Selected papers presented at the CIB World Building Congres Construction and Society, Brisbane 5-9 May 2013

Proceedings

Law and Dispute Resolution

Publication 390

CIB Commission W113 - Law and Dispute Resolution

Papers from the Designated Session Law and Dispute Resolution that took place as part of the CIB World Building Congress, Brisbane, Australia, May 2013, under the responsibility of Working Commission W113 - Law and Dispute Resolution Papers reviewed by: John Adriaanse, London South Bank University, UK Julie Adshead, University of Salford, UK Andrew Agapiou, University of Strathclyde, UK Deniz Artan Ilter, Istanbul Technical University, Turkey Julian Bailey, CMS Cameron McKenna, UK Matthew Bell, University of Melbourne, Australia Michael C Brand, University of New South Wales, Australia Philip Britton, Kings College London, UK Penny Brooker, University of Wolverhampton, UK Philip C F Chan, NUS, Singapore Sai On Cheung, City University of Hong Kong, China

Paul Chynoweth, University of Salford, UK Julie Cross, University of Salford, UK Dee Davenport, University of Central Lancashire, UK Philip Davenport, University of New South Wales, Australia Steve Donohoe, University of Plymouth, UK Phil Evans, Murdoch University, Australia Peter Fenn, University of Manchester, UK Paula Gerber, Monash University, Australia Asanga Gunawansa, NUS, Singapore Peter Hibberd, University of Salford, UK Jan-Bertram Hillig, Herrenknecht AG, Germany Joe Horlen, Texas A&M University, USA Andrew Kelly, University of Wollongong, Australia Anthony Lavers, Keating Chambers, UK Mel Lees, Birmingham City University, UK Wayne Lord, Loughborough University, UK Shaun Lowry, University of Central Lancashire, UK Tinus Maritz, University of Pretoria, South Africa Jim Mason, University of the West of England, UK Brodie McAdam, University of Salford, UK Tim McLernon, University of Ulster, UK Frits Meijer, TU Delft, The Netherlands M. Ehsan Che Munaaim, King’s College London, UK Issaka Ndekugri, University of Wolverhampton, UK Linda Thomas-Mobley, Georgia Tech, USA

Keren Tweeddale, London South Bank University, UK Henk Visscher, TU Delft, The Netherlands Peter Ward, University of Newcastle, Australia Clive Warren, University of Queensland, Australia Suzanne Wilkinson, University of Auckland, New Zealand Peter Williams, University of New South Wales, Australia Adrienne Yarwood, University of Central Lancashire, UK CIB Publication 390

W113 - Law and Dispute Resolution The Commission's primary function is to coordinate the identification of and response to the multitude of emerging legal challenges faced by the construction and property industries worldwide. In this context the Commission's objectives are: • to establish a thriving international research community in the fields of law and dispute resolution • to contribute to the wider building and construction research agendas through encouraging the active engagement of legal scholars with other specialist in the field • to coordinate efforts to identify and address emerging legal challenges faced by the global construction and property industries through building a coalition of stake-holders from industry, the professions and academia • to generate interest in the application of law in an international construction and property context amongst legal specialists in the legal professions and law faculties worldwide • to increase the understanding of obstacles to effective transnational construction operations and building performances management by facilitating the development of comparative legal methodologies and research projects.

CONTENTS

Papers A Case Study Investigation into the use of Computer Generated Visualisations 1 to Assist with Construction Delay Claims David-John Gibbs, Stephen Emmitt, Kirti Ruikar and Wayne Lord ADR Practice in the construction industry: a futuristic perspective 13 Olive du Preez, Basie Verster Analysis of delay, disruption and global claims in the context of statutory 25 adjudication in Australia Damian Michael†, Michael C Brand Assessing the Outstanding Payment Issues in Hong Kong Construction Industry 37 Ho Paul Construction Mediation Training: A Case of Pedagogical 50 Principle-based E-learning Sai On Cheung, Yingying Qu Learning from the Past: Analysis of Factors Contributing to Construction Project 62 Disputes in Australia Ana Laura Campos Gutierrez, Kriengsak Panuwatwanich and Angela Walker Measuring Enrichment Liability in the Context of Unfinished Construction 74 Projects Aimite Jorge Monetary value as a proxy for vulnerability in statutory adjudication and 86 other construction regulation Matthew Bell and Ravindu Goonawardene Payment Scenario in the Malaysian Construction 99 Industry Prior to CIPAA Mohamed Nor Azhari Azman, Natasha Dzulkalnine, Zuhairi Abd Hamid, Kamarul Anuar Mohd Kamar, Mohd Nasrun Mohd Nawi Should the application and practice of construction adjudication be underpinned 109 by legislative intervention in the South African construction industry? Vaughan Hattingh and Marthinus Johannes Maritz The Enforceability of Termination for Convenience Clauses 121 Philip Evans

A Case Study Investigation into the use of Computer Generated Visualisations to Assist with

Construction Delay Claims

David-John Gibbs1, Stephen Emmitt2, Kirti Ruikar3, Wayne Lord4

Abstract

It is probable that a construction project will encounter some form of delay which can have differing adverse effects on the various parties involved in the works. Those affected by the delay are entitled to claim a form of compensation but the burden of proof lies with the party making the assertion. Analysing the cause and effect of a delay event is difficult given the ever increasing complexity of construction works; thus, experts are often employed to undertake the task but face the challenge of clearly representing and communicating their findings. This paper identifies the accepted traditional methods of representing construction delays and explores how they could be assisted through technological developments in computer generated visualisations, which have gained growing acceptance within legal proceedings. An in-house case study presents two different visualisations, one in 2D and one in 4D, which were developed in an attempt to assist with the same delay claim. The benefits, limitations and areas of improvement are discussed for each and an overall recommendation on the potential use of visualisations to assist with construction delay claims is presented. The paper recognises further investigation into the use of Building Information Modelling to support delay claims which forms part of on-going research towards an engineering doctorate.

