Is cutting corners on your contracts putting your business at risk?

It is common ground that business owners need to be smart with their money and minimise expenses where possible. Unfortunately, this often means cutting corners by making important decisions without legal advice, using oral contracts, and attempting to get by on patchy form contracts hacked together from a late night on the internet.

While it might seem biased for a law firm to say so, this is playing Russian Roulette with your business.

Failing to secure the legal rights that your business model depends on

Modern business is fast paced and the temptation is to ‘just get it done’ and worry about the ‘legal stuff’ later. Unfortunately, the task of formalising the agreements between the parties seems to be constantly pushed to the back, and each party assumes that the other has pretty much the same understanding of the arrangement as they do. This seems to work ok for a while…and then an unexpected cost arises and everyone rushes to their legal positions hoping not to get stuck with the short straw.

A good example of this occurred in the case of TMA Australia Pty Ltd v Indect Electronics & Distribution GmbH [2015] NSWCA 343. TMA was an installer of third-party car park guidance systems (if you’ve been to a Westfield you’ve probably seen the sensors that tell you how many free spaces there are on each level of the car park), and Indect was a manufacturer of these systems.

TMA and Indect had a co-operative arrangement for a while, with Indect reps even attending TMA sales meetings sometimes to provide support and endorsement. They didn’t bother with full written contracts. The only written clauses were some brief terms about deliverables and warranty periods on the Indect quotes, with some reference to ‘standard terms & conditions’ which were never identified. Other than that the contracts for purchase of the systems were oral.

TMA built a large part of its business model for these systems on making a profit from the maintenance period, which required it to be able to purchase replacement parts directly from Indect for many years after installation. Some negotiations to formalise this as an exclusive dealership arrangement were attempted but nothing was signed.

The relationship eventually broke down when TMA withheld payment, asserting that Indect’s late delivery on a project had caused it to incur LDs. This led to threats of sabotage, and then to litigation to recover the debt, and then to Indect refusing to directly supply TMA with parts.

This all ended up in the NSW Court of Appeal (an expensive exercise for anyone) where TMA had the hard task of trying to assert that certain arrangements and understandings existed between the parties that were never recorded in writing. Ultimately, TMA’s case failed on all grounds and they were forced to perform their maintenance contracts with parts purchased from a supplier who was also a direct competitor.

Failing to ensure that you own the intellectual property that a contractor has produced for your business 

Another very common pit fall is using contractors to develop a website, software platform, artwork, media, documents, etc etc and failing to have them assign the intellectual property rights over to the company. Only in very particular circumstances will a court find that the company owns the IP rights without a written agreement.

The best approach is always to get written agreement upfront that what the contractor produces for you will be owned by your company. Trying to fix this up later, when your business relies on their work to operate, leaves you in a vulnerable position.

Cutting corners here will also undermine your bargaining position when it comes to selling your business or seeking investment. The business is the bundle of systems and legal rights that you use to convert wages, materials, and information into profits. If you don’t clearly own all of those systems, and the rights to use those systems, this harms your valuation. It also increases the discount that a purchaser applies to any offer to account for the risk this poses, and the cost of fixing this and other problems which they might find.

Relying on contracts hacked together from the internet 

Contracts can be likened to computer programs, they are a set of instructions that determine the rights, benefits and liabilities of the parties according to the events that occur throughout the transaction. Just like a computer program, you need to understand the underlying laws that govern the operation of contracts to properly understand how it actually works. A contract that that has been hacked together by a non-lawyer is about as reliable as a program that has been hacked together by a non-programmer – it’s going to be full of bugs, fail to handle important events, generate unintended results, and probably crash when put to the test.

The world is full of these DIY contracts, many of them readily available on the internet. They are verbose, self-contradictory, often contain terms that are invalid, and seldom provide the protections that their users hope they will provide.

It is important to control your costs, but not at the expense of protecting your business. Cutting corners on your contracts will leave you vulnerable, and it only takes once for your business to suffer real financial damage. Some expenses can be avoided, but when it comes to your contracts it’s important to bite the bullet and get it done right.

When can I challenge an Adjudicator’s Determination? [Security of Payment Act]

As most in the construction industry would be aware, the Building and Construction Industry Security of Payment Act 1999 (NSW) (‘the Act’) provides for the swift determination of progress payment disputes.

