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As has been widely reported, the record levels of labour and material inflation, broken supply chains and rise in the cost of money have generated an oppressive environment for all sectors of the construction ecology, not limited to developers, contractors and subcontractors.

The writer won’t further ventilate the reasons behind this maelstrom for there is a great deal of well-informed opinion in circulation. Suffice to say that many actors find themselves incarcerated by contractual sums that were costed in ‘normal’ and more benign market conditions.

Early nineties Interest rate hikes

There are some parallels with the early nineties recession where the carnage that was visited upon the building industry was  due to external factors, beyond the control of construction industry actors. The writer was a young construction lawyer in the early nineties and recalls Interest rates of more than 17 percent destroying many good businesses.

Price of steel hikes early 3^rd millennium

Then again in the early 3^rd millennium there was a huge hike in the price of steel. The writer in a paper that he delivered to the Financial Services Institute of Australasia (FINSIA) titled, Damage Control and the Commercial Imperative in the Property Sector July 2008, quoted, Mathew Dunkley in a Financial Review piece reported that ‘construction companies fear impact of soaring steel…rocketing steel prices could bankrupt companies unless greater flexibility is built into contracts’ . The same article quoted, Brian Seidler, Executive Director of Master Builders Association (MBA) New South Wales, stating that “unless there is some flexibility in contracts to allow contractors to cope with the unpredictable  building material costs companies will struggle to survive and competition in the building sector will take a blow”.

In the FINSIA address the writer contended that ‘in such a paradigm consideration should be given to permitting contractors and sub-contractors ‘down the line’ to claim rise and fall’ or cost adjustment  based on a formula that is commensurate with the labour and material index pertaining to the building  industry. Reason being if the project goes off the rails because of high inflationary impacts the lender inherits a hole in the ground or 50 percent completed project, the cost to complete will be horrific and will be compounded by higher than normal inflation. Note however that in the case of residential or multi-unit development rise and fall provisions are illegal as the contravene the domestic building contracts acts.

This narrative seems all too familiar in recent commentary and in an admission of my advanced years the writer recall that late nineties residential contracts allowed contractors to claim rise and fall to immunise contractors against the vagaries of ‘L and M’  price volatility. Cost adjustment clauses were rendered illegal in consumer reforms to domestic building legislation in the mid-nineties. The great irony is that if rise and fall provisions were permissible in this current environment on balance, there would be fewer insolvencies and the viability of many (albeit not all) projects would be saved.  

Back to the future

In a ‘back to the future’ scenario once again construction actors are not the villains, the vice is in the external factors that are in play. It follows that in the macro sense governments may need to, in collaboration with key industry bodies and consumer representatives’ divine holistic solutions. This neither occurred in the early 90s or early 2000s but the current conditions seem to be even more extreme absent the ability for contracts to invoke rise an fall clauses.

This may involve legislating to:-

• Impose interest rate hike moratoriums on borrowings for pre-committed projects where large numbers of actors could be impacted by insolvency. Governmental covert interventions provided some innovative ideas on how to ameliorate some worst case scenarios so there are precedents for effective utilitarian intervention.

• Allow for rise and fall or cost adjustment 

• Allow for mediation interventions to enable contracting parties to negotiate price amendments that facilitate construction survival.

Although according to some commentators the headwinds may start to die down soon. But in the interim, absent governmental intervention insolvencies will accelerate as the macro drivers diminish the viability of many projects.

But those are some musings on the macro ecology. In terms a day-to-day survival this writer will draw upon corporate memory from the early nineties with regards to resort to contract when all else fails .

Get the contract out and drill into  every ‘nook and cranny’ in the contract

Regardless of whether one is a property owner, contractor or a sub-contractor if you aren’t already intimately familiar with every term of the contract, you will create a vulnerability. And yes, many of us have an aversion to fine print, but the devil is always in the detail. Particularly if the other party’s contractual dexterity is superior to one`s own. Much of the work that finds its way to lawyers is a result of lack a lack of contractual acumen.

Make full use of  contractual entitlements

Be it:-

• time extension applications, assessments approvals or rejections;

• prolongation cost applications, assessments approvals or rejections;

• variation submissions and replies to same; and

• the drafting of default instruments.

A  meticulous and rapid response time disposition with regards to one`s discharge of contractual obligations is required along with an equally demanding set of expectations with respect to the other party`s  contractual obligations. Courts are unforgiving if contractual terms are not followed. Further if matters are not attended to within the time frames the ‘Deemer’ provisions guillotine what otherwise would have been a non-controversial contractual entitlement.