Key words: BIM, claims, delays, disputes, visualisation.

1. Introduction

Construction projects are becoming increasingly complex, yet tender values in the UK are decreasing (BCIS, 2012). The more complex a construction project, the more likely it is to encounter time delays, which may result in financial implications (CIOB, 2008). Given that 70% of UK construction projects are delivered late (HM Treasury, 1999) and that organisations cannot financially absorb the difference from what was planned, if the delay is beyond the organisations control, it is likely that a claim will be made for some form of

1 Research Engineer; DAQS Ltd; Stokes Suite, Unit 7a, East Bridgford Business Park, Kneeton Road, East Bridgford, Nottingham, England, NG13 8PJ; D.Gibbs@lboro.ac.uk. 2 Professor of Architectural Technology; Loughborough University; School of Civil and Building Engineering, Loughborough University, Loughborough, Leicestershire, LE11 3TU, England; S.Emmitt@lboro.ac.uk. 3 Senior Lecturer; Loughborough University; School of Civil and Building Engineering, Loughborough University, Loughborough, Leicestershire, LE11 3TU, England; K.D.Ruikar@lboro.ac.uk. 4 Lecturer; Loughborough University; School of Civil and Building Engineering, Loughborough University, Loughborough, Leicestershire, LE11 3TU, England; W.E.Lord@lboro.ac.uk.

compensation. If the claim is not accepted, the project may go into dispute. The number of construction disputes in the UK has risen by a third during the recent recession (Sweet & Maxwell, 2010) with both the value and length of the average UK construction dispute increasing by US$2.7million and 1.95months (EC Harris, 2012). Owing to the extensive resources required to undertake a construction claim, the divergence away from the proactive management of the organisation, as well as the migration of cash flow out of the construction industry when disputes occur, it is imperative that steps are made to improve the claim process.

This paper investigates the use of computer generated visualisations to assist with construction delay claims, an area in which to date there has been very little published research. The research reported in this paper is based on an in-house case study which presents two different visualisation approaches, one in 2D and one in 4D, which were developed to assist with the same delay claim.

2. Background

The term delay is exhaustively used in the construction industry; however, no standard form of construction contract defines the term due to the comparative nature in which it is used (Pickavance, 2010). In this paper, the term delay refers to the non-completion of works by a date set in the construction contract (Fenwick Elliott, 2012). Therefore, the process of analysing delays can be viewed as the forensic investigation into an issue which has caused the project to overrun on time (Farrow, 2001). This is distinctly different from disruption, a term generally conjoined with delay, which investigates loss of efficiency due to a lower productivity or an interference with progress (Cooke, 2009). The topic of disruption is not covered in this paper; however, both can become intertwined and result in construction claims.

Subject to the claiming party, different forms of compensation are available depending on how the delay is categorised (Trauner, 2009). On the one hand, the client can claim unliquidated or liquidated damages which protect their investment if the project is not completed by the contract completion date. On the other hand, the contractor can claim an extension of time and/or loss and expense if the project is delayed for reasons beyond their control. In order for the claimant to receive compensation, a construction delay claim must be made. This is broken down into three stages: causation, liability and quantum, all of which can prove a challenge for delay analyst (Williams, 2003).The burden of proof is placed with the claimant to prove each of these by showing on the balance of probabilities through cause and effect (Carnell, 2000). The balance of probabilities can then be shifted based on the standard of evidence, with stronger evidence required for more severe cases.

Construction programmes are the most common way to represent the cause and effect of delays and a variety of methodologies are available which use them, but some are preferred to (SCL, 2002). The chosen approach will be influenced by a variety of factors (Braimah, 2008); therefore, the choice of methodology should be the one which best represents the claim (Bubshait, 1998). It is argued that the most reliable of these methodologies is Time Impact Analysis which breaks the construction programme into a series of windows, each

with their own baseline, and re-sequences in line with as-built activities to analyse the relationships and durations of individual delay events by inserting them into each window to identify the event and the delay caused in that period (Arditi, 2006).

The findings from the analysis must be supported by a narrative, which will attempt to explain the claimants interpretation of what occurred on the project. Visual information is preferred to oral information as it improves understanding and retention (Keane, 2008); thus it allows for a more informed decision to be made. At present, the submission of a delay claim may involve numerous lever arch files with complex construction programmes and supporting evidence. Although accepted as a means to show cause and effect, the various delay analysis methodologies can be difficult to understand (Kumaraswamy, 2003). This is emphasised by Humphrey Lloyd QC in Balfour Beatty Construction v. London Borough of Lambert:

“This letter shows that the adjudicator was unable to make use (and, possibly, sense) of the material submitted on behalf of BB which included BB's “as-built” programme and analysis.”