The following link provides a quick refresher on how it all works: Outline of the Building and Construction Industry Security of Payment Act

But what if you believe the Adjudicator has got it wrong? if the other party isn’t willing to come to an agreement, and instead plans to file the Adjudication Certificate in court and enforce it?

Grounds for Challenging an Adjudicator’s Determination 

Identifying the grounds for challenging an Adjudicator’s Determination requires a foray into the highly technical areas of Administrative Law and Statutory Interpretation. This is the law of ‘reading between the lines’ to determine when a purported exercise of statutory power is actually invalid. This is because a Determination by an Adjudicator is an exercise of the statutory powers granted by the Act.

If an Adjudicator has failed to satisfy the mandatory pre-conditions that activate their power to make a Determination, then their Determination is not a valid Determination under the Act. When this occurs it is said that the Determination was affected by ‘jurisdictional error’ (i.e. the Adjudicator did not have the jurisdiction/power to make the Determination).

“There is, in our view, no reason in principle why the general law should treat… decisions involving jurisdictional error as binding or having legal effect unless and until set aside. A decision that involves jurisdictional error is a decision that lacks legal foundation and is properly regarded, in law, as no decision at all.” – Minister for Immigration and Multicultural Affairs v Bhardwaj [2002] HCA 11 at [51]

Restraining Enforcement of the Adjudication Certificate 

For the practical steps to be taken immediately if you intend to challenge the Adjudicator’s Determination see the summary under ‘Enforcing Security of Payment Determinations’ in Practical Tips from “Tracing a Construction Dispute” Seminar at the NSW Supreme Court

Jurisdictional Errors

The core guiding principle to this area is that the Courts take the view that Parliament intends that statutory powers be exercised according to reason, and only after satisfying the statutory pre-conditions.

Types of Jurisdictional Errors include:

(1) Failure to establish the factual prerequisites for making a Determination

A prominent example is where the reference date for the relevant payment claim has already been used for a previous payment claim. The High Court ruled late last year that you can only make one payment claim per reference date (i.e. payment milestone).

(2) Breach of Natural Justice / Procedural Fairness that could have materially affected the outcome of the Determination 

A breach of natural justice requires that the Adjudicator has not given one of the parties a reasonable opportunity to be heard on the issues that may result in a decision that is adverse to their interests. This might occur, for example, where the Adjudicator places heavy reliance on a new piece of evidence provided by one party, and does not give the other a chance to respond to that new evidence before making the Determination.

(3) Unreasonableness / Irrationality 

This requires showing that no Adjudicator acting reasonably could have made such a Determination. For example, awarding payment for work where there was no evidence that the work was even started.

There are a range of ways in which a Determination could be affected by Jurisdictional Error, so it is a good idea to have your lawyer check over the Adjudicator’s reasons if you are dissatisfied with the result.

Other options

The Act contains a ‘slip rule’ provision which allows for a party to raise a miscalculation or misdescription in the Determination with the Adjudicator for correction.

Furthermore, where the Determination is affected by jurisdictional error, an Adjudicator may be able to re-open the matter and determine it correctly, providing that each party is afforded the opportunity to provide further submissions and documentation (the High Court decision of Bhardwaj cited above provides authority for this).

Under s32(3) of the Act, if there is a subsequent dispute about another matter under the contract, the court or tribunal must take into account any amounts previously paid pursuant to a payment claim that was made under the Act.

There may also be situations generally in Security of Payment disputes where the circumstances provide scope for relief by asserting an estoppel or misleading & deceptive conduct. For example, in Bitannia Pty Ltd & Anor v Parkline Constructions Pty Ltd [2006] NSWCA 238 the payment claim was served on the owner and stated that it was also served on the architect, when it had not been. This caused the owner to miss the deadline for responding with the payment schedule. The owner was able to establish that there had been misleading and deceptive conduct, and this enabled them to escape the liability to pay the amount of the claim (which would otherwise be the result of missing the deadline – e.g. Ampcontrol v Gujarat NRE Wonga [2013] NSWSC 707).

Uncertainty – Error of Law

At present, the state of the law is that you cannot challenge a Determination on the ground that the Adjudicator misinterpreted the contract, or the operation of the legal rights that arise from the contract (i.e. error of law). However, the High Court has recently granted special leave to appeal to both a New South Wales and a South Australian dispute on this point.