Don’t tolerate the drip feed

The writer vividly recalls early nineties first-hand experiences with certain developers drip feeding sub-contractors. Part payments trickled into the payment stream, just enough to entice the sub-contractor to continue. Meanwhile the sub-contractor would descend deeper and deeper into the mire which often led to insolvency.

Use the suspension clauses where contractually permissible

There are suspension clauses in contracts for good reason, they give the aggrieved leverage where there is default, to protect contractual parity and integrity.

But before invoking this remedy speak to your in-house or construction lawyer to craft the suspension instrument and be satisfied that there is a ground to suspend.

Default notices and termination 

When payment is late, have regard to the default provisions of the contract.

Contracting parties under financial stress often delay pay or part pay. This is a red light and is often a precursor to insolvency. If the recalcitrant defaults and the aggrieved continues to work then the risk of escalating indebtedness increases along with the increased risk of non-payment.

Consider invoking the contract default and termination provisions as a failure to terminate the contract for non-payment may prejudice the solvency of the aggrieved.

A standard contract will have a menu of default provisions that entitle a contractually aggrieved to issue a notice of default. The type of default and the apposite contractual conditions must be pleaded in the notice, as will the period that is stipulated in the default clause for remedy of the default.

Once the time has lapsed if the default has not been remedied the contract will ordinarily afford the aggrieved the ability to send a further termination notice.

Be careful to ensure that the default instrument is served in accordance with the mode of service stipulate in the contract.

Some cautions

The first ‘defaulter’ is generally found to be the primary defaulter or the ‘repudiator’ in a court of law.

If a party terminates a contract when the ‘terminator’ is in default themselves, then the ‘terminator’ may well find themselves having repudiated the contract. A repudiation is the evincing of an intention to no longer be bound by the contract and amounts to a wrongful termination of the contract.

A repudiation can place the ‘repudiator’ in a parlous position. Great care must thus be taken if one elects to invoke the termination procedure and legal advice should be sought from ‘the get go’, such are the adverse consequences of getting it wrong.

When the writer began his legal career as a Legal and Contracts Officer at the Master Builders  Association of Victoria, he was often asked by builders to review termination instruments where owners had terminated their building contracts. Many of the contracts had not been correctly terminated and issue was immediately taken.

The writer also recalls a client who appeared as a lay advocate in a two week trial against the client of a well-known law firm of the time. The client was a builder whose contract had been terminated by a rather emotional owner. The contract required:- 

• Written notice to be given.

• Prescribing the default.

• Along with a time to remedy the default.

• And absent the remedying of the default a further termination notice to be sent.

The owner did not follow the procedure, instead the owner in an invective laden directive demanded that the builder leave the side, to never come back, remonstrated that if he were to set foot on the site again the police would be summonsed.

The owner lost the case, the Court found that the owner  had evinced an intention to no longer be bound by the contract as the vitriolic admonishment and ‘access to site ban’ was found to be totally at odds with the termination procedure of the contract. The writer remembers the builder giving evidence of the expletives that were hurled at him that underpinned the repudiation directive, pretty much word for word, but this is not the forum to repeat the narrative.

Suffice to say, the owners’ legal bill was well more than $100,000 – a lot of money in the early nineties and to reiterate the builder won the case as a lay advocate as the law was clear.

Key take-outs

The times are unusual and great care must be afforded to the exercise of contractual enforcement and default provisions. Although it sounds cliché and possibly self-serving for the legal profession but when it comes round to determining how best to exercise contractual rights to protect yourself, defer to the experts, the construction lawyers, after all that’s what they are trained to advise on.

Further even though some of the damage control methods articulated above may seem self-evident to many, it is amazing how often well – resourced operations neglect to follow tried and true remedial contractual pathways. Maybe there is an element of complacency or a case of the head  in the sand, it is hard to know, but the more things change the more they stay the same. Economic conditions fluctuate as do market drivers but contractual universal truths remain constant.

Disclaimer

This article is not legal advice and discusses it’s topic in only general terms. Should you be in need of legal advice, please contact construction law firm. Lovegrove & Cotton Lawyers and our experienced lawyers will assist you based on the facts and circumstances of your case.

Lovegrove & Cotton Lawyers to the building industry

For thirty years, Lovegrove & Cotton have represented property owners, builders, building surveyors, and building practitioners in Melbourne, Canberra, Sydney and Queensland. Lovegrove & Cotton can help property owners and building practitioners resolve any type of building dispute. If you wish to engage the firm, feel free to contact us via our website, by emailing enquiries@lclawyers.com.au, or via phone at (03) 9600 4077.