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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See also:

Technical Specifications – Where the Trouble Starts

How lawyers can serve engineers better

Lawyers, how to choose them and how to use them to save you money

Business owners can often be apprehensive about engaging lawyers: they charge too much, they take too long, they don’t listen properly to what your priorities are, they don’t speak the language of your industry, they cause disputes to escalate rather than resolve, and signing a costs agreement can feel like writing a blank cheque. But this need not be the case.

If you know how to choose the right lawyer for you, and how to use them in the right way, they can actually save you a lot of money and help you move forward with confidence.

How to choose the right lawyer

Common experience

A great start is to look for a lawyer who has experience in your industry or situation. For example, my father, Peter Kelso, spent 13 years in foster care as a State ward. He now has a significant practice representing former State wards. Why? Because he speaks their language, he understands the challenges they face, and because he relates to them they know that he will go the extra mile for them.

Many excellent lawyers have come to the law having previously trained or worked in other industries. There are lawyers with backgrounds in medicine, psychology, engineering, building, small business, media, and the list goes on.

Lawyers love to fight for a cause, so look for a lawyer who relates to your situation and chances are they will go above and beyond for you.

Systematic methods

When you approach a lawyer about a problem they may not be able to give you a solution off the cuff. This is because legal issues usually involve too many variables – much like the ground conditions on a construction project, you can never know with certainty what you’re going to be up against until you start digging.

However, they should be able to give you an outline of how they will go about designing the strategy, executing it, and the usual milestones along the way. Lawyers who have a methodical, systematic, ‘project management’ approach to their work are far more likely to deliver on time and on budget.

Temperament

Employing the most aggressive or ‘alpha male’ lawyer in town can often work against you. The significant majority of disputes are now resolved by various forms of negotiation or mediation. These methods require a lawyer with emotional intelligence who can change gears and use a range of tactics, from the adversarial to the relational to the courteous diplomatic deal-maker. Using only aggressive tactics will put the other side on the defensive and leave them in no frame of mind to rationally consider the weaknesses of their own case.

A good indicator in choosing a lawyer is how well they engage with you when discussing the work you need them to do. Is the conversation focused on understanding your situation, your priorities, and how to achieve your objectives? If it’s all about them, or you don’t feel listened to, that’s not a good start.

How to use your lawyer

Prevention is cheaper than cure

A significant cause of the cost of engaging lawyers is that people often engage them only after things have gone pear-shaped. When you consider the losses you’ll have to wear, the disruption to your business, and the legal costs involved in litigation, there is significant money to be saved by engaging a lawyer early to help you weed out the risks and resolve disputes before they escalate. Engaging a lawyer in this way will make their fees affordable, and all the more so because you’ll be able to spend more time focused on running your business.

Mitigating the risk of disputes

The terms of the contracts you enter are a major source of disputes. If they are vague, incomplete, too ridged, impractically allocate the risks to parties who can’t control or contain them, rely on shaky assumptions, or are open to a variety of interpretations then this is fertile ground for disputes to arise.

If the contact has not yet been signed, your lawyer can negotiate amendments to mitigate these risks. If the contract has already been entered into, your lawyer can assist you to clarify the operation of the contract with the other party, and may be able to negotiate variations to head off potential issues. Your lawyer can also advise you on the systems, procedures and record-keeping needed to ensure that you are in a strong position should a dispute arise. (Being organised and following the contract procedures will also make a big difference to how much work your lawyer has to do to).

Resolving disputes before they escalate

Getting legal advice early can help see a dispute resolved in just a few emails. Your lawyer can assist you in responding to the other party in a way that leaves them uncertain about the strength of their position and far more willing to resolve the matter in a mutually suitable manner. While the standard threatening letter can cause things to escalate quickly, a skillful and persuasive response can help resolve the dispute and maintain the business relationship.

I recently had a matter where one well-worded email was able to achieve a written apology, the payment of several thousand dollars in previously disputed invoices, and an invitation to discuss further business. Disputes need not escalate to ‘lawyers at twelve paces’.

