suspend the works.
Termination. This sets out the contractual termination rights of both parties. The Contractor usually has very limited contractual termination rights. These rights are limited to the right to terminate for non-payment or for prolonged suspension or prolonged force majeure and will be further limited by the tripartite or direct agreement between the Developer, the lenders and the Contractor. The Developer will have more extensive contractual termination rights. They will usually include the ability to terminate immediately for certain major breaches or if the Contractor becomes insolvent and the right to terminate after a cure period for other breaches. In addition, the Developer may have a right to terminate for convenience. It is likely the Developer’s ability to exercise its termination rights will also be limited by the terms of the financing agreements.
Project Brief. This sets out the scope of works to be designed and constructed by the Contractor and must include all of Developer’s specific requirements. The Project Brief is discussed in more detail below.
Whilst there are, as described above, numerous advantages to using a D&C Contract, there are some disadvantages. These include the fact that it can result in a higher contract price than alternative contractual structures. This higher price is a result of a number of factors not least of which is the allocation of almost all the construction risk to the Contractor. This has a number of consequences, one of which is that the Contractor will have to factor into its price the cost of absorbing those risks. This will result in the Contractor building contingencies into the contract price for events that are unforeseeable and/or unlikely to occur. If those contingencies were not included the contract price would be lower. However, the Developer would bear more of the risk of those unlikely or unforeseeable events. Sponsors have to determine, in the context of their particular project, whether the increased price is worth paying.
As a result, sponsors and their advisers must critically examine the risk allocation on every project. Risk allocation should not be an automatic process. Instead, the Developer should allocate risk in a sophisticated way that delivers the most efficient result. For example, if a project is being undertaken in an area with unknown geology and without the time to undertake a proper geotechnical survey, the Developer may be best served by bearing the site condition risk itself as it will mean the Contractor does not have to price a contingency it has no way of quantifying. This approach can lower the risk premium paid by the Developer. Alternatively, the opposite may be true. The Developer may wish to pay for the contingency in return for passing off the risk which quantifies and caps its exposure. This type of analysis must be undertaken on all major risks prior to going out to tender.
Another major disadvantage of a D&C Contract becomes evident when problems occur during construction. In return for receiving a guaranteed price and a guaranteed completion date, the Developer cedes most of the day-to-day control over the construction. Therefore, project companies have limited ability to intervene when problems occur during construction. The more a Developer interferes the greater the likelihood of the Contractor claiming additional time and costs. In addition, interference by the Developer will make it substantially easier for contractors to defeat claims for liquidated damages and defective works.
Obviously, ensuring the project is completed satisfactorily is usually more important than protecting the integrity of the contractual structure. However, if a Developer interferes with the execution of the works they will, in most circumstances, have the worst of both worlds. They will have a contract that exposes them to liability for time and costs incurred as a result of their interference without any corresponding ability to hold the Contractor liable for delays in completion or defective performance. The same problems may occur even where the D&C Contract is drafted to give the Developer the ability to intervene. In many circumstances, regardless of the actual drafting, if the Developer becomes involved in determining how the Contractor executes the works then the Contractor will be able to argue that it is not liable for either delayed or defective performance.
As a result, it is vitally important that great care is taken in selecting the Contractor and in ensuring the Contractor has sufficient knowledge and expertise to execute the works. Given the significant monetary value of D&C Contracts, and the potential adverse consequences if problems occur during construction, the lowest price should not be the only factor used when selecting contractors.
General interface issues
As noted in the earlier section above, a D&C Contract is one of a suite of agreements necessary to develop a property development project. Therefore, it is vital that the D&C Contract properly interfaces with those other agreements. In particular, care should be taken to ensure the following issues interface properly:
- commencement and completion dates
- liquidated damages amounts and trigger points
- caps on liability
- indemnities
- entitlements to extensions of time
- insurance
- force majeure, and
- intellectual property.
Obviously, not all theses issues will be relevant for all agreements. In addition to these general interface issues that apply to most types of projects, there are also property development project issues that must be considered. They are discussed in more detail below
Registration of plan of subdivision
Most property development projects will involve the Developer selling part of the development and will therefore require the land or part of the land in question to be subdivided. However, before any sale can be completed a plan of subdivision will need to be registered.
Sales Agreements will usually provide that the settlement of the property in question is subject to the registration of the plan of subdivision. The agreement will usually allow either party to terminate the contract if the plan is not registered by an agreed date. There should also be provision for the agreed date to be extended if the completion of the development is delayed for reasons beyond the Developer’s control.
Given the importance attached to the registration of the plan of subdivision, it is vital that these issues are clearly defined in the D&C Contract. It should address whether the Developer or the Contractor is responsible for carrying out the survey work necessary to prepare the plan of subdivision and which party is responsible for its preparation and registration. If under the D&C Contract the Developer is responsible for these tasks, then provision should be made for the Contractor to complete all works necessary for the survey to be carried out by an agreed date. This will allow the Developer sufficient time to prepare the plan of subdivision and ensure it is registered before or at the time practical completion is achieved. If these issues are not adequately addressed in the D&C Contract, delays in the registration of the plan of subdivision are likely to occur which in turn will delay the settlement of the Sales Agreements.
Novation of consultancy agreements
Although under a D&C Contract the Contractor is responsible for design, it will be the Developer that initially engages the project designers and consultants on a property development project.
The reason for this is that these consultants will prepare preliminary design documentation that will enable the Developer to market the development to prospective purchasers and lessees. This work will be completed well before the Developer enters into the D&C Contract with the Contractor. The consultants will also assist the Developer in preparing the Project Brief.
Once the Developer enters into the D&C Contract with the Contractor, all of the Consultancy Agreements are then novated to the Contractor. It is therefore vital that both the Consultancy Agreements and the D&C Contract address these issues.
Each Consultancy Agreement must provide that the Developer can novate its rights and obligations under that agreement to the Contractor and it should also clearly define the Consultant’s obligations during the various stages of the project. For example, the Consultancy Agreement with the architect must provide that the architect will need to prepare preliminary design documentation to enable the Developer to obtain planning approvals and to market the development to prospective purchasers or lessees.
Similarly, the D&C Contract must provide that:
- the agreements with the Consultants engaged by the Developer will be novated to the Contractor
- the Contractor assumes all responsibility for the design documentation prepared by the consultants prior to the date of novation (‘Existing Design’), and
- the Contractor warrants that it can comply with its obligations under the D&C Contract without the need to change the Existing Design.
An example of a Deed of Novation we have used on a number of projects is included in Part 1 of Appendix 1 of the paper.
Project brief and sales agreements/agreements for lease
The Project Brief sets out the scope of works to be completed under the D&C Contract by the Contractor, including the Developer’s technical requirements and any finishes schedules. As the Project Brief is the only contractual document which sets out the scope of work and the Developer’s requirements under the D&C Contract, it is extremely important that they are described in as much detail as possible. The less detailed the Project Brief is, the more flexibility the Contractor will have in designing the project. This may result in the delivery of a project that may satisfy the requirements of the D&C Contract but does not meet the expectations and requirements of the Developer.