Engaging the Lawyers

The payment schedule stage is the time to raise any reasons for withholding payment that arise under the contract. Section 20(2B) of the Act prevents a respondent from raising matters in their submissions to the Adjudicator that were not referred to in their payment schedule. At the very least, have your lawyer finalise the drafts of your payment schedules, and provide them with any notes that you consider relevant. Otherwise you may be tying your own hands when it comes to responding to an Adjudication Application.

As there is presently no room to challenge an Adjudicator’s Determination for misinterpreting the contract and its legal effect, it is highly advisable to involve your lawyer. They can prepare submissions that will guide the Adjudicator through the contract, the documentation, the legal issues, and set out the Determination that should be made upon the correct interpretation of it all. Given the time pressure applicable to Adjudication Determinations, having your lawyer provide this assistance will minimise the risk of important points being missed or misunderstood by the Adjudicator.

The Adjudicator’s Determination will set out their reasons for their decision. As the grounds for challenging a Determination are quite technical it is best to have your lawyer review these reasons. Lawyers with an Administrative Law background will be particularly skilled at identifying defects in a decision that can allow you to challenge it, or negotiate a solution with the other party.

Finally, being disciplined in your documentation of the progress of the project, and your communications with the other parties, will be a great help to your lawyer. Thorough documentation will go a long way to helping them secure the best outcome for you in any dispute under a construction contract (see: Systems for managing the risk of legal disputes on projects).

Contact AustraLaw for assistance with your payment claims and disputes

Can your lawyer code? Change is on the way and hybrid legal advisers are a must

There has been a lot of talk about how ‘blockchain’, ‘machine learning’, and ‘Internet of Things’ (IoT) will ‘disrupt’ everything. How it will automate jobs, challenge existing business models, and overhaul the legal industry. But there haven’t been a lot of tangible examples of how this will occur.

This article aims to provide a snapshot of some of the technologies that are being developed, their practical applications, and the implications for businesses and legal advisers.

Automating Contract Administration

At a recent BIM (Building Information Modelling) seminar for Engineers Australia, Daniel Kalnins of Ridley demonstrated the fruits of a hackathon between Ridley and Google company Flux. The system allowed users to document the progress of work on site with mobile phones and tablets. This was then automatically processed and presented for project controls staff in an easy to follow dashboard.

This technology has tremendous promise, automating the leg work of reporting and allowing for tighter management of projects. Building on this functionality, additional capabilities could be readily added, such as:

Automatically generating chronologies of the actual progress of the project, which would link to the data used to produce the chronologies (to assist with continual improvement and dispute resolution);

Use of algorithms to detect when the risk of schedule slip reaches a certain level, and automatically identify the source of those risks;

Faster generation of payment claims and payment schedules;

Cutting the cost and delay of dispute resolution by functioning as an automatically generated ‘agreed bundle’ for the mediator/arbitrator/judge;

Automatically alerting users when notification requirements are triggered by events in the project. This would be assisted if these requirements were written in pseudo code in the contract, which would allow a computer to reliably scan contracts and automatically set up the alerts;

Electronic scoring of work by site inspectors where payments are a function of factors such as quality of materials and workmanship.

Automating Copyright Infringement Detection

Samuel Brooks of Sydney-based company, Veredictum, is solving the problem of copyright infringement where videos are copied without consent and shared on social media.

The service embeds an artist’s video with a unique marker which Veredictum searches for when users pay it to look for any infringing copies of the video. The task of searching such a large space is divided up by Veredictum and automatically outsourced to private computers. Veredictum then uses the Ethereum blockchain to record and verify the correctness of the search results. When infringements are detected the system generates infringement notices which can then be sent to the owner of the site that is hosting the infringing copies of the videos. It also employs a ‘Minority Report’ style procedure to resolve disputes – for example, when three computers search the same block of data but only one asserts that it detected an infringement.

Veredictum demonstrates how decentralised computing can be used to tackle huge repetitive tasks that are simply too time-consuming and expensive to do manually. Services like this are critical for maintaining the value copyrighted works in the social media age.

This technology could also potentially be employed to search social media sites for any comments made by a claimant relevant to their claim – a useful tool for plaintiff and defendant firms alike.

Property and Security Registries

The core function of blockchain technology is to serve as a reliable registry to record changes in the state of something (e.g. ownership of property). for instance, the Bitcoin blockchain records the changes in ownership, and issuing, of bitcoins.