Furthermore, deciphering supporting information to allow for an informed judgement to be made can prove a challenging task, especially interpreting technical construction drawings (Dziurawiec, 1986). This is apparent in Hunte v. Bottomley where Arden L.J. states:

“Those who prepare bundles or skeleton arguments would do well to remember that a plan, map, diagram or photograph which is clear to people who are fully familiar with the case may well not be wholly clear to a judge coming to the case for the first time.”

In an attempt to combat these problems, the courts are moving closer to e-disclosure and the use of screens as a method of communication. Therefore, the potential to use modern technology, particularly computer generated visualisations, to represent construction delays is possible. With continual developments in computer hardware along with the reductions in its cost, there has, and continues to be, a rise in the quality of computer generated visualisations. The definition of visualisation is open to interpretation and its meaning will vary between individuals. To some, a construction programme is a visualisation; whereas others, a simple line may suffice. In general, the term relates to a visual representation of information to enhance understanding (Card, 1999). For the purpose of this paper, ‘visualisations’ are Computer Generated Imagery (CGI) of tangible construction works which represent the progress of the project at a point in time.

Since the 1980s the entertainment industry has developed CGI for the internet, television, computer/video games and film (Parent, 2012). These platforms have progressed rapidly because the information is stored digitally, which allows it to be enhanced through bespoke software packages. Despite its rapid uptake in this sector, the UK construction industry has been slow to adopt electronic information as a communication method. Developments towards Computer Aided Drafting/Design (CAD) were made in 1963 (Tizzard, 1994); however, the current level and use of CAD within the industry is extremely varied, with 35% of organisations not using CAD (NBS, 2012). This could be attributed to the fact that

although the information is electronic, it is uncoordinated and must be interpreted by individuals; thus, it is little different to the traditional drawing board (Sacks, 2004).

Within the construction industry, visualisations are predominantly used in architectural design, but their benefits can be realised throughout the construction lifecycle (Bouchlaghem, 2005). Their main benefit is assisting with understanding and communication. The value of visualisations can be extended to legal proceedings and their use is expected to rise as courts are becoming increasingly technologically sophisticated (Narayanan, 2001). Visualisations have assisted the courtroom in the 1998 UK inquiry into the events of Bloody Sunday in Londonderry 1972 and the 2001 Carla Terry murder case in Connecticut. The criteria for visualisations to be accepted as supporting evidence are identified in the latter case as:

1. The equipment used is standard in the field and is shown to be in good working order 2. Qualified operators, procedures and reliable software are employed to produce the

output 3. The equipment was operated correctly 4. The exhibit is identified as the output produced.

Unfortunately, delay claims have not advanced in the same manner and the technology associated with them lags behind that of other stages in the lifecycle of a construction project (Vidogah, 1998). Pickavance (2007) identifies how technology can be used to create animations of tangible construction works to support construction disruption claims. Using both static and dynamic images to visually represent the cause and effect of disruption, the research highlights the importance of a side by side comparison of as-planned v. as-built progress. If used correctly, this method may be suitable in some adjudications and arbitrations (Pickavance, 2010); however, its value as evidence will vary depending on how it is employed and the supporting documentation (Schofield, 2005).

Numerous software providers offer products which allow you to virtually construct a construction project. The rise can be attributed to the growth of Building Information Modelling (BIM), a process of working which the UK government has mandated a minimum level of use on all public sector construction projects by 2016. BIM is seen as a way of tackling the inefficiencies present in the industry (Cabinet Office, 2011) through the process of recording all of a project’s information throughout its lifecycle in one, central, electronic, location. This information is linked to a 3D virtual representation of the project which is produced using object based parametric modelling software. This software advances from ‘traditional’ CAD based lines and instead places objects with rules and parameters which determine both geometric and non-geometric properties and features (Eastman, 2011). The relationships and constraints between objects ensure realistic connections between elements and when designed in a single source model, a change to an object in one view will automatically update all other views and linked information. Through the coordinated information, multiple dimensions become available. These include 4D (time), 5D (cost) and 6D (FM) (RIBA, 2012) where a change in any view or dimension will instantly change all dimensions, views and report the most up-to-date information on the project. The benefits of

this to assist with delay analysis are discussed by Gibbs (2012) while the process of BIM is also recognised as being able to assist with dispute systems (Greenwald, 2012).

3. Method

In order to determine how visualisations can assist with construction delay claims, primary data was collected through an in house case study. The use of a case study as a viable research methodology for construction claims is enhanced through Pickavance’s (2007) research. Although the conclusions drawn from the research will be specific to a single project, the lessons learnt should be transferable. The author was unable to assist with the delay claim as it occurred before they joined the organisation and the dispute remains strictly confidential; therefore, the level of detail in the paper has been limited.

3.1. Background to the case

Claim consultants were approached in 2010 by a Sub-contractor (from here on known as the Client) requesting expert delay analysis support on a construction project in the United Kingdom. The works, valued at several million pounds, included for the design and construction of a reinforced concrete frame, internal stair cases and the provision for tower cranes including the construction of the tower crane bases.

After investigation by delay analysts, critical delays were found in areas ‘A’ and ‘B’ for periods, EOT1 and EOT2. The chosen delay analysis methodology was time impact analysis, which broke the total project duration into one month windows. This identified protective scaffolding and edge protection restrictions, which were the responsibility of others, as prominent delaying activities through stop-start relationships restricting the continuity of successive activities. Although not a complex site, the numerous on-going parallel tasks made it difficult to understand the cause and effect of these delay events. In an attempt to provide clarity on this, computer generated visualisations were explored as a method of communication.