Similarly, any Sale Agreements or Agreements for Lease will also contain standards and levels of finishes that the Developer has agreed to provide to purchasers or lessees respectively. It is vitally important that an adequate review is done of the Project Brief to ensure that any plans and specifications and finishes schedules contained in any Sales Agreements or Agreements for Lease are also incorporated into the Project Brief. Any mis-match between the various agreements will more than likely lead to disputes.
As a further safeguard, the Project Brief should specifically refer to any requirements/finishes under any of the Sales Agreements/Agreements for Lease and require the Contractor to design and construct the development in accordance with those agreements.
An example of a Project Brief that we have used on a number of residential development projects is included in Part II of Appendix 1 of this paper. This is by no means exhaustive.
Prototype apartments
On a residential property development it is almost always the case that many of the apartment/dwellings will contain the same or similar finishes and equipment. Consequently, the Contractor will often be required under the D&C Contract to construct a prototype apartment.
While the purpose of the prototype apartment is to set a guide to the standard of workmanship required in the fitout of the apartments, a prototype apartment can also be the source of disputes. For example, the Contractor may seek to rely on the standard of workmanship achieved in the prototype apartment as being the required standard as opposed to the standard set out in the Project Brief. This will be particularly problematic if the standard achieved in the prototype does not meet the requirements of the Project Brief.
To avoid any potential uncertainty as to the standard required the D&C Contract should provide that:
- the prototype apartment is not an exhaustive guide to the quality or the standard of workmanship required in the fitout of the apartments, and
- the extent to which it can be used as a benchmark will be as determined and directed by the Developer or its representative
Staged completion/separable portions
It is often the case that there are separate and distinct parts of a property development. For example, the development may consist of two or more buildings that are to be constructed as part of the one project. In those circumstances it is possible for the project to be completed on a stage by stage basis where each part/stage constitutes a separable portion under the D&C Contract. Each separable portion will generally have a different completion date and defects liability period.
On a project that has separable portions the Developer will need to exercise great care in calculating DLDs. There must be a separate rate for each separable portion and the Developer must ensure that each rate specified represents an accurate estimate of the loss that will be suffered for late completion of that separable portion. If the same loss is included in the rate for both separable portions, a court is likely to conclude that the liquidated damages regime constitutes a penalty as it will overcompensate the Developer. Liquidated damages are discussed in more detail below.
Similarly, the Developer should also ensure that there is a separate rate for delay costs for each separable portion. If there is only one rate specified, the Developer will probably be overcompensating the Contractor if the Contractor becomes entitled to delay costs.
Adjoining properties
Unlike many other D&C projects, property development projects generally involve the development of land adjacent to existing buildings particularly high rise buildings. As a result, damage to existing buildings resulting from the construction of the property development is a regular cause of disputes involving the Developer, the Contractor and adjoining owners.
An effective method of managing this risk and minimising such disputes is by carrying out a dilapidation survey prior to the commencement of construction.1 A dilapidation survey involves the Contractor and a Developer representative inspecting the adjoining buildings for existing defects. A written and photographic record is taken for all existing defects and damage to all adjoining buildings. Once the inspection is completed, the Contractor or the Developer will seek to obtain agreement from each adjoining owner that the record of the inspection is true and correct.
At the conclusion of the Defects Liability Period, a further inspection of the adjoining buildings is carried out to determine if there has been any change in their condition. The D&C Contract should provide that the Contractor is responsible for any change in the condition of the adjoining buildings that has been caused by the construction of the property development.
Another issue that must be considered by the Developer and addressed in the D&C Contract is whether the Contractor will require access to adjoining properties during construction. For example, the tower crane used to hoist materials on the site may need to utilise the airspace above an adjoining property.
If it is likely that access will be required, the D&C Contract should deal with the following issues:
- which party is responsible for negotiating with the adjoining owners and occupiers to obtain their consent to works being carried out in or above their property
- which party bears the costs associated with obtaining any consents, and
- which party bears the risk of any delays in obtaining any consents.
From the Developer’s perspective, the Contractor is generally in a better position to manage these risks and therefore they will usually be allocated to the Contractor. However, on some projects the Developer may have a particular interest in maintaining a strong relationship with the adjoining owners and therefore may choose to deal directly with the adjoining owners. In those circumstances, the D&C Contract will usually make provision for the Contractor to be granted an extension of time and possibly delay costs if there is a delay in obtaining any consents that impact on critical path activities.
Legislative requirements
In many jurisdictions, the form and content of the D&C Contract will need to be tailored to satisfy local legislative requirements. This is particularly the case for contracts involving the construction of residential developments. For example, in Victoria, the Domestic Building Contracts Act 1995 (“the Victorian Act”), as its name suggests, regulates contracts for the carrying out of domestic building work.
Although the Victorian Act and equivalent legislation in other jurisdictions were enacted to regulate contracts between a home owner and a builder and to largely protect home owners, some still apply to multi-storey residential developments despite the fact that both parties to the construction contract are sophisticated and well advised commercial entities.2
Under the Victorian Act, for example, a construction contract for a residential development must include:
- a notice in prescribed form stating that the building owner (the Developer) may withdraw from the contract during the statutory cooling-off period
- a notice in prescribed form containing a checklist to be completed by the building owner before signing the contract, and
- a notice in prescribed form warning the building owner that the contract price is not fixed and may increase.
The consequences of failing to include these warnings or notices can be quite severe in some circumstances. For example, if the D&C Contract does not contain a notice about the cooling-off period, the building owner may withdraw from the contract within 7 days of becoming aware that the contract should have contained such a notice.
Other legislation that will need to be taken into consideration in preparing the D&C Contract is security of payment legislation. In jurisdictions where such legislation has been enacted,3 both contractors and subcontractors will have a statutory right to progress payments and may, in certain circumstances, be entitled to suspend works until they receive payment. In those jurisdictions, the D&C Contract should require the Contractor to provide the Developer with a copy of any notice that the Contractor receives from a subcontractor seeking payment under the legislation. The Developer should also seek an indemnity under the D&C Contract from the Contractor for any loss or damage that it suffers or any cost that it incurs as a result of:
- works being suspended by a subcontractor; or
- the Developer being given a payment claim from a subcontractor.
Damages for delay
In most D&C Contracts, the Contractor’s liability for late completion will be limited to the amount of delay liquidated damages set out in the contract. This is also the case for most property developments.
However, where parts of the project, if not at all, are to be sold and the Developer has entered into Sales Contracts, it will be very difficult, if not impossible, to accurately estimate the losses/damages that the Developer may suffer in the event of late completion.
For example, if Sales Contracts are terminated as a result of late completion, the Developer’s loss will not be able to be quantified until the Developer enters into new Sales Contracts. The Developer may also incur re-financing costs which are not able to be estimated at the commencement of the project.
In those circumstances, the contract will set out an amount for delay damages that can be estimated at D&C commencement of the project, e.g., interest on borrowings, and will also allow the Developer to recover damages at law resulting from other losses.
An example of a damages for delay clause that we have used on a number of residential development projects is included in Part III of Appendix 1.
Industrial relations delays
Most D&C Contracts make provision for industrial relations related delays such as strikes or lockouts and identify which party bears the time and the cost consequences of those delays. Usually, the D&C Contract will provide that the Contractor is entitled to an extension of time and delay costs for industry wide or nationwide strikes or lockouts but not if the strike or lockout was caused by the Contractor or its subcontractors.