The Ethereum blockchain is the next generation, it allows users to write ‘smart contracts’ so that more sophisticated transactions can be recorded on a blockchain. Smart contracts allow us to customise the attributes of the object to be tracked on the blockchain, the conditions and constraints on who can make changes to the attributes of that object, and what the effect of those changes will be. For example, smart contracts can be used to record interests in property, establish private carbon trading schemes, or issue vouchers and gift cards for retailers.

solidity
The Solidity smart contract programming language

The problem that blockchain solves can be explained by reference to the old system for tracking ownership and interests in land. The risks of fraud, lost records, and subsequent discovery of third-party interests led to the necessity of establishing the Torrens system. Similarly, blockchain performs this roll of a common registry that can reliably track the changing ownership and interests in an object. However, the cost is reduced by having computers administrate the registry, and data preservation is improved by decentralised storage of the registry.

Another use of blockchain functionality is to incorporate it as part of a decentralised application (Dapp). Truffle and Embark are two popular development frameworks for creating decentralised applications. For example, Embark provides the framework for combining the capabilities of an Ethereum smart contract written in Solidity, decentralised storage using IPFS, JavaScript, and a user interface that will open in your web browser.

Self-Executing Contracts

The next step is the development of contracts that are increasingly self-executing. For example, sensors (e.g. temperature, accelerometers, humidity etc) can be installed to measure the status of freight or buildings, that data can be transmitted to the cloud using low-power wide-area (LPWA) IoT communications technology, then fed into a smart contract via Oracalize or processed on an IoT platform like IBM Watson IoT. Australian businesses like Wisen are already offering IoT solutions that could be integrated with smart contracts.

We are also seeing other Australian IoT businesses, such as Wirefree and Blue IoT, offering IoT solutions for homes and offices. This makes the ‘infrastructure as a service’ business model available to the commercial and residential market, and in turn enables payment to be a function of on-going performance (e.g. running costs, maintenance costs,  air temperature and humidity thresholds etc etc).

As the sophistication of these business models develops, it will become necessary to express the basis for calculating performance payments in code and demonstrate it to avoid disagreements (starting out, this could be done in an Excel document, or a smart contract stored on the blockchain).

Another foreseeable application would be in the construction industry. Project bank accounts might be administered using smart contracts. Or sub-contractors could receive an alert if the head contractor or employer’s account drops below a certain level, they might then be entitled to stop work until there are sufficient funds in the account to cover the rest of the work.

Wills as Smart Contracts

Imagine a world where wills were self-interpreting (i.e. enter in the facts and it tells you the division of assets and interests) and could not be misplaced?

It is foreseeable that a will could be converted into a smart contract and stored on the blockchain. Converting a will into code would also allow for it to be tested in advance to ensure that it divided up the assets as intended. This would allow lawyers to demonstrate the will for their clients, applying the various scenarios, and to confirm that it functions in accordance with their wishes. Concerns over bugs etc could be addressed with proper commenting of the code, and storage of the final version of the code using IPFS.

Machine Learning as an Assistant

The other major area of change will be where services and systems employ machine learning to cut down the leg work of traditionally time-intensive activities such as tender evaluations, contract analysis, discovery, and progress reporting. Computers can be trained to do a first pass over a large volume of documents and flag parts of those documents for risks, relevance, or general importance to the decisions the user needs to make.

This could also be applied in personal injury matters to reduce the work of evidence gathering. For example, the client enters in the details of their health care providers and the program automatically fills out the record requests to be sent out.

The future is uncertain, but that just makes it interesting

What all this means is that the game is changing:

Advisers need to be able to understand how these innovations work so that they can anticipate and deal with the issues that will arise, as established business models are threatened and legislators struggle to keep up. (i.e. ‘you can’t manage what you don’t understand’).

Some lawyers will need to develop a working knowledge of programming languages (e.g. Solidity, JavaScript, and Python are heavily used in Daaps and IoT systems) in order to draft and advise on hybrid legal instruments (i.e. agreements that are partly self-executing or self-interpreting).

And the role of computer scientists and engineers as expert witnesses will likely increase, where questions arise as to the cause of unexpected results from autonomous systems and smart contracts.

If you’re working with smart contracts, IoT, or autonomous systems, Contact Us, we want to work with you. We can help with advice, dispute resolution, and assist with the development of hybrid legal instruments.