3.2. 2D visualisation

A prototype 2D visualisation of area ‘A’ was created by a delay analysts using Microsoft Excel to determine whether a visualisation would offer clarity on the delay claim (Figure 1). The Excel visualisation compares as-planned v. as-built progress side by side for the North, South, East and West faces of the building. Each floor compromises of the key sequencing activities required for its completion which include: deck installed, scaffolding, edge protection, freedom to complete floor and floor compete. Individual colours were applied for each activity and represented on each level at all four faces of the building when complete. The progress of the works were automated by linking the model to a bespoke Microsoft Excel construction programme in a separate tab, which automated side by side progress over time. The visualisation could also be used to demonstrate the exact progress for a point in time.

The benefits associated with the visualisation were clear to the Client who decided to progress the concept further into 4D, which subsequently halted the developments of the 2D visualisation. As the claim consultants did not have expert skills in virtual modelling, an external organisation was employed to create a visualisation of the works. Under the Clients request, communication was not allowed between the parties.

Figure1: Snap shot of a buildings progress from the 2D visualisation

3.3. 4D visualisation

A 4D visualisation of the Clients work was created by a virtual modelling organisation using Synchro. An open viewer of the software was obtained which allowed the visualisation to be viewed and analysed by the claims consultants, although no alterations could be made.

The visualisation incorporated all of the Client’s work which included all of the concrete superstructure levels which were individually coloured for each level (Figure 2). The visualisation was linked to an as-built programme within the software to create a fourth dimension, time. Under the 4D visualisation, the delayed elements were highlighted in red, returning back to the original floor level colour once the delay had passed.

Figure 2: Snap shot of a building from the 4D visualisation

4. Analysis

4.1. 2D visualisation

4.1.1. Benefits

The 2D visualisation provides an easy to understand representation of the causes of delay on the project. The visualisation identifies five colour coded elements of sequencing works which make up the construction of each floor of the project. Through automated sequencing which shows as-planned v. as-built progress side by side, the visualisation demonstrates which elements are delayed for a point in time in relation to all faces of the project. Seeing all faces of the project simplified the understanding of how works progressed in an area and the impact of delay. In order to assist the understanding of the as-planned and as-built progress, the automation can be paused, or a specific date selected, to represent progress at a point in time.

4.1.2. Limitations

Despite the apparent benefits of the 2D visualisation, it was not fully developed given the Clients request for the 4D visualisation and their monetary restraints; thus, limitations exist. Some of these limitations would have been tackled if the visualisation had been continually developed; others are inherent in the software.

Had additional time and resources been available to develop the 2D visualisation, it would have included additional activities involved in constructing the project. In its current state, the 2D visualisation demonstrates the sequencing of works to complete each horizontal level, it does not take into account the erection of columns or striking of formwork. Although simple to demonstrate in Excel, the records available from the Client did not allow for its straightforward incorporation.

Whilst an extremely powerful piece of software, Microsoft Excel is not developed to assist with construction delay claims; therefore, limitations exist, with particular regard to representation. The visualisation is not eye-catching and may not retain an individual’s attention, an importance expressed by Keane (2008). The visualisation is also not to scale and does not represent the site layout or space available between elements of the areas, which may give a misconception of the amount of work undertaken and incomplete. This limitation is enhanced as the visualisation only shows one building in an area. Although this may be suitable for a single tower block, if all buildings on the particular project were included on one spreadsheet, it would become difficult to understand. Consequenlty, if the site has not been visited by those passing judgement, it would not assist with understanding the project, a problem identified in Hunte v. Bottomley.

Furthermore, the visualisation is not linked to a construction programme which recognises logic and a duplication of effort is required to ensure the creation of an accurate construction programme which is transferred correctly into Microsoft Excel format.

4.1.3. Possible improvements

As the 2D visualisation was developed in a Microsoft Office software package, it is extremely interoperable. The Excel visualisation does not utilise this and the possibility exists to add annotations and link information and documents, such as the narrative, delay programme or photographs, to the visualisation to provide clarity and supportive evidence.

While the Excel model simply represents construction delays, it is limited through the software on how it is represented. Therefore, the same process could be followed using another piece of software which, if available, would make the visualisation more appealing to the eye whilst also being linked to the original delayed construction programme.

4.2. 4D visualisation

4.2.1. Benefits

The 4D visualisation provides an accurate, detailed, virtual representation of the construction works which were undertaken by the Client. This allows the governing body to clearly understand the construction site without ever having to visit. With the ability to pan around the visualisation it is possible to assess a specific building or element from any desired angle. When linked to the construction programme, it allows the viewer to virtually see the construction of the building without having to understand the construction programme in detail, a challenge encountered in Balfour Beatty Construction v. London Borough of Lambert.

4.2.2. Limitations

Despite some of the benefits realised in the 4D visualisation, it is not useful in conveying the cause and effect relationship of the delay events and subsequently was not used to support the delay claim.