Many of these standard provisions, however, do not deal with industrial relations delays that are not caused by the Contractor and do not fall within the category of nationwide or industry wide disputes.
This is particularly problematic given that trade unions have been in recent times targeting individual contractors during the negotiations for a new enterprise bargaining agreement. In those circumstances, it is often the case that the contractor is targeted by trade unions as a direct result of the Contractor’s size and market share and, therefore, it is arguable that those strikes are not caused by the Contractor. On the other hand, while the strike or lockout is part of an industry wide campaign, it may be difficult to categorise it as an industry or nationwide dispute if the Contractor’s sites are only targeted at that particular point in time. It may be the case that such a strike or lockout falls within the meaning of a nationwide or industry wide dispute. It will depend on the specific wording of each contract.
To avoid disputes, the D&C Contract should specifically address this issue. The Developer would obviously seek to exclude an entitlement to costs and an extension of time. From a contract administration perspective it is also a lot easier if those types of strikes or lockouts do not entitle the contractor to costs or an extension of time. It is extremely difficult, if not impossible, for the Developer’s Representative to determine what is the real cause of the strike or lockout. How would the Developer’s Representative know whether the Contractor is being targeted for reasons other than the proposed enterprise bargaining agreement?
An example of a clause that entitles the Contractor to an extension of time for such industrial relations delay is included in Part V of Appendix 1.
1 In some jurisdictions, a dilapidation survey must be carried out prior to the commencement of certain types of works. See for example section 94 of the Building Act 1993 (Vic).
2 For example, Victoria and New South Wales.
3 New South Wales, Northern Territory, Queensland ,Victoria and Western Australia. For a detailed description on these Acts please contact us.
Rationale for imposing liquidated damages
Almost every construction contract will impose liquidated damages for delay. A property development D&C Contract is in that respect no different to any construction contract. D&C Contracts impose DLDs because the late completion of project impacts on the success of the project and because of the liability the Developer will have under other agreements. DLDs are a ‘stick’ used to motivate the Contractor to fulfil its contractual obligations.
However, on some property developments projects the DLDs specified may not be the Developer’s only remedy for late completion. For example, on a residential development, losses resulting from the termination of Sales Agreements or from refinancing the project as a result of late completion are generally not included as part of the DLDs specified. In these circumstances, the D&C Contract will provide that the Developer can recover damages for those losses in addition to the DLDs specified.
The law of liquidated damages
As discussed above, liquidated damages must be a genuine pre-estimate of the Developer’s loss. If liquidated damages are more then a genuine pre-estimate they will be a penalty and unenforceable. There is no legal sanction for setting a liquidated damages rate below that of a genuine pre-estimate, however, there are the obvious financial consequences.
In addition to being unenforceable as a penalty, liquidated damages can also be void for uncertainty or unenforceable because they breach the prevention principle. Void for uncertainty means, as the term suggests, that it is not possible to determine how the liquidated damages provisions work. In those circumstances, a court will void the liquidated damages provisions.
The prevention principle was developed by the courts to prevent employers ie: Developer from delaying contractors and then claiming DLDs. It is discussed in more detail below in the context of extensions of time.
Prior to discussing the correct draft liquidated damages clauses to ensure they are not void or unenforceable it is worth considering the consequences of an invalid liquidated damages regime. If the D&C Contract contains an exclusive remedies clause the result is simple - the Contractor will have escaped liability unless the contract contains an explicit right to claim damages at law if the liquidated damages regime fails. This is discussed in more detail below.
If, however, the D&C Contract does not contain an exclusive remedies clause the non-challenging party should be able to claim at law for damages they have suffered as a result of the challenging party’s non performance. What then is the impact of the rates in the now invalidated liquidated damages clauses?
Unfortunately, the position is unclear in common law jurisdictions, and a definitive answer cannot be provided based upon the current state of authority. It appears the answer varies depending upon whether the clause is invalidated due to its character as a penalty, or because of uncertainty or unenforceability. Our view of the current position is set out below. We note that whilst the legal position is not settled the position presented below does appear logical.
- Clause invalidated as a penalty
When liquidated damages are invalidated because they are a penalty (ie: they do not represent a genuine pre-estimate of loss), the liquidated damages or its cap will not act as a cap on damages claims at general law. We note that it is rare for a court to find liquidated damages are penalties in contracts between two sophisticated, well advised parties. - Clause invalidated due to acts of prevention by the Developer
A liquidated damages clause will cap the Contractor’s liability where a liquidated damages regime breaches the prevention principle because this gives effect to the commercial bargain struck by the parties. - Clause void for uncertainty
A liquidated damages clause which is uncertain is severed from the D&C Contract in its entirety, and will not act as a cap on the damages recoverable by the Developer from the Contractor. Upon severance, the clause is, for the purposes of contractual interpretation, ignored.
However, it should be noted that the threshold test for rendering a clause void for uncertainty is high, and courts are reluctant to hold that the terms of a contract, in particular a commercial contract where performance is well advanced, are uncertain.
Drafting of liquidated damages clauses
Given the role liquidated damages play in ensuring D&C Contracts are bankable, and the consequences detailed above of the regime not being effective, it is vital to ensure they are properly drafted to ensure contractors cannot avoid their liquidated damages liability on a legal technicality.
For example, where the property development contains separable portions the Developer needs to be particularly careful that the DLDs for each separable portion do not contain the same losses. This is the best illustrated by reference to an example.
Assume that under the D&C Contract there are two separable portions. Separable portion A is the construction of an office building and separable portion B is the construction of a multi-storey apartment building. In calculating the rate of liquidated damages for separable portion A, the Developer must only include the additional financing costs associated with that separable portion and not the whole development. Similarly, in calculating the rate of liquidated damages for separable portion B the Developer cannot include loss of rent from the office building.
Delay and extensions of time
(a) The prevention principle
As noted previously, one of the advantages of an D&C Contract is that it provides the Developer with a fixed completion date. If the Contractor fails to complete the works by the required date they are liable for DLDs. However, in some circumstances the Contractor is entitled to an extension of the date for completion. Failure to grant an extension for a Developer caused delay can void the liquidated damages regime and ‘set time at large’. This means the Contractor is only obliged to complete the works within a reasonable time.
This is the situation under common law governed contracts due to the prevention principle. The prevention principle was developed by the courts to prevent employers ie: Developers from delaying contractors and then claiming DLDs.
The legal basis of the prevention principle is unclear and it is uncertain whether you can contract out of the prevention principle. Logically, given most commentators believe the prevention principle is an equitable principle, explicit words in a contract should be able to override the principle. However, the courts have tended to apply the prevention principle even in circumstances where it would not, on the face of it, appear to apply. Therefore, there is a certain amount of risk involved in trying to contract out of the prevention principle. The more prudent and common approach is to accept the existence of the prevention principle and provide for it in the D&C Contract.