Appeals are expensive

The recent case of Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd (No 2) [2016] NSWCA 379 shows just how expensive things can get when disputes escalate. In that case, Shade Systems served a progress payment claim on Probuild for construction work. Probuild served a payment schedule on Shade Systems stating that no amount was payable because the liquidated damages cancelled out the value of the work claimed. The dispute when went to an adjudicator who misinterpreted the contract and awarded about $277,000 to Shade Systems. The matter then went to the Supreme Court who quashed the adjudicator’s decision, and then to the Court of Appeal who set aside the previous order.

Now, imagine the expense that could have been saved had the parties used lawyers who could communicate and resolve the disagreement over the interpretation of the liquidated damages clause without resorting to the adjudicator; or failing that, had Probuild provided persuasive submissions to the adjudicator to guide his/her interpretation of the contract. Sometimes (and perhaps in that case), the other side is determined to litigate, or a decision-maker will inexplicably decide against you anyway. However, on average, a lawyer who can anticipate the sticking points and resolve them with clear communication will save you a lot money.

When to contact your lawyer

Running a problem by your lawyer need not be big deal or a formal occasion. The sooner your lawyer is told about an issue the better the chance they can resolve it. If you’ve picked the right lawyer, you should feel free to email or pick up the phone for a casual conversation about the issue. A good approach can be to email an outline of the issue, and schedule a follow up phone call. This will give your lawyer a chance to think about the problem first, and the conversation should be more productive.

See our services page, or contact us to find out what Australaw can do for you.

Outline of the Building and Construction Industry Security of Payment Act

Regular cash flow is the lifeblood of any business. This is particularly so for those in the construction industry, which has led to the Building and Construction Industry Security of Payment Act 1999 (NSW). Similar legislation exists in most Australian jurisdictions:

  • Building and Construction Industry Payments Act 2004 (QLD)
  • Building and Construction Industry Security of Payment Act 2002 (VIC)
  • Building and Construction Industry Payments Act 2004 (WA)
  • Building and Construction Industry Security of Payment Act 2009 (TAS)
  • Building and Construction Industry Security of Payment Act 2009 (SA)
  • Building and Construction Industry (Security of Payment) Act 2009 (ACT)
  • Construction Contracts (Security of Payments) Act (NT)

The main purpose of these Acts is to ensure that progress payments on construction projects don’t get held up by disputes, which can easily lead to contractors going under. Litigation can quickly become a war of attrition, and meanwhile people have businesses to run and bills to pay.

The graphic below provides a general outline of the process of enforcing progress payments. The process is comparable in most jurisdictions, and the courts generally seek to interpret these Acts consistently with each other.

Due to the very limited scope for challenging an adjudicator’s determination, it is strongly recommended that you have the assistance of a lawyer throughout this process – as the saying goes ‘measure twice, cut once’ prevention is always less expensive than cure.

It is also good practice to seek legal advice on how to comply with the procedural requirements of the Security of Payment process for your particular project. This advice will be a very valuable addition to your contract management plan.

outline-of-building-and-construction-industry-security-of-payment-actNotes:

  • ‘Construction Work’ includes the supply of goods or services related to the completion of construction work.
  • ‘Reference Dates’ are the dates or events (or milestones) in the contract that trigger progress payments. If the contract does not specify these triggers then the reference date is the last day of each month, starting with the last date of the month in which the construction work was first carried out.
  • ‘Respondent’ is the party to the contract with the Claimant who has undertaken to pay for the Construction Work.
  • ‘Payment Claim’ is a claim for payment for Construction Work carried out on or before the Reference Date. (Note: there can only be one Payment Claim served per Reference Date, but you can claim for work that was included in a previous Payment Claim that the Respondent has not yet paid for).
  • ‘Payment Schedule’ sets out the amount that the Respondent considers is due and owing to the Claimant, and the reasons for withholding payment for work claimed by the Claimant in the Payment Claim.