See also:

Securing the value of your business by protecting your IP

Internet of Things

Risk Management of Disputes on Engineering & Construction Projects Using Cloud-Based Project Management Tools

Legal disputes are a critical element of effective risk management. Disputes have the capacity to completely derail a project; blowing out the time, budget and the political capital (or social license to operate). Just like other risks on a project, there are factors that increase the likelihood of disputes occurring, and there are processes that can be implemented to mitigate the extent of their occurrence and impact on the project.

A few general observations can be made about construction and engineering disputes:

(1) Uncertainty combined with large sums of money is a recipe for disputes.

(2) Most disputes turn primarily on their facts.

(3) Time-pressures often undermine the ability of contractors to properly examine the contract or site conditions before work commences.

(4) Lawyers are often seen as an expense (rather than an insurance) and will more readily be engaged to fight claims, rather than prevent them.

(5) Legal disputes have the capacity to multiply the cost of a project.

Dispute Risk Management – Addressing Uncertainty

Therefore, an effect risk management strategy requires setting up systems and practices to mitigate the likelihood and duration of disputes. This is done primarily by addressing sources of uncertainty:

(1) Uncertainty in time limits and notice requirements for claims (e.g. extension of time, delay costs, variations, progress payments etc etc)

As soon as possible, make a list of all the prerequisites for making claims and extending time under the contract and keep it handy. You want to avoid having to rely on a verbal assurance from the other party that they won’t hold you to the strict contract time limits.

(2) Uncertainty of scope or performance requirements.

At the earliest opportunity, identify and clarify any points of uncertainty in the customer’s expectations (e.g. vague elements of the spec, boundaries of the scope etc etc) and confirm this with them in writing (be as specific as possible).

It is all well and good to just ‘leave the contract in the draw’, but if a dispute arises all that good will and mutual understanding will evaporate. If you have not thoroughly documented these mutually agreed departures from (or clarifications of) the contract, the other party will pull that contract out of the draw and rely on it with impunity (or you’ll be facing their own documentation of what you supposedly said you would do).

(3) Uncertainty in your ability to prove the facts you rely on should a dispute escalate.

It is a lesson that many learn the hard way – ‘document everything’. Don’t rely on verbal assurances (at the very least confirm them in writing by sending that person an email with any relevant pictures or documents attached). When a disagreement arises it will be critical that you can provide a clear and reliable documented chronology of what was said, who said it, what their authority was to say it, when it was said, and the circumstances of the communication that impacted on how it was understood.

Benefits of Effective Dispute Risk Management

The best way to address this is by having effective systems to keep you organised and make it easy to reliably document everything. This way, when a dispute does escalate you will have records of everything, and be able to quickly identify the relevant documents. This will:

(1) Allow your lawyer to more quickly advise you of the strength of your position.

(2) Reduce the legal costs involved in case preparation.

(3) Allow quick and comprehensive responses to claims (e.g. security of payment, EOT, delay etc etc). 

(4) Minimise uncertainty over the strength of your position, allowing your lawyer to take a more forceful and decisive approach in negotiations

(5) Ensure that you are able to meet the timetable set by the dispute resolution clauses.

As a result, the average cost and duration of disputes will reduce, you will establish a reputation that discourages other parties from ‘trying it on’ which will reduce the number of disputes, and you will have more time and energy to devote to growing your business.

Tools to Manage Dispute Risk 

Much of the above revolves around having robust systems to document everything and keep you organised. Two project management tools that were prominent at the Sydney Build Expo this year (30-31 March 2017) were Procore and Aconex (Aconex also integrates with BidContender).

Procore

Aconex

Critically, tools like these are:

(1) Cloud-based: So you won’t lose your data if you lose your device.

(2) Optimised for mobile devices: So you can document developments on the fly while on site.

(3) Simultaneously accessible by multiple parties: So you can ensure that everyone is kept on the same page as the project inevitably evolves.

(4) Designed to keep you organised: Maintaining a clear filing system and chronology of project developments so that you (and your lawyer) can quickly find those critical documents.

Remember, disputes are not resolved on the basis of what actually happened, they are resolved on what can be proved by hard evidence. The best response to that letter of demand from the other party’s lawyers is solid documentary evidence showing their case to be baseless.

Document everything, be specific, your lawyer will thank you – and most of all, you will place your self in the best possible position to protect your interests and resolve disputes economically.

Contact Us for assistance with dispute resolution and advice. 