The Contractor’s entitlement to an extension of time is not absolute. It is possible to limit the Contractor’s rights and impose pre-conditions on the ability of the Contractor to claim an extension of time. A relatively standard extension of time (EOT) clause would entitle the Contractor to an EOT for:
- an act, omission, breach or default of the Developer
- suspension of the works by the Developer (except where the suspension is due to an act or omission of the Contractor)
- a variation (except where the variation is due to an act or omission of the Contractor), and
- force majeure,
which cause a delay on the critical path1 and about which the Contractor has given notice within the period specified in the contract. It is permissible (and advisable) from the Developer’s perspective to make both the necessity for the delay to impact the critical path and the obligation to give notice of a claim for an extension of time conditions precedent to the Contractor’s entitlement to receive an EOT.
In addition, it is usually good practice to include a general right for the Developer to grant an EOT at any time. However, this type of provision must be carefully drafted because some judges have held (especially when the Developer’s representative is an independent third party) the inclusion of this clause imposes a mandatory obligation on the Developer to grant an extension of time whenever it is fair and reasonable to do so, regardless of the strict contractual requirements. Accordingly, from the Developer’s perspective it must be made clear that the Developer has complete and absolute discretion to grant an EOT, and that it is not required to exercise its discretion for the benefit of the contractor.
Similarly, following some recent common law decisions, the Contractor should warrant that it will comply with the notice provisions that are conditions precedent to its right to be granted an EOT.
We recommend using the clause in Part III of Appendix 1.
(b) Concurrent delay
You will note that in the suggested EOT clause, one of the subclauses refers to concurrent delays. While most D&C Contracts deal with the issue of concurrent delays some remain silent on this issue. For the reasons explained below we do not agree with the latter approach.
A concurrent delay occurs when two or more causes of delay overlap. It is important to note that it is the overlapping of the causes of the delays not the overlapping of the delays themselves. In our experience, this distinction is often not made. This leads to confusion and sometimes disputes. More problematic is when the contract is silent on the issue of concurrent delay and the parties assume the silence operates to their benefit. As a result of conflicting case law it is difficult to determine who, in a particular fact scenario, is correct. This can also lead to protracted disputes and outcomes contrary to the intention of the parties.
There are a number of different causes of delay which may overlap with delay caused by the Contractor. The most obvious causes are the acts or omissions of a Developer. For example, a D&C Contract will usually require the Contractor to submit design documentation to the Developer to obtain its approval. The Developer will be required to approve/review the documentation within a specific time frame. If the Developer fails to approve/review the documentation, in the absence of a concurrent delay clause, the Developer’s failure could entitle the Contractor to an extension of time despite the fact the Contractor was already in delay.
Concurrent delay is dealt with differently in the various standard forms of contract. Accordingly, it is not possible to argue that one approach is definitely right and one is definitely wrong. In fact, the ‘right’ approach will depend on which side of the table you are sitting.
In general, there are three main approaches for dealing with the issue of concurrent delay. These are:
- Option One - the Contractor has no entitlement to an extension of time if a concurrent delay occurs.
- Option Two - the Contractor has an entitlement to an extension of time if a concurrent delay occurs.
- Option Three - the causes of delay are apportioned between the parties and the Contractor receives an extension of time equal to the apportionment. For example, if the causes of a 10 day delay are apportioned 60:40 Developer : Contractor, the Contractor would receive a 6 day extension of time.
Each of these approaches is discussed in more detail below.
(i) Option One: Contractor not entitled to an extension of time for concurrent delays
A common, Developer friendly, concurrent delay clause for this option one is:
“If more than one event causes concurrent delays and the cause of at least one of those events, but not all of them, is a cause of delay which would not entitle the Contractor to an extension of time under [EOT Clause], then to the extent of the concurrency, the Contractor will not be entitled to an extension of time.”
The most relevant words are bolded.
Nothing in the clause prevents the Contractor from claiming an extension of time under the general extension of time clause. What the clause does do is to remove the Contractor’s entitlement to an extension of time when there are two or more causes of delay and at lease one of those causes would not entitle the Contractor to an extension of time under the general extension of time clause.
For example, if the Contractor’s personnel were on strike and during that strike the Developer failed to approve drawings, in accordance with the contractual procedures, the Contractor would not be entitled to an extension of time for the delay caused by the Developer’s failure to approve the drawings.
The operation of this clause is best illustrated diagrammatically.
Example 1: Contractor not entitled to an extension of time for Developer caused delay
In this example, the Contractor would not be entitled to any extension of time because the Contractor Delay 2 overlaps entirely the Developer Delay. Therefore, using the example clause above, the Contractor is not entitled to an extension of time to the extent of the concurrency. As a result, at the end of the Contractor Delay 2 the Contractor would be in 8 weeks delay (assuming the Contractor has not, at its own cost and expense accelerated the Works).
Example 2: Contractor entitled to an extension of time for Developer caused delay
In this example, there is no overlap between the Contractor and Developer Delay Events the Contractor would be entitled to a two week extension of time for the Developer owner delay. Therefore, at the end of the Developer Delay the Contractor will remain in six weeks delay, assuming no acceleration.
Example 3: Contractor entitled to an extension of time for a portion of the Developer caused delay
In this example, the Contractor would be entitled to a one week extension of time because the delays overlap for one week. Therefore, the Contractor is entitled to an extension of time for the period when they do not overlap ie: when the extent of the concurrency is zero. As a result, after receiving the one week extension of time, the Contractor would be in seven weeks delay, assuming no acceleration.
From a Developer’s perspective, we believe, this option is both logical and fair. For example, if, in Example 2 the Project Company Delay was a delay in the approval of drawings and the Contractor Delay was the entire workforce being on strike, what logic is there in the Contractor receiving an extension of time? The delay in approving drawings does not actually delay the works because the Contractor could not have used the drawings given its workforce was on strike. In this example, the Contractor would suffer no detriment from not receiving an extension of time. However, if the Contractor did receive an extension of time it would effectively receive a windfall gain.
The greater number of obligations the Developer has the more reluctant the Contractor will likely be to accept option one. Therefore, it may not be appropriate for all projects.
(ii) Option Two: Contractor entitled to an extension of time for concurrent delays
Option two is the opposite of option one and is the position in many of the Contractor friendly standard forms of contract. These contracts also commonly include extension of time provisions to the effect that the Contractor is entitled to an extension of time for any cause beyond its reasonable control which, in effect, means there is no need for a concurrent delay clause.
(iii) Option Three: Responsibility for concurrent delays is apportioned between the parties
Option three is a middle ground position that has been adopted in some of the standard form contracts. For example, the Australian Standards construction contract AS4000 adopts the apportionment approach. The AS4000 clause states:
When both non-qualifying and qualifying causes of delay overlap, the Superintendent shall apportion the resulting delay to WUC according to the respective causes’ contribution.
In assessing each EOT the Superintendent shall disregard questions of whether:
a) WUC can nevertheless reach practical completion without an EOT; or
b) the Contractor can accelerate, but shall have regard to what prevention and mitigation of the delay has not been effected by the Contractor.”
We appreciate the intention behind the clause and the desire for both parities to share responsibility for the delays they cause. However, we have some concerns about this clause and the practicality of the apportionment approach in general. It is easiest to demonstrate our concerns with an extreme example. For example, what if the qualifying cause of delay was the Developer’s inability to provide access to the site and the non-qualifying cause of delay was the Contractor’s inability to commence the works because it had been black banned by the unions. How should the causes be apportioned? In this example, the two causes are both 100% responsible for the delay.