AustraLaw can assist with all payment claim issues, including:

  • Advice on complying with the procedural requirements to enforce or respond to payment claims;
  • Preparation of Payment Claims and Payment Schedules;
  • Preparation of Adjudication Applications and Adjudication Responses;
  • Enforcement or challenging of Adjudicator Determinations.

See our services page, or contact us to find out what Australaw can do for you.

5 Keys for a Productive Mediation

Mediations are in vogue for dispute resolution in Australia. However, without a disciplined approach their effectiveness in settling disputes can be quite inconsistent. From experience, common problems involve:

  • Failure to engage a lawyer who has a thorough understanding of the law and the technical issues involved. Without a lawyer who has a good understanding of the technical aspects of your case, the negotiations risk devolving into frustration and leaving money on the table.
  • Legal representatives that just ‘go through the motions’. Almost as bad as a lawyer who attempts to get by on bluff and bluster, is one that can’t adapt to the circumstances and propose creative solutions to get the negotiations past the sticking points.
  • Legal representatives who don’t know how to make full use of the mediator. If you don’t engage a lawyer who understands how to use a mediator, you’ll be paying thousands of dollars just for someone to run the offers back and forth, and the negotiations will likely run at snail pace.

How to make the most out of a mediation

(1) Preparation allows the parties to focus on what is most important

A thorough position paper should be prepared by your lawyer for any mediation, and served on the other party in the weeks leading up to the mediation date. A good position paper, served early, will assist the parties to narrow the issues in dispute as far as possible. This will allow the mediation day to be focused on resolving the most contentious issues which most require the intensity, flow and nuance of face-to-face discussions.

(2) Be proactive – chart the course and set the tone

Mediations, as a rule, require a proactive approach. Your lawyer should grab the mediator as soon as possible for a private chat. Your lawyer should explain your expectations to the mediator, emphasise initiative in assisting the parties through the sticking points, flag any concerns, and iron out any procedural issues. If your lawyer doesn’t drive the mediation it may take its own bumbling course.

(3) Relational not adversarial

If the parties unthinkingly take an adversarial approach it will become very difficult to have a productive discussion of the real issues and a genuine attempt to solve them. Unfortunately, this being in the context of a dispute, it is very easy for people to fall into old habits (i.e. lawyers at twelve paces and deny everything). It is good practice for your lawyer to talk with the other side’s lawyer early, before things get started. This is an opportunity to set the tone for a mutually respectful day, and handle any assumptions they may have that could otherwise put them in a less receptive frame of mind.

(4) Mutual problem-solving

Despite all the theatrics that can occur in mediations, the money on the table ultimately reflects each party’s perception of the respective BATNAs (Best Alternative To Negotiated Agreement). At this stage of the dispute resolution process each party is effectively a judge in their own case. So the most effective course is to focus on shifting their perception of what might happen it this matter goes to arbitration or court. This is also a good time to consider non-monetary items of value that might assist in resolving the dispute. In any case, it is important to remember that their client needs to be able to justify their decision to settle to their shareholders, partners, or superiors. All this requires a lawyer who can roll up their sleeves and communicate productively with the other side.

(5) Issue-focused bargaining

Negotiations can sometimes fall into a laborious rally of offers and counter-offers, that don’t appear to bear much reference to the merits of the respective cases. One alternative is to accompany a number of your offers with a breakdown of how it was calculated and some explanatory dot-points. The other side will often reciprocate (eventually) and you’ll often find that you’re only apart on a couple of points. This can be a good way to start bridging the gap if both sides are far apart and neither is addressing why that is. Because of the maths involved, it helps to have a lawyer who can program an Excel sheet to do these calculations quickly.

While there are times when the gloves have to come off, this should be seen as the nuclear option in a mediation. As far as the circumstances permit, it is best to approach the day with a collaborative attitude and see if a win-win solution can still be achieved. All this is helped a great deal by engaging a lawyer who can grasp the technical issues and use creativity to navigate you to a favourable outcome.

Contact AustraLaw today to discuss how we can help get you a better deal. Our Services Page outlines our key areas of expertise.