The main limitation associated with the 4D visualisation is that it does not represent as-planned v. as-built progress side by side, as promoted by Pickavance (2007). Instead, both construction programmes are linked to one visual representation of the works, with colour coding depicting elements in delay. This method of representing delay does not provide a clear insight into the as-built progress of the works as the visualisation appears to progress at the as-planned rate but under different colours. Therefore, the stop-start relationship of the works is not clear and the delayed elements are not easy to understand. Given the restrictions of the software no annotations, links or photographs could be included to assist with understanding. Furthermore, despite the ability to pan around the visualisation, it was not possible to see all faces of the building at once. With the single view window of the project, it was not possible to see the effect of scaffolding restriction on sequencing works for all faces of the building at one moment in time. This was not supported through the emission of scaffolding objects within the visualisation. The visualisation only represented the finished floor and column elements, it did not break down the sequencing of delay events or include

any resources, such as scaffolding, which the software supported that would have assisted with understanding the cause and effect of delays.

4.2.3. Possible improvements

The limitations of the 4D model could have been mitigated if direct contact was allowed between the claim consultants and the virtual modelling organisation. The reason why communication was not allowed is unknown, but it is expected to be due to confidentiality reasons given the legal situation of the case. It is thought that the individuals developing the visualisation had no experience of delay analysis; therefore, if direct communication was allowed, the delay analysts would have been able to instruct the virtual modelling organisation on the effective use of the visualisation to represent their findings. This would have solved the main problem of not having as-planned v. as-built progress views side by side. This function is not included in all software packages; however, the software used in this particular case is capable. Additionally, the software could have been used to generate multiple angles, or snapshots, of the project in one view for an exact moment in time. This would allow the effect of delay to be analysed on the project at one point in time.

The 4D visualisation could be further enhanced through attaching or linking information which relate to the delay report. If this is not available in the software, a voice recorded description of the analysis which plays over the visualisation would have been of benefit.

5. Overall recommendation

Firstly, a cost benefit analysis should be undertaken to determine whether the costs associated with the development of the visualisation will add value to the representation of the delay claim. This was overlooked in this case study, which resulted in neither visualisation being used as a supporting tool. Despite this, the case study identifies the potential benefits of using visualisations and that the problems encountered can be mitigated.

In future, if visualisations are used to support construction delay claims, it is recommended that they have a side by side comparison of as-planned and as-built progress which is linked to a construction programme, as promoted by Pickavance (2007). Ideally, an accurate 3D visualisation would be developed of all the main construction works on the site, including the main resources used in its construction. Therefore, if simultaneous delays occur, multiple views of the project can be represented in different windows to see the effect of the delay on the entirety of the project. Supporting information could then be coordinated and linked to the model to add clarity. With the rise of BIM, software packages are becoming available which offer these services in a bid to support the new process of working.

Regardless of the capabilities of the software, the case study highlights the importance of strong communication between all parties in order to provide a visualisation which effectively represents the delay analysts findings. Given the justification for this research, it is unfair to expect a virtual modelling organisation to understand a complex delay claim and accurately demonstrate it in a virtual environment with no support from a delay analyst. Preferably, a

delay analyst with virtual modelling skills would be employed to create the visualisation, or visa-versa. If not, as is always the case where different professional disciplines are required to work together to produce a solution, strong communication between both parties is required to ensure the visualisation conveys the delay findings as accurately and effectively as possible.

In order to assist the research, further case studies should be undertaken in which a visualisation are used and the recommendations identified in this paper should be incorporated on a delay claim using visualisation and reported on.

6. Conclusion

One of the challenging tasks faced by delay analysts is to clearly represent their findings to support a construction delay claim. The traditional methods of representing construction delays through construction programmes can be difficult to understand, as highlighted by the case law, and assistance through technological developments in computer generated visualisations is recognised.

The potential to use visualisations to support construction delay claims is discussed through an in-house case study where two different visualisations, one in 2D and one in 4D, were developed to assist with the same delay claim. Despite neither of the visualisations being used to support the delay claim, the research highlights some important findings. These include the need for a cost benefit analysis before a decision is made on whether to use a visualisation to support a claim, the importance of a linked logically driven construction programme to the visualisation as well as a side by side comparison of as-planned v. as-built progress. Given the justification for the research, as with any project, the importance of strong communication is required in order for the project to succeed. Further research is required to put the recommendations found in this paper into practice to demonstrate how they can support a construction delay claim. The potential to exploit elements of BIM to assist with construction delay claims are also discussed to assist with construction claims and will continue to be researched as part of an engineering doctorate.

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ADR Practice in the construction industry: a futuristic perspective

Olive du Preez1, Basie Verster2

Abstract

Research suggests that the practice of Alternate Dispute Resolution (ADR) is successfully implemented in the South African Construction Industry however; research also indicates that parties seldom negotiate their own settlement and that decisions are made for them. This study records the current situation relating to ADR practice in the South African construction industry and projects possible future trends based on the evolution of the ADR process in the industry. A literature review was conducted on standard ADR practice (as practised internationally) after which an empirical study employed both questionnaires and interviews to determine the current situation in the industry. A comparative analysis was conducted in order to determine the relationship between standard and current practice in the industry. The comparative analysis also serves to identify ADR trends in the industry which may serve as predictors and provide a futuristic perspective to the development of ADR in the South African construction industry. Dispute resolution is an important element in the management of projects which in turn is dependent on the effective application of ADR.

Keywords: Alternate Dispute Resolution, ADR, construction industry, current practice, future trends.