In our view, an example like the above where both parties are at fault has two possible outcomes. Either:
- the delay is split down the middle and the Contractor receives 50% of the delay as an extension of time, or
- the delay is apportioned 100% to the Developer and therefore the Contractor receives 100% of the time claimed. The delay is unlikely to be apportioned 100% to the Contractor because a judge or arbitrator will likely feel that that is ‘unfair’, especially if there is a potential for significant liquidated damages liability.
We appreciate the above is not particularly rigorous legal reasoning, however, the clause does not lend itself to rigorous analysis.
In addition, option three is only likely to be suitable if the party undertaking the apportionment is independent from both the Developer and the Contractor.
Exclusive remedies and fail safe clauses
It is common for contractors to request the inclusion of an exclusive remedies clause in a D&C Contract. However, from the perspective of a Developer, the danger of an exclusive remedies clause is that it prevents the Developer from recovering any type of damages not specifically provided for in the D&C Contract. This is particularly the case in residential property developments where the DLDs do not usually include losses suffered as a result of Sales Agreements being terminated or the project having to be re-financed.
A D&C Contract is conclusive evidence of the agreement between the parties to that contract. If a party clearly and unambiguously agrees that their only remedies are those within the D&C Contract, they will be bound by those terms. However, the courts have been reluctant to come to this conclusion without clear evidence of an intention of the parties to the D&C Contract to contract out of their legal rights. This means if the common law right to sue for breach of D&C Contract is to be contractually removed, it must be done by very clear words.
The main reason for a Contractor insisting on a Developer being subject to an exclusive remedies clause is to have certainty about its potential liabilities. The preferred position for a Contractor will be to confine its liabilities to what is specified in the D&C Contract. For example, an agreed rate of liquidated damages for delay. A Contractor will also generally require the amount of liquidated damages to be subject to a cap and for the D&C Contract to include an overall cap on its liability.
(b) Project company’s perspective
The preferred position for a Developer is for it not to be subject to an exclusive remedies clause. An exclusive remedies clause limits the Developer’s right to recover for any failure of the Contractor to fulfill its contractual obligations to those remedies specified in the D&C Contract. For this reason, an exclusive remedies clause is an illogical clause to include in an D&C Contract from the perspective of a Developer because it means that the Developer has to draft a remedy or exception for each obligation - this represents an absurd drafting position.
The most significant risk for a Developer in D&C Contract is where there is an exclusive remedies clause and the only remedies for delay are liquidated damages. If, for whatever reason, the liquidated damages regimes are held to be invalid, the Developer would have no recourse against the Contractor as it would be prevented from recovering general damages at law, and the Contractor would escape liability for late delivery of the property development.
In contracts containing an exclusive remedies clause, the Developer must ensure all necessary exceptions are expressly included in the D&C Contract. In addition, drafting must be included to allow the Developer to recover general damages at law for delay if the liquidated damages regime in the D&C Contract is held to be invalid. To protect the position of a Developer (if liquidated damages are found for any reason to be unenforceable and there is an exclusive remedies clause), we recommend the following clauses be included in the D&C Contract:
“[ ].1 If clause [delay liquidated damages] is found for any reason to be void, invalid or otherwise inoperative so as to disentitle the Developer from claiming Delay Liquidated Damages, the Developer is entitled to claim against the Contractor damages at law for the Contractor’s failure to complete the Works by the Date for Practical Completion.
[ ].2 If [ ].1 applies, the damages claimed by the Developer must not exceed the amount specified in Item [ ] of Appendix [ ] for any one day of delay and in aggregate must not exceed the percentage of the D&C Contract Price specified in Item [ ] of Appendix [ ].”
These clauses mean that if liquidated damages are held to be unenforceable for any reason the Developer will not be prevented from recovering general damages at law. However, the amount of damages recoverable at law may be limited to the amount of liquidated damages that would have been recoverable by the Developer under the D&C Contract if the liquidated damages regime had not been held to be invalid (see discussion above). For this reason, the suggested drafting should be commercially acceptable to a Contractor as its liability for delay be the same as originally contemplated by the parties at the time of entering into the D&C Contract.
In addition, if the D&C Contract excludes the parties rights to claim their consequential or indirect losses, these clauses should be an exception to that exclusion. The rationale being that the rates of liquidated damages are likely to include an element of consequential or indirect losses.
Force majeure
Force majeure clauses are often included in D&C Contracts. However, they are rarely given much thought unless and until one or more parties seek to rely on them. Generally, the assumption appears to be that “the risk will not affect us” or “the force majeure clause is a legal necessity and does not impact on our risk allocation under the contract”. Both of these assumptions are inherently dangerous, and, particularly in the second case, incorrect. Therefore, especially in the current global environment, it is appropriate to examine their application.
Force majeure is a civil law concept that has no real meaning under the common law. However, force majeure clauses are used in contracts because the only similar common law concept - the doctrine of frustration - is of limited application. For that doctrine to apply the performance of a contract must be radically different from what was intended by the parties. In addition, even if the doctrine does apply, the consequences are unlikely to be those contemplated by the parties. An example of how difficult it is to show frustration is that many of the leading cases relate to the abdication of King Edward VIII before his coronation and the impact that had on contracts entered into in anticipation of the coronation ceremony.
Given force majeure clauses are creatures of contract their interpretation will be governed by the normal rules of contractual construction. Force majeure provisions will be construed strictly and in the event of any ambiguity the contra proferentem rule will apply. Contra proferentem literally means “against the party putting forward”. In this context, it means that the clause will be interpreted against the interests of the party that drafted and is seeking to rely on it. The parties may contract out of this rule.
The rule of ejusdem generis which literally means “of the same class” may also be relevant. In other words, when general wording follows a specific list of events, the general wording will be interpreted in light of the specific list of events. In this context it means that when a broad ‘catch-all’ phrase, such as ‘anything beyond the reasonable control of the parties’, follows a list of more specific force majeure events the catch all phrase will be limited to events analogous to the listed events. Importantly, parties cannot invoke a force majeure clause if they are relying on their own acts or omissions.
The underlying test in relation to most force majeure provisions is whether a particular event was within the contemplation of the parties when they made the contract. The event must also have been outside the control of the contracting party. There are generally three essential elements to force majeure:
- it can occur with or without human intervention
- it cannot have reasonably been foreseen by the parties, and
- it was completely beyond the parties’ control and they could not have prevented its consequences.
Given the relative uncertainty surrounding the meaning of force majeure we favour explicitly defining what the parties mean. This takes the matter out of the hands of the courts and gives control back to the parties. Therefore, it is appropriate to consider how force majeure risk should be allocated.
(b) Drafting force majeure clauses
The appropriate allocation of risk in project agreements is fundamental to negotiations between the Developer and its contractors. Risks generally fall into the following categories:
- risks within the control of the Developer
- risks within the control of the Contractor, and
- risks outside the control of both parties.
The negotiation of the allocation of many of the risks beyond the control of the parties, for example, latent site conditions and change of law, is usually very detailed so that it is clear which risks are borne by the Contractor. The same approach should be adopted in relation to the risks arising from events of force majeure.
