Standards Australia invites public comment on a draft of its new general conditions for use in construction contracts, called AS 11000 - 2015. Once published, this Australian Standard is intended to replace the current and popular AS 2124 – 1992 and AS 4000 – 1997.
Overall, we consider the proposed changes represent a step forward towards balanced, fair and commercially efficient risk allocation. However, as with all new proposals, there are still a few areas which in our view, require attention:
- Sub-clause 42.10 (and possibly others) may require amendment to accommodate relevant provisions of the Personal Property Securities Act 2009. In some instances, that Act ("PPSA") may entitle another secured creditor to seize the things which, under that clause (as essentially, a retention of title clause), the Principal may retain as security for payment by the Contractor. For more information about how the PPSA commonly affects the rights of parties to a construction contract, see The Secret Simplicity of a Personal Property Security Register
- Whilst we appreciate that clause 2.1, headed "Good Faith" is meant as a broad statement of the objects and purposes of the contract, we still consider that the term "good faith" would benefit from being defined more precisely. In considering what parties to a construction contract would have to do in order to be seen to be acting in good faith, we have had regard to the case where an Australian Court first authoritatively implied a duty of good faith into a construction contract. That decision is Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234. Taking note of what the NSW Court of Appeal said in that case together with our own experience of what reasonable parties to a construction contract ordinarily expect of each other, we suggest that the duty to act in good faith entails at least the following:
- Where the superintendent has to make decisions based on disputed matters of fact, both parties should first be given a fair and equal opportunity to be heard in relation to those facts. This is called procedural fairness.
- Neither party should exploit some minor, technical irregularity or deficiency in order to derive a disproportionate commercial benefit in a way that does not accord with the spirit of the bargain. In other words, if a requirement in a contract is designed to protect something that is of commercial value to a party (for example, notice provisions intended to protect the principal's right to be notified quickly of commercially significant events), that party should invoke the clause only to the extent necessary to achieve its purpose. Neither party should invoke their rights under the contract for an ulterior purpose such as gaining an unfair advantage over, oppressing or applying undue pressure on, the other party.
- Each party should communicate as often as the circumstances require and disclose completely and accurately, any information that it has, and the other party may not have, and that might affect the other party's commercial interests in connection with the subject matter of the contract or its ability to perform its contractual obligations.
- Where the contractor informs the principal that a stage of the works under contract has been completed by a subcontractor, but that subcontractor has not been paid yet, sub-clause 41.6 may apply. That sub-clause allows the principal to make a payment to a subcontractor which would otherwise be payable under the contract to the contractor. To the extent that such a payment reduces the amount that the contractor then owes the subcontractor, it will be treated as if it had been paid to the contractor under the contract.
We have no issue in principle with this arrangement. On the contrary, as long as it keeps the cash flowing and the project moving, it will serve its purpose. However, if you are a principal in a construction project and are thinking of paying a subcontractor directly under this clause (or its equivalent), we would caution you:
- to do so strictly in accordance with this clause; and
- to expressly invoke this clause in writing when making the payment.
Otherwise, there is a risk that if the contractor becomes insolvent, the subcontractor will look to you for payment of the balance then owing to the subcontractor for works which it did, under a separate subcontract, in relation to your project. In that event, the Court may treat your earlier payment to that same subcontractor in connection with the same project as evidence of a relationship between you and the subcontractor. The Court may then say that, because of this "relationship", you have voluntarily assumed an obligation to pay for the subcontractor's works directly or alternatively, you are not entitled to take the benefit of those works without first paying its "fair value" to the subcontractor. Principals have been ordered to pay the "fair value" of subcontractors' works in similar circumstances in Liebe v Malloy (1906) 4 CLR 347 and more recently (and on different legal grounds) in ABB Power Generation Ltd v Chapple & Ors  WASCA 412. The first was a decision of the High Court, which is the highest court in Australia and the other was a decision of the WA Court of Appeal. This means that the right of subcontractors, in some circumstances, to recover payment from principals even without any written contract between them, is now beyond dispute.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.