1. Introduction

Arbitration has been used as a means of Alternate Dispute Resolution (ADR) since the days of Jan van Riebeek and was based on Roman-Dutch law. The present South African Arbitration Act 42 of 1965 and contract documentation are based on English Law. Mediation and conciliation in South Africa and the UK are in some respects applied in a different manner to international standard practice. In standard mediation practice, the mediator is not required to recommend a solution to the dispute, but in the construction industry it is required of him. The application of conciliation is also reversed (Butler & Finsen, 1993: p10-11).

1 Lecturer; Department of Quantity Surveying and Construction Management; University of the Free State; P.O. Box 339, (Internal Box 47) Bloemfontein, South Africa 9301; DuPreezORC@ufs.ac.za. 2 Head of Department; Department of Quantity Surveying and Construction Management; University of the Free State; P.O. Box 369, (Internal Box 47) Bloemfontein, South Africa 9301; VersterJ@ufs.ac.za.

Dispute resolution in the construction industry is different due to the use of unique adjudicative methods whereby judgments can be made with non-binding decisions which are characterised with consensual and control features (Finsen, 2005: pp222-223). It is important to note that the consensual nature of arbitration places it in the ADR context (Pretorius, 1993: p176; JBCC PBA, 2007: pp30-31).

Mediation was introduced to the South African construction industry in 1976 as an alternative method of dispute resolution to the cost and time consuming method of arbitration. The Joint Study Committee issued a practice note with the intention of saving costs and time in the resolution of disputes. However, it was submitted that should parties be dissatisfied with the outcomes, they were still entitled to submit to arbitration (Quail, 1978: p165). Adjudication was introduced to the South African construction industry as an ADR method which requires expert determination and was therefore included in the Joint Building Contracts Committee Principal Building Agreement (JBCC PBA) Series 2000 4th Edition (2004: p30). This approach took effect after the change to adjudication, adopted from the Latham Report in the United Kingdom (Scott & Markram, 2004: p1). Adjudication is applied as a dispute resolution method when the parties require a decision to be made for them and this decision is provisionally binding unless it is overturned in a subsequent arbitration (Finsen, 2005: pp222-223).

Agent resolution was included in the PBA of 1991 Dispute Clause 37 which was recommended by the JBCC (1991: pp21). Agent resolution as a method of dispute resolution was identified in the Association of South African Quantity Surveyors (ASAQS) 1981 Practice Manual under the Agreement and Schedule of Conditions of Building Contracts (1981: p17). However, due to its popularity in practice (ASAQS, 1981:p17; Verster & van Zyl, 2009: p7; JBCC PBA, 1991: p21) agent resolution was included in this study. Although conciliation is not included as a method of dispute resolution in the JBCC Contract documentation, it may suffice as a method of informal dispute resolution as required in Clause 40.2 in the JBCC PBA (2007: pp30-31).

The similarities that exist between arbitration, the oldest method of ADR, and mediation, may be appreciated because new methods were developed for the purpose of speeding up the arbitration procedure so as to provide a more informal and cost-effective way of resolving disputes most suited to the industry (Butler & Finsen, 1993: p8).

Having adopted a process which is exclusive to ADR practice in the South African construction industry, the context in which the methods are applied (which originally stem from arbitration and have overlapping similarities) may vary, and the application may prove to be somewhat confusing when compared to standard practice as practiced internationally.

2. Current ADR practice in the South African construction industry

The ADR process is intended to give parties control and responsibility for the outcome (Bevan, 1992:p18) which ultimately produces advantages and is referred to as the Four C’s. These advantages which constitute the features of the ADR context apply to the non- adjudicative methods of ADR and are as follows:

• Consensus

• Continuity

• Control

• Confidentiality. These features produce effective outcomes (Loots, 1991: pp8-13; Verster, 2006: p13).

Adjudication now takes precedence to arbitration in the dispute clauses of the following contracts: General Conditions of Contract for Works of Civil Engineering Construction (GCC) (2010:pp68-71), the New Engineering and Construction 3 (NEC3) (2005: pp28-33) and the International Federation for Consulting Engineers (FIDIC) (1999: pp66-70). Adjudication in the engineering discipline follows a different process in the form of Dispute Adjudication Boards (DAB) (Lalla & Ehrlich, 2012: online) which is supported by the FIDIC (1999), GCC (2010) and the NEC, (2005) contracts, whereas in the building industry, adjudication is supported by the JBCC PBA (2007: pp30-31). The South African Institute of Architects (SAIA) generally practise adjudication according to the JBCC PBA Dispute Clause 40 (The Cape Institute for Architecture, 2010: online). The DABs follow much the same process however; the establishment of the board differs where three adjudicators are appointed to resolve the dispute. The process relies on the expertise of engineers (Owen, 2003: p25).

Researched authors are of the opinion that there is a growing preference for adjudication in the construction industry and courses have been developed in order to promote the practice of adjudication (Alusani, 2012: online). Maritz (2009: online) is of the opinion that adjudication will be underutilised without statutory intervention however; the (Construction Industry Development Board (cidb) promotes adjudication as a rapid and cost effective method (cidb, 2012: online).

Similar to this process is the method of expert determination. With adjudication, a dispute is referred to an expert rather than to litigation, where a judge may base his decision on law, rather than technical issues. Expert determination is also based on rules (What is ADR, 2010: online). This suggests that adjudication in the JBCC PBA (2004) was based on the principles of expert determination. In view of the above, DABs are based on the same principles and may involve more experts which according to Swart, (2012: personal communication), tends to generate expenses and may be suited to larger projects. Mediation has been identified as a preferred method of ADR however; the application of mediation in the South African construction industry has been questioned. Professionals are appointed as mediators due to their expert knowledge and the mediation process is often expedited to suit the hurried nature of the construction industry. As such, mediators are relying on inherent ADR communication skills and making decisions for the parties (Povey, 2005: pp6).