There are 2 aspects to the operation of force majeure clauses:
- the definition of force majeure events, and
- the operative clause that sets out the effect on the parties’ rights and obligations if a force majeure event occurs.
The events which trigger the operative clause must be clearly defined. As noted above, it is in the interests of both parties to ensure that the term force majeure is clearly defined.
The preferred approach for a Developer is to define force majeure events as being any of the events in an exhaustive list set out in the contract. In this manner, both parties are aware of which events are force majeure events and which are not. Clearly, defining force majeure events makes the administration of the contract and, in particular, the mechanism within the contract for dealing with force majeure events simpler and more effective.
An example exhaustive definition is:
“An Event of Force Majeure is an event or circumstance which is beyond the control and without the fault or negligence of the party affected and which by the exercise of reasonable diligence the party affected was unable to prevent provided that event or circumstance is limited to the following:
(a) riot, war, invasion, act of foreign enemies, hostilities (whether war be declared or not) acts of terrorism, civil war, rebellion, revolution, insurrection of military or usurped power, requisition or compulsory acquisition by any governmental or competent authority;
(b) ionising radiation or contamination, radio activity from any nuclear fuel or from any nuclear waste from the combustion of nuclear fuel, radio active toxic explosive or other hazardous properties of any explosive assembly or nuclear component;
(c) pressure waves caused by aircraft or other aerial devices travelling at sonic or supersonic speeds;
(d) earthquakes, flood, fire or other physical natural disaster, but excluding weather conditions regardless of severity; and
(e) strikes at national level or industrial disputes at a national level, or strike or industrial disputes by labour not employed by the affected party, its subcontractors or its suppliers and which affect an essential portion of the Works but excluding any industrial dispute which is specific to the performance of the Works or this Contract.”
An operative clause will act as a shield for the party affected by the event of force majeure so that a party can rely on that clause as a defence to a claim that it has failed to fulfil its obligations under the contract.
An operative clause should also specifically deal with the rights and obligations of the parties if a force majeure event occurs and affects the project. This means the parties must consider each of the events it intends to include in the definition of force majeure events and then deal with what the parties will do if one of those events occurs.
An example of an operative clause is:
“[ ].1 Neither party is responsible for any failure to perform its obligations under this Contract, if it is prevented or delayed in performing those obligations by an Event of Force Majeure.
[ ].2 Where there is an Event of Force Majeure, the party prevented from or delayed in performing its obligations under this Contract must immediately notify the other party giving full particulars of the Event of Force Majeure and the reasons for the Event of Force Majeure preventing that party from, or delaying that party in performing its obligations under this Contract and that party must use its reasonable efforts to mitigate the effect of the Event of Force Majeure upon its or their performance of the Contract and to fulfil its or their obligations under the Contract.
[ ].3 Upon completion of the Event of Force Majeure the party affected must as soon as reasonably practicable recommence the performance of its obligations under this Contract. Where the party affected is the Contractor, the Contractor must provide a revised Program rescheduling the Works to minimise the effects of the prevention or delay caused by the Event of Force Majeure.
[ ].4 An Event of Force Majeure does not relieve a party from liability for an obligation which arose before the occurrence of that event, nor does that event affect the obligation to pay money in a timely manner which matured prior to the occurrence of that event.
[ ].5 The Contractor has no entitlement and the Developer has no liability for:
(a) any costs, losses, expenses, damages or the payment of any part of the Contract Price during an Event of Force Majeure; and
(b) any delay costs in any way incurred by the Contractor due to an Event of Force Majeure.”
In addition to the above clause, it is important to appropriately deal with other issues that will arise if a force majeure event occurs. For example, as noted above, it is common practice for a Contractor to be entitled to an extension of time if a force majeure event impacts on its ability to perform the works. Contractors also often request costs if a force majeure event occurs. In our view, this should be resisted. Force majeure is a neutral risk in that it cannot be controlled by either party. Therefore, the parties should bear their own costs.
Another key clause that relates to force majeure type events is the Contractor’s responsibility for care of the works and the obligation to reinstate any damage to the works prior to completion. A common example clause is:
“[ ].1 The Contractor is responsible for the care of the Site and the Works from when the Developer makes the Site available to the Contractor until 5.00pm on the Date of Practical Completion.
[ ].2 The Contractor must promptly make good loss from, or damage to, any part of the Site and the Works while it is responsible for their care.
[ ].3 If the loss or damage is caused by an Event of Force Majeure, the Developer may direct the Contractor to reinstate the Works or change the Works. The cost of the reinstatement work or any change to the Works arising from a direction by the Developer under this clause will be dealt with as a Variation except to the extent that the loss or damage has been caused or exacerbated by the failure of the Contractor to fulfil its obligations under this Contract.
[ ].4 Except as contemplated in clause [ ].3, the cost of all reinstatement Works will be borne by the Contractor.”
This clause is useful because it enables the Developer to, at its option, have the damaged section of the project rebuilt as a variation to the existing D&C Contract. This will usually be cheaper than recontracting for construction of the damaged sections of the works.
Operation and maintenance manuals
The Contractor is usually required to prepare a detailed Operating and Maintenance Manual. The D&C Contract should require the Contractor to prepare a draft of the O&M Manual for review by the Developer and possibly the lenders prior to Practical Completion.
The final version of the O&M Manual should incorporate any comments made by the Developer or the lenders and should be submitted within one month of Practical Completion being achieved.
The Contractor is also usually required to provide the Developer with a copy of all as-built drawings. The D&C Contract should require the Contract to provide a copy in both hard copy and electronic CAD form.
1 The critical path is the path on the construction program that shows the dates when certain activities must be completed by in order to achieve completion by the specified date.
Dispute resolution provisions for D&C Contracts could fill another entire paper. There are numerous approaches that can be adopted depending on the nature and location of the project and the particular preferences of the parties involved.
However, there are some general principles which should be adopted. They include:
- having a staged dispute resolution process that provides for internal discussions and meetings aimed at resolving the dispute prior to commencing action (either litigation or arbitration)1
- obliging the Contractor to continue to execute the works pending resolution of the dispute
- subject to any legislative requirements to the contrary, not permitting commencement of litigation or arbitration, as the case may be, until after practical completion of the work. This provision must make exception for the parties to seek urgent interlocutory relief ie: injunctions and to commence proceedings prior to the expiry of any limitations period. If the provision does not include these exceptions it risks being unenforceable, and
- providing for consolidation of any dispute with other disputes which arise out of or in relation to the construction of the property development. The power to consolidate should be at the Developer’s discretion.
1 Note that in some jurisdictions a contract for the construction of a residential development cannot include a term requiring a dispute to be referred to arbitration. See for example, section 14 of the Domestic Building Contracts Act 1995 (Vic).
Part I - Deed of novation
1.1 The Contractor becomes the Developer under the Consultancy Agreement. The Contractor must perform all of the obligations of the Developer under the Consultancy Agreement which are not performed at the Date of Novation. The Contractor is bound by the Consultancy Agreement as the Developer and the Contractor assumes all liabilities of the Developer to the Consultant in any way related to the Consultancy Agreement as if the Contractor had originally been named in the Consultancy Agreement as the Developer.