See also:

 

Practical Tips from “Tracing a Construction Dispute” Seminar at the NSW Supreme Court

It was an eminent panel in fine form at last night’s seminar (3 April 2017) “Tracing a Construction Dispute” at the NSW Supreme Court, presented by the Lighthouse Club and 39 Essex Chambers. The panel was comprised of:

  • Solicitor Simon Bellas, Partner, Jones Day
  • Quantity Surveyor Stephen Bolt, QS, Director – Aquenta and Vice President LHC, Sydney
  • Solicitor Alex Baykitch AM, Partner, King & Wood Mallesons, Sydney and President of ACICA
  • Mediator Dennis Wilson, Independent Barrister and Mediator, Sydney
  • Barrister Ben Olbourne, Barrister, 39 Essex Chambers, Singapore
  • Arbitrator David Bateson, former Head of Construction, King & Wood Mallesons, Hong Kong and now Arbitrator, 39 Essex Chambers, Singapore
  • President of the NSW Court of Appeal Justice Margaret Beazley
  • NSW Chief Justice Tom Bathurst

The panel considered a common construction dispute scenario, each providing their advice to the room on the stage of the dispute in which they would become involved. Some important takeaways included:

(1) Time Bars 

It is common knowledge that tender processes are often short and subcontractors will often not have much opportunity to review the contract documentation before papers are signed and work begins. However, it is of the utmost importance to clearly identify the time limits and notice requirements applicable to any claims under the contract.

It was a point emphasised by barrister Ben Olbourne that while a more understanding approach may be taken in the UK, you should assume that contractual time-bars will be strictly enforced in Australia. This was driven home by Justice Beazley, who explained that unless the extension of time clause, or an estoppel, could be engaged, failing to give notice of the claim in the time required under the contract will often be fatal.

(2) Documentation

Arbitrator David Bateson and Justice Beazley, both emphasised the importance of documentation on construction projects.

Mr Bateson stated that in his experience, while witnesses have their role, it is the documents that will usually carry the day in arbitration. He implored parties to take a focused approach to the presenting of their evidence and arguments. It is far better to present the most salient documents, with targeted submissions that reference (rather than recite at length) the evidence, than to write ‘War & Peace’ and drown the arbitrator.

Mr Bateson also advised that parties select expert witnesses who have the requisite communication skills to be engaging in Court and make their underlying methodologies clear. Sound expertise, incomprehensibly communicated, will be discarded as unhelpful.

Justice Beazley commented on the risky practice on multi-million dollar projects of parties relying on casual verbal assurances. Her Honour referred to the recent case of Crown Melbourne Limited v Cosmopolitan Hotel (VIC) Pty Ltd & Anor [2016] HCA 26 in which a party from Crown said to Cosmopolitan “we’ll look after you at renewal time”. Such casual verbal assurances will often not be sufficient to give rise to a collateral contract or an estoppel by which to enforce the benefit hoped for.

Her Honour commented that such problems are compounded where the identity and position of the person giving the assurance has not been recorded. In such circumstances the nature of what is being promised is not specific enough, it is unclear whether the person had the authority to make good on the assurance, and both these matters question the reasonableness of placing reliance on such an assurance.

(3) Enforcing Security of Payment Determinations 

Solicitor Alex Baykitch took the room through the general procedure for making a Security of Payment claim, obtaining an adjudicator’s determination, and enforcing the determination. Importantly, he reminded everyone that the benefits of the Security of Payment Act are available not just to builders, but also to those who provide goods and services for use in construction work.

Mr Baykitch then commented on the recent case of Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd [2017] NSWCA 53 handed down on 23 March 2017. This case contains an important practical lesson for developers looking to challenge an adjudicator’s decision.

In that case,

  • The builder had served a payment claim on the developer for over $10.5M, and stated stated it to be a progress payment claim made under the Building and Construction Industry Security of Payment Act 1999 (NSW).
  • The developer responded by serving a payment schedule on the builder asserting that no amount was payable.
  • The builder successful obtained an adjudicator’s determination that the claim was payable in full.
  • The developer failed to make payment within the required 5 days, and so the builder obtained an adjudication certificate.
  • The developer commenced proceedings in the Supreme Court challenging the validity of the adjudicator’s determination.
  • The builder filed the adjudication certificate in the Supreme Court, causing it to take effect as a judgment debt.
  • The builder successfully applied ex parte to the Supreme Court for a garnishee order to enforce the judgment debt, served it on the developer’s bank, and the bank paid the sum to the builder out of the developer’s account.
  • The developer found out that the money had been paid from its account, but was unsuccessful in having the garnishee order set aside. No undertaking had been given by the builder not to proceed to enforce the judgment debt, and no interlocutory relief had been applied for by the developer at the time the garnishee order was sought.