Conciliation is the psychological component of mediation where the neutral third party will attempt to create an atmosphere of trust and co-operation which is conducive to constructive negotiation. The aim of conciliation is to correct perceptions, reduce fears and improve communication in order to relax parties and guide them into conflict-free negotiations and

bargaining. Conciliation also offers parties the opportunity to determine their own end results. Being a primary element of mediation, conciliation is applied with the intention of preparing the parties psychologically to enter into the extended process of mediation (Moore, 1986: pp4-6). As such conciliation may serve as a preventative measure against disputes developing on site.

The relief of court congestion has been addressed by the Department of Justice and Constitutional Development in the Civil Justice Reform Programme (CJRP) (2012: pp14-20) by simplifying lengthy and complex court processes and implementing ADR in the form of mandatory mediation in order to settle out of court. The intention is to implement these court based mediation rules gradually commencing in 2012. However, Joubert and Jacobs (2012) are of the opinion that for this process to be successful, the voluntary process of mediation would be considered an obstacle (online).

3. The standard ADR process compared to current practice

Table 1 compares the standard practice of mediation to current practice as adopted in the South African construction industry. The table is divided into two columns; the left column is an illustration by Moore (1986) of the standard mediation process in a detailed description which works through set stages. It is important to note that the process may be somewhat tapered to suit the hybrid type of ADR practiced in the South African construction industry, which is based on the conclusions of Povey’s (2005:p6) research. The reader may find that the stages relating to current practice have been adjusted or eliminated to more accurately reflect the situation in the industry. Due to the possibility of the lengthy stages being questioned in regard to the construction industry, the process was adjusted to accommodate the trend to expedite the mediation process.

Table 1: The process of standard practice of mediat ion compared to current mediation practice

Standard practice of the mediation process Current mediation practice

Stage 1: Initial contacts with the parties

• Making initial contacts with the parties

• Building credibility

• Educating the parties about the process and selecting approaches

Stage 1: The dispute is reported according to JBCC PBA, 2007 Dispute Clause 40

Stage 3: Collecting and analysing background information

• Collecting and analysing relevant data, dynamics, and substance of a conflict

Stage 3: The principal agent has all the information at hand

Stage 6: Beginning the mediation session

• Opening negotiation between the parties

• Establishing an open and positive tone

• Assisting the parties in venting emotions

• Assisting the parties in exploring commitments, salience and influence

Stage 6: Beginning the mediation session

• Opening negotiation between the parties

• Establishing the problem

• Facilitator offers an opinion for a settlement

Stage 9 Generating options for settlement

• Generating options using either positional or interest-based bargaining

Stage 10: Assessing options for settlement

• Reviewing the interests of the parties

• Assessing how interests can be met by available options

• Assessing the costs and benefits of selecting options

Stage 11: Final bargaining

• Reaching agreement through either incremental convergence of positions, final leaps to package settlements, development of a consensual formula, or establishment of a procedural means to reach a substantive agreement

Stage 12: Achieving formal settlement

• Identifying procedural steps to operationalise the agreement

• Establishing an evaluation and monitoring procedure

• Formalising the settlement and creating an enforcement and commitment mechanism

Stage 12: Achieving formal settlement

Source: (Adapted from Moore, 1986: p32; Povey, 2005: pp2-7).

Stages 2, 4 and 8 regarding the strategy, design and hidden interests were eliminated due to the existing involvement of the professional fulfilling the role of principal agent or project manager. In standard practice, mediation may be conducted by a natural person however; in the construction, industry mediation is invariably conducted by an expert.The hybrid form of mediation practice to suit the needs of the fast track nature of the industry is illustrated.

4. Research methodology

A literature review was conducted to identify the current trends of ADR practice in the South African construction industry in order to compare these with international standard practice. The research followed a mixed methods approach gathering qualitative and quantitative data. A questionnaire survey was conducted to determine the preference for the methods of ADR and how important the respondents consider these methods to be, to what extent conciliation will prevent differences developing into disputes and the application of ADR. In addition to this, the respondents were requested to give their opinion of current practice in the industry. One hundred questionnaires were distributed with a 45% response. Interviews were also conducted to determine the current situation in the industry. The results of the data analysis are addressed in the findings.

5. Findings

The evaluative process of mediation is implemented successfully in so far as disputes are being settled however; the qualitative data analysis suggests that the facilitative process is lacking. The quantitative data suggests that professionals in the construction industry are in favour of applying ADR which produces the advantages relating to the Four C’s. Although respondents rated themselves as knowledgeable of the process, the qualitative data indicates that the psychological component is being disregarded by professionals. The qualitative data contradicts the quantitative data in so far as professionals have indicated that they do not have “the time to waste” on the psychological needs of the parties because they have “a business to run”. A statement by a respondent such as “I make the decision for the parties and tell them that this is how the dispute will be resolved” suggests that an autocratic approach tends to be used in the resolution of disputes. This suggests that professionals are aware of the requirements for effective facilitation and have limited time available for implementation.

Figure 1 illustrates the quantitative data relating to the effectiveness and the satisfactory end results experienced by the respondents. This supports the notion that the basic fundamentals are in place.

