In this two part blog series, we explore the key points to consider prior to crafting a contract for commercial construction, and in our second part (to be posted next week) we discuss conducting due diligence for commercial construction.
A contract is the foundation of risk management in commercial construction – an essential element of the proper planning and completion of any project. A well-drafted commercial construction contract is one that describes the:
- Work to be done;
- Method of payment; and
- How to resolve unforeseen problems.
As a minimum, understanding and including these elements within a contract can keep the parties out of court. At its best, it may also provide the foundation of a long and fruitful business relationship for the future. Why then is this so hard to accomplish?
There is, of course, the risk of leaving things out. However, on the other hand including too much detail may limit flexibility and unnecessarily complicate negotiations. The overly one-sided or badly understood construction contract is an invitation to litigation, and the “do-it-yourself” drafter is often his own worst enemy. Finally, at its core, commercial construction may simply be more complicated than a residential project.
Complex Commercial Construction Contracts
Commercial construction agreements can be especially difficult to fully comprehend for many reasons:
- the subject matter of the agreement may be highly technical and contain many risks;
the legal processes and language may be difficult to integrate with the scientific and engineering aspects of the project;
- the contract may consist of a number of different documents or different versions of the same document, including drawings and specifications. Some of these may be mutually inconsistent in some respects;
- the agreement is often part of a long contractual chain, involving principals, contractors and several levels of subcontractors; and
- terms may be incorporated by reference across the contractual chain or implied by law.
Nonetheless, parties to commercial contracts are generally presumed to be sophisticated, and courts have been unsympathetic to commercial litigants who argue that they did not fully understand the implications of an agreement. That is not an argument any party to a contract wants to have to make. It is an especially unfortunate situation for the commercial construction professional.
Standardised Construction Contracts
It is hardly surprisingly, under the circumstances, that there is widespread support within the construction industry for the development and use of standardised construction agreements. The Australian Standards major works forms are used in many areas of the commercial industry. Other forms have been developed by other groups for projects of more than a given value, in specific industrial sectors or in certain states.
At the same time, it is widely acknowledged that the standardised forms are most useful when amended to reflect specific situations. Most often, these amendments relate to:
- Extensions of time;
- Damages for delay;
- Site conditions;
- Payment and security including processes for making price adjustments;
- Warranties as to quality;
- Claimable costs; and
- Goods and Services Tax.
However, more extensive amendments may undo the benefits of standardisation. Some argue that bespoke contract documents or lengthy amendments to standard form do little to prevent disputes and may, in fact, promote them, especially in the case of one-sided agreements.
How much amendment is enough, too much or too little? This should be your lawyer’s job, not yours alone.
Mitigating the Risk of Self-Help
The risk of dispute is greatly increased when clients do not seek legal assistance in drafting a commercial construction contract, even one that follows a standardised agreement closely. An experienced legal team can be invaluable not only in ensuring that the contract reflects the intentions of the parties, but in exploring the significance of special conditions in the light of related contractual agreements, incorporated documents and the law governing commercial contracts. Self-help is often an attempt at cost containment, but given the risks and responsibilities in a sophisticated undertaking, such as commercial construction, penny wise may quickly prove to be pound foolish.
The attorneys at Owen Hodge Lawyers look forward to assisting you in the negotiation and drafting of your commercial construction contract and in helping you understand its full implications. Please call us to schedule a consultation at 1800 770 780 at your earliest convenience.