This case was an important reminder of the speed with which an adjudicator’s determination can be enforced. It was also reminder to those wishing to challenge an adjudicator’s determination to quickly apply for an interlocutory injunction to prevent enforcement of the determination before it can be set aside.

(4) Mediation

Finally, Mediator, Dennis Wilson, reminded the room of the important opportunity that mediation provides parties to achieve the just, quick and cheap resolution of disputes (referring to section 56 of the Civil Procedure Act 2005).

Mediation allows parties to:

  • Keep the dispute confidential;
  • Keep control of the dispute and retain full flexibility as to the terms on which it is resolved;
  • Hold a more open and frank discussion which assists the resolution of disputes;
  • Minimise the cost, procedure, and time required to resolve a dispute;
  • Avoid the damage to reputation and the critical path of proceeding to litigation;
  • Consider mutually acceptable outcomes, rather than digging further into their positions;

The seminar was well attended by fellow members of the Society of Construction Law Australia and other groups. As always it is excellent to see professionals from the construction industry and legal profession gather and exchange such practical advice. With the number of construction projects on foot growing by the day it is more important than ever to support a cooperative and informed approach to resolving disputes efficiently.

Designing Contracts for Project Success

The problems are well known to anyone who has had the task of rescuing a troubled project or administering a contract. Most projects run into trouble for two core reasons:

(1) Rushing the design or planning (including the contract) phase of the project; and

(2) Ineffective communication between the parties throughout the project.

These factors cause trouble because they lead to parties inadvertently taking on a number of avoidable risks:

(1) Risks to Quality and Schedule:  Customers will often compare tenders on their upfront cost only, rather than their full life cycle cost. The cheapest tender is chosen, often not considering that this involves increased risk of contractor insolvency from paper-thin margins, delays for rectification or selection of replacement contractors, reduced useful life of the project, and high ongoing maintenance costs arising from workmanship issues and cheap substituted materials.

(2) Risks to Performance: A rush to contract signature encourages re-purposing of contracts from previous projects, without assessing their suitability. For example, if quality is a high priority, a contract that incentivises cutting corners to make a profit is unlikely to see the project completed to the standard envisioned. It is not uncommon to find well intentioned incentive clauses that actually incentivise against the factors that will govern the success of the project.

(3) Ineffective Communication: Any reasonably sizable project will require effective communication to stay on course. The unexpected will occur and flexibility will be needed. Contract negotiations will stress-test the ability of the parties to resolve issues and avoid them spiralling into disputes. Far better to find out upfront that you can’t trust the other party, than to find out later when money has been spent and your lawyer tells you that the contract puts all the risk on you.

(4) Litigation Risks: As a good rule of thumb, if there are sizable payments or liabilities attached to contractual clauses, and those clauses are ambiguous or uncertain in their operation, that’s a litigation risk. Once the contract is on foot and money has been spent, you will have a difficult time getting the other party to adopt your understanding of an ambiguous contract clause when they have a strong financial incentive not to.

It is always important to remember that hope is not a strategy. When push comes to shove any pre-contractual verbal assurances and niceties will count for little. Your ability to protect your interests will come down to the terms of the contract, the depth of your pockets, and the degree of commercial leverage you can bring to bear on the interests of the other parties.

It is therefore highly advisable to take full advantage of negotiations to arrive at a contract that is designed to head off disputes and promote the successful delivery of the project.

Effective contract design:

(1) Starts with a sound understanding of what the parties intend to do, how they intend to do it, and what they’ll require to succeed. Good drafting thinks ahead to how the project will actually be carried out in practice;

(2) Works backwards, identifying the interests of the parties, the objectives of the project, and identifying the measures that need to be in place to align those interests with the objectives; and

(3) It treats the contract as a system or machine that takes events as inputs (e.g. milestones, dates, disputes, accidents, defects etc) and produces outputs in the form of rights and rewards (e.g. payments, dispute resolution, indemnities, rectification, liquidated damages etc).

The aim being to ensure that the interests of the parties will be served, and certainly not undermined, by achieving the project objectives.