1.2 Subject to the Developer paying the Consultant all amounts certified as due and payable to it under the Consultancy Agreement as at the Date of Novation:
(a) the Consultant releases and forever discharges the Developer from its obligations under the Consultancy Agreement and from all claims and demands under the Consultancy Agreement;
(b) the Consultant releases and forever discharges the Contractor from all claims and demands under the Consultancy Agreement where the claim or demand arises from an event or circumstance occurring before the Date of Novation; and
(c) the Consultant accepts the liability of the Contractor in place of the liability of the Developer.
1.3 The Contractor must perform its obligations under, and be bound by, the Consultancy Agreement as if the Contractor was originally named in the Consultancy Agreement in place of the Developer.
1.4 The Consultant confirms to the Contractor that:
(d) it has performed all of its obligations under the Consultancy Agreement in accordance with the requirements of the Consultancy Agreement; and
(e) all of the design, including preparation of the design documentation, under the Consultancy Agreement carried out by it up to the Date of Novation is in accordance with the Project Brief.
1.5 The Consultant may not, and must do everything within its power so that its employees and subconsultants do not, without the Developer’s written approval, disclose or give to any person any document or other information that is the property of the Developer (or any copy or record of any such document or information), or any confidential report concerning the business or finances of the Developer acquired by the Contractor before, on or after the date of this deed (whether under the Consultancy Agreement or this deed), except for the purposes of performing its obligations under the Consultancy Agreement. This clause does not apply to information:
(g) that a party is required to disclose under this deed;
(h) that a party is required to disclose by law; and
(i) that a party discloses to an adviser where that adviser has executed an appropriate confidentiality agreement.
1.6 The parties acknowledge and agree that:
(j) the Developer has paid the Consultant [ ] dollars ($ ), being all amounts due to the Consultant from the Developer under the Consultancy Agreement at the Date of Novation; and
(k) the Contractor will pay the Consultant [ ] dollars ($ ) in respect of the Consultant’s outstanding obligations under the Consultancy Agreement.
1.7 This deed is governed by the laws of [ ] and the parties agree to submit to the non-exclusive jurisdiction of the courts of that state
Part II - Project brief
1.1 This document contains information that falls into two categories:
(a) information in this section 1 which describes the Project in a general way and is not contractually binding; and
(b) information which describes the requirements of the Developer which the Contractor and the Consultants must satisfy in undertaking the Design and Construct Contract for the [] Project (“Contract”). These sections, being sections 2 to 7 of the Project Brief, are contractually binding.
All terms used in this Project Brief have the same meaning as in the Contract unless noted otherwise.
[Describe what the Project involves.]
1.3 The Developer proposes to finance the Project through bank funding.
The Contractor must satisfy the requirements of the lending bank and enter into a side deed with the lending bank.
2.1 The Developer’s objectives for the Project are:
- to fulfil all its legal obligations
- to fulfil the obligations of the Sales Contracts
- to have a completed project that is constructed to the very best standard of finish available
- to have the project delivered free of all significant defects
- to fulfil all of the requirements of the planning permit obtained for the Project
- to have the project completed and fully commissioned no later than the Date for Practical Completion
- to have the project meet the performance requirements for the full period of the nominated design life
- to minimise disruption to surrounding owners and occupiers
- to encourage a positive community attitude to the overall Project, and
- to have the Project built in accordance to the relevant Australian Standards, DDA Standards, the Building Code of Australia (“BCA”), current building regulations and the requirements of any other relevant statutory authority.
2.2 The Work under the Contract must be fit for the purpose of achieving the Developer’s objectives.
3 Developer’s specific requirements
3.1 Without limiting the objectives listed in section 2 the following specific requirements must be complied with. The requirements apply to all of the Project unless stated otherwise.
(a) be capable of being fully operational 24 hours a day every day of the year;
(b) have continuous operation and function without disruption to the use of any part of the development by shutdown of the individual building systems;
(c) have planned routine maintenance that does not disrupt the use of any part of the development;
(d) provide a high level of environmental performance and minimise the environmental impacts of all aspects of the Project; and
(e) have the number of apartments and in the configurations set out in Appendix [ ] to this Project Brief.
[Describe the scope of work generally and, in detail, for each trade/discipline ie structural, mechanical, electrical, hydraulic, fire and lifts]
[Set out the specifications and requirements for the facade]
[Set out particular requirements relating to the carpark]
All finishes must be in accordance with the schedules in Appendix [].
The structural design for the Project must comply with section 4 of this Project Brief.
[Set out requirements/specifications for noise levels, exhaust air ventilation, fresh air ventilation, apartment airconditioning and exhaust systems, apartment rangehoods, tenancy airconditioning and exhaust ventilation, lift motor room, plant room and carpark ventilation]
[Set out the design criteria and the specifications/requirements for the mains switchboard, submains and cabletrays, distribution boards, lighting, power, emergency warning and intercommunications system, fire detection systems, building access system, lift control system, lightning protection system, telephone/data/audiovisual cabling and metering]
3.10 Hydraulic services and fire suppression systems
[Setout the design criteria and the requirements/specifications for sanitary plumbing, sewer drainage, trade waste drainage , sanitary fixture flushers, domestic hot and cold water, static water storage pumps, gas supply and fire suppression systems]
3.11 Stormwater drainage and downpipes
[Set out the design criteria and specifications/requirements for stormwater drainage and downpipes]
[Set out the design criteria and summarise the main features of the lift installation including the performance requirements and noise and vibration requirements.]
[Set out design criteria and requirements/specifications for walls, courtyards, pool areas, garden beds etc]
The Works must be designed and constructed in accordance with the following requirements:
(a) average Five Star energy rating;
(b) good levels of insulation throughout;
(c) north solar access maximised by layout;
(d) double glazing for thermal and acoustic performance;
(e) high levels of natural daylight, particularly to all habitable areas;
(f) integrated thermal mass to moderate internal temperatures;
(g) minimised air infiltration through sealing of all gaps and cracks;
(h) solar protection provided to glazing where required;
(i) energy efficient lighting and automatic controlled lighting for public areas;
(j) triple AAA rated water appliances and fixtures;
(k) rainwater collection for irrigation (including provision of storage tank); and
(l) bicycle parking must be provided.
4.1(a) The Work under the Contract must comply with all of the relevant Australian Standards and the Building Code of Australia unless otherwise stipulated in the Contract or to the extent that higher standards are required to fulfil the Developer’s requirements.
(b) Without limiting paragraph (a) above the structural design must comply with the following documents.
[List the relevant Australian standards.]
5 Requirements during construction
5.1(a) Access to the Site is limited by the adjacent buildings.
(b) The Contractor must comply with all directions of the Developer’s Representative in regard to access to the Site.
(c) Access to the Site will be available from [ ]. Access is available along the route shown in Drawing [ ] in Appendix [ ] to this Project Brief.
5.2 Throughout construction the Contractor is responsible for the preparation of all traffic management plans and the management of roadways and traffic affected by the execution of the works.
All site establishment and temporary structures must be in accordance with [insert description].
5.4 Noise from the Project must not exceed the limits prescribed in [insert relevant requirement]
5.5 Dust from the Project must not exceed the limits prescribed in [insert relevant requirement]
The Contractor must clean adjacent properties as required during construction.
6.1 The warranties stipulated in Appendix [ ] to this Project Brief must be provided in accordance with the Design and Construct Contract for the Project.
7.1 Maintenance must be provided for the items stipulated in Appendix [ ] to this Project Brief. The maintenance period stipulated commences on the Date of Practical Completion for the last Separable Portion.
Part III - Damages for late completion
The parties have agreed to differentiate between causes of delay in relation to the payment of liquidated damages.
[ ]. 2 Payment of liquidated damages
If the Contractor fails to bring the Works to Practical Completion by the Date for Practical Completion, then, subject to clause [ ], for every day between the Date for Practical Completion and the earlier of the Date of Practical Completion and the date this Contract is terminated, the Contractor must pay the Developer liquidated damages at the rate specified in Appendix [ ]
[ ]. 3 Types of loss recovered
The liquidated damages stipulated in clause [ ] 2 are the pre-agreed damages in respect of the Developer’s interest costs under the [Finance Agreement] and, subject to clause [ ].3(a), the loss of use or revenue. The liquidated damages stipulated in clause [ ].2 do not include and do not prevent the Developer from recovering damages from the Contractor for any other category of loss that might be suffered by the Developer, including any loss, expense or damage that may be suffered or incurred by:
(a) the Developer by reason of termination of any Sales Contract as a result of a failure by the Contractor to achieve Practical Completion by the Date for Practical Completion; and
(b) the Developer by reason of having to refinance the Project, putting in place alternative financing arrangements for the Project or the Developer becoming liable for any Fee as a result of a failure by the Contractor to achieve Practical Completion by the Date for Practical Completion.
[ ] Recovery of damages at law
If clause [ ].2 is found for any reason to be void, invalid or otherwise inoperative, so as to disentitle the Developer from claiming liquidated damages for the Contractor’s failure to achieve Practical Completion by the Date for Practical Completion, the Developer is entitled to recover damages from the Contractor for such failure at law. Those damages will not be limited to the liquidated damages that the Contractor would otherwise have been entitled to recover from the Contractor.
Part IV - Extension of time regime
[ ].1 The Contractor must immediately give notice to the Developer’s Representative of all incidents and/or events of whatsoever nature affecting or likely to affect the progress of the Works.
[ ].2 Within 15 days after an event has first arisen the Contractor must give a further notice to the Developer’s Representative which must include:
(a) the material circumstances of the event including the cause or causes;
(b) the nature and extent of any delay;
(c) the corrective action already undertaken or to be undertaken;
(d) the affect on the critical path noted on the Program;
(e) the period, if any, by which in its opinion the Date for Practical Completion should be extended; and
(f) a statement that it is a notice pursuant to this clause [ ].2.
[ ].3 Where an event has a continuing effect or where the Contractor is unable to determine whether the effect of an event will actually cause delay to the progress of the Works so that it is not practicable for the Contractor to give notice in accordance with clause [ ] .2, a statement to that effect with reasons together with interim written particulars (including details of the likely consequences of the event on progress of the Works and an estimate of the likelihood or likely extent of the delay) must be submitted in place of the notice under clause [ ] .2. The Contractor must then submit to the Developer’s Representative, at intervals of 30 days, further interim written particulars until the actual delay caused (if any) is ascertainable, whereupon the Contractor must as soon as practicable but in any event within 30 days give a final notice to the Developer including the particulars set out in clause [ ].2.
[ ].4 The Developer’s Representative must, within 30 days of receipt of the notice in clause [ ] .2 or the final notice in clause [ ] (as the case may be), issue a notice notifying the Contractor’s Representative of its determination as to the period, if any, by which the Date for Practical Completion is to be extended.
[ ].5 Subject to the provisions of this clause [ ], the Contractor is entitled to an extension of time to the Date for Practical Completion as the Developer assesses, where a delay to the progress of the Works is caused by any of the following events, whether occurring before, on or after the Date for Practical Completion.
(a) any act, omission, breach or default by the Developer, the Developer’s Representative and their agents, employees and contractors;
(b) a Variation, except where that Variation is caused by an act, omission or default of the Contractor or its Subcontractors, agents or employees;
(c) a suspension of the Works pursuant to clause [ ], except where that suspension is caused by an act, omission or default of the Contractor or its Subcontractors, agents or employees; or
(d) an Event of Force Majeure.
[ ].6 Despite any other provisions of this clause, the Developer’s Representative may at any time and at his or her absolute discretion extend the Date for Practical Completion, by giving written notice to that effect which refers to the clause [ ] 6. The Developer’s Representative has no obligation to exercise, or consider to exercise this power.
[ ].7 The Contractor must constantly use its best endeavours to avoid delay in the progress of the Works.
[ ].8 If the Contractor fails to submit the notices required under clauses [ ].1, [ ].2 and [ ].3 within the times required then:
(a) the Contractor has no entitlement to an extension of time;
(b) the Contractor must comply with the requirements to perform the Works by the Date for Practical Completion; and
(c) any principle of law or equity (including those which might otherwise entitle the Contractor to relief and the “prevention principle”) which might otherwise render the Date for Practical Completion immeasurable and liquidated damages unenforceable, will not apply.
[ ].9 It is a further condition precedent to the Contractor’s entitlement to an extension of time that the critical path noted on the Program is affected in a manner which might reasonably be expected to result in a delay to the Works reaching Practical Completion by the Date for Practical Completion.
[ ].10 If there are two or more concurrent cause of delay and at least one of those delays would not entitle the Contractor to an extension of time under this clause [ ] then, to the extent of that concurrency, the Contractor is not entitled to an extension of time.
[ ].11 The Developer’s Representative may direct the Contractor’s Representative to accelerate the Works for any reason including as an alternative to granting an extension of time to the Date for Practical Completion.
[ ].12 The Contractor will be entitled to all extra costs necessarily incurred, by the Contractor in complying with an acceleration direction under clause [ ] .11, except where the direction was issued as a consequence of the failure of the Contractor to fulfil its obligations under this Contract. The Developer’s Representative must assess and decide as soon as reasonably practical, the extra costs necessarily incurred by the Contractor.
Part V - Industrial relations extension of time clause
Subject to the provisions of this [ ], the Contractor is entitled to an extension to the Date for Practical Completion as the Developer’s Representative assesses, where a delay to the progress of the Works is caused by:
(d) statewide or widespread disputes in the metropolitan area including where the Contractor is specifically targeted by trade unions or similar organisations in connection with a proposed enterprised bargaining agreement or other agreement relating to employee entitlements but not if the dispute or delay was caused directly or indirectly by the Contractor or its Subcontractors on the Project or any other project.
Contacts
Damian McNair
Partner, Melbourne
T +61 3 9643 4111
F +61 3 9643 5999
damian.mcnair@mallesons.com
David Nancarrow
Senior Associate, Melbourne
T +61 3 9643 4267
F +61 3 9643 5999
david.nancarrow@mallesons.com
Nicholas Tsirogiannis
Solicitor, Melbourne
T +61 3 9643 4527
F +61 3 9643 5999
nicholas.tsirogiannis@mallesons.com