Ultimately, all projects have problems. Through thorough disciplined planning, most problems can be flushed out and solved before they have the chance to disrupt the project and put the parties to significant expense. The key is having the experience to realise this, the insight to identify professionals who share your values, and the discipline to work backwards from the result you are after to ensure that you have what you need to achieve it before you start.

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Technical Specifications – Where the Trouble Starts

How lawyers can serve engineers better

Technical Specifications – Where the Trouble Starts

It is no secret that the source of most problems in a technology-centric contract is the specification.

(1) If the specification is vague, or mistakenly relies on the propensity of the reader to fill the gaps with the same assumptions as the writer, then each party will have a different understanding of what is to be delivered. This leads to two potential problems:

(a) The supplier delivers something different to what the purchaser actually requires; or

(b) The purchaser can continually use the ambiguity in the specification to deny payment or insist on endless rework.

Ultimately, each party will rely on its own interpretation and assert that the other party has breached the contract.

(2) If the specification turns out to be unworkable, there will need to be appropriate contractual mechanisms and an effective working relationship to resolve this. Without this:

(a) The purchaser will assert that the supplier is trying to deliver less than what was agreed to, or repudiating the contract; and

(b) The supplier will be burdened with the cost of rework or even abandoning the project.

The end result (if delivered) will likely struggle to fulfil the purchaser’s purposes for the project. Again, this difference in what each side had in mind when entering the contract provides fuel for disputes.

It is little wonder that most disputes come back to the specification, as it provides the baseline on which the major parts of a technology-centric contract rely:

(a) Payment terms rely on acceptance that certain features of the specification have been met;

(b) Warranty terms rely on answering whether the deliverables have failed to perform according to the specification;

(c) Maintenance and service level agreements rely maintaining or returning the deliverables to the requirements of the specification;

(d) Liquidated damages clauses will rely on determined whether certain aspects of the specification have been met by a certain date;

(e) Variation clauses rely on determining the extent to which a change request is a deviation from the agreed scope of work;

(f) Common law rights of termination and damages rely on discerning the disparity between what was delivered and what was required;

(g) The pricing of the contract relies on the interpretation of what is required to satisfy the specifications;

And ultimately, a failure to translate purchaser expectations into a specification, which, if delivered will satisfy them, risks the agreement ending in disputes and project failure.

The trouble with specifications is that they exist at the intersection of three project vulnerabilities:

(1) Specifications are often drafted by engineers, or other technical professionals. These professionals are accustomed to communicating using the jargon and terminology of their respective fields and not for the broader audience that a contract specification must communicate to. They risk drafting the specification in a manner that is riddled with numerous assumptions because in their mind those assumptions ‘go without saying’.

Unfortunately, any audience outside that area will apply their own assumptions to fill those gaps and arrive at a different interpretation of what is required. Furthermore, a non-technical audience (e.g. lawyers, managers and business people etc) will often be unable to traverse those assumption-gaps in the specification and struggle to read the document at all.

(2) The lawyers engaged by the parties to draft and negotiate the contract often lack the technical literacy to address shortcomings in the specification, don’t know the right questions to ask, and won’t want to concede that they don’t understand it. As a result they are likely to gloss over the specification and revert to risk-shifting clauses to pin the cost of eventual project issues on the other party. For those who desire to ‘leave the contract in the draw’ while administering the project, risk-shifting clauses provide little assistance.

(3) The more unique a project is the more difficult it is to predict all the issues that may arise. As the saying goes, ‘no plan survives first contact with the enemy’. The art in drafting specifications, is in providing adequate quality and performance goals, while allowing room to adapt to handle uncertainties as they occur during the life of the project.

For example, there may be known uncertainty at the outset about what exactly will be required, or whether certain performance levels can be guaranteed. Options to deal with this may include the use of a high level specification, with a more detailed specification to later be accepted or rejected against that high level specification once those unknown have been addressed; or the specification might provide room for the supplier to determine the best trade-off within specified tolerances.

The best way to keep a project on track is to avoid disputes from arising at all. The most fertile origin for disputes in a technology-centric contract is the specification. In the worst case, it will be a legally trained mind (i.e. a judge) that will finally determine the ‘proper’ meaning of the contract.

Therefore, the best means to de-risk a technology-centric contract is to engage professionals at the start who have the skills and expertise to critically analyse specifications from both a legal and technical standpoint. Engaging such expertise before signing the contract reduces the risk to all parties and ultimately, makes the project much more likely to succeed.

See also: How lawyers can serve engineers better

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