Figure 1: Advantages of the Four C’s

Secondary data indicates that there is a preference for mediation however; according to the data analysis, the trend is changing towards adjudication. This is also supported by the literature review. Arbitration was also identified as a preferred method, which suggests that it holds its stance as the support system to ADR. Although DAB’s are considered to be effective, the cost implications on smaller projects limit the use of this method.

Figure 2 depicts the order of preference for the various ADR methods and the respondents’ opinion on their effectiveness. Respondents prefer arbitration closely followed by adjudication. Agent resolution is considered the most effective method with a rating of 18.6% and conciliation the least with 13.4%.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Consensus: Control: Continuity: Confidentiality:

Advantages of Four C's

Effectiveness of advantages

Experienced Satisfactory end

results

Figure 2: Order of preference and effectiveness

Contrary to the findings of the order of effectiveness and preferences as depicted in Figure 2, Figure 3 indicates that respondents are of the opinion that conciliation will prevent differences developing on site to the extent of 68%.The respondents were divided into age groups to determine at which point the application of conciliation is considered important in preventing differences occurring on site. The advantages of conciliation are realised with experience. Although agent resolution is not included in the JBCC PBA (2007) Dispute Clause 40, it may be related to conciliation in so far as these skills are used to apply the method (pp30-31). As such, this highlights the importance of conciliation on site.

.

Arbitration

Adjudication

Unassisted

negotiation

AssistedNegotiati

on(Concilia

tion)

Mediation

Agentresolutio

n

Effectiveness 16.7% 18.4% 17.2% 13.4% 15.4% 18.6%Preference 20.2% 19.3% 14.8% 13.0% 15.3% 17.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Order of preference and effectiveness

Effectiveness

Preference

Figure 3: Conciliation preventing differences on si te

6. Discussion

ADR practice has evolved to suit the needs of the industry and this has led to a form of practice which differs from standard mediation practice as identified in the literature review. Having identified the current situation in the industry the question is, what future events are likely to influence current trends?

Professionals in the construction industry have practiced ADR to suit the needs of the industry since the original introduction to mediation. As depicted in the comparison of standard with current mediation practice, the hasty nature of the construction industry lends itself to expediting the resolution of disputes rather than applying ADR according to the identified requirements. Measures may need to be taken to encourage professionals to apply the mediation rules in regard to the application of conciliation as an element of mediation.

Mandatory mediation and adjudication may have a negative impact on time and cost goals as opposed to the use of the expertise of the professional on site. The Department of Justice is currently systematically introducing mandatory mediation and the changing trend toward adjudication suggests that the intention is to follow suit. Although the current voluntary process is considered a hindrance, the construction industry has a history of applying ADR to suit the needs of the industry. This suggests that the construction industry will in all probability continue practice to suit their needs. The opinion of professionals in regard to the focus of adjudication (with possible statutory intervention) may require further research. However, mandatory mediation may present a challenge in a fast track industry.

7. Conclusion

From the introduction of mediation dating back to 1976, the applications of the ADR methods have been adapted to suit the needs of the industry. As such, it is concluded that although ADR practice may be facing challenges in the future and the evolutionary trends remain

58.0%

60.0%

62.0%

64.0%

66.0%

68.0%

70.0%

72.0%

74.0%

All Profesionals Age <30 Age 30 - 40 Age >40

Conciliation preventing differences on site

constant, the hybrid form of ADR practice may in all probability continue unless the change is forced on professionals in the form of regulations. The consensual basis of ADR in the dispute clauses of the various contracts is supported by the industry and professionals are aware of the advantages. However; the application of conciliation and the realisation of the importance of settling differences on site before a dispute develops are lacking.

The consensual approach to ADR in the South African construction industry is effective without statutory intervention in so far as it gives contracting parties the opportunity to use the method of dispute resolution best suited to their needs.

8. Recommendations

Despite the implementation of mandatory mediation and the probability of statutory involvement in adjudication, it is recommended that more emphasis be placed on the advantages of and subsequent implementation of effective conciliation for the successful completion of projects

It is further recommended that institutions may consider providing opportunities for professionals in the industry to update their knowledge of ADR in the form of Continuous Professional Development and that emphasis should be placed on conciliation and the changing trends which are taking place.

References

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Analysis of delay, disruption and global claims in the context of statutory adjudication in Australia

Damian Michael†, Michael C Brand*

Abstract

There has been a fusion of delay, disruption and global claims in the context of statutory adjudication in Australia. These claims arise within a contractual setting or from principles of common law. The one thing that these claims have in common is that they arise due to an act, default, or omission by the principal, or where those matters are caused by a third person who is the responsibility of the principal. The courts have recognised that delay, disruption, and global claims are claimable and can be determined by an adjudicator under statutory adjudication. The purpose of this paper analyse delay, disruption and global claims in the context of statutory adjudication in Australia. A comparative ‘black-letter’ approach is adopted to analyse case law in various international jurisdiction dealing with delay, disruption and global claims in construction. The paper shows that delay, disruption, and global claims are frequently unappreciated within the framework of statutory adjudication. There are varying degrees of consideration to be taken into account where there can be compensable, non-compensable, and modified or apportioned claims. There is also causation, criticality, and concurrency to be considered. These are generally complicated factors that adjudicators are requested to consider in statutory adjudication. Those matters often lead to the unfortunate results that one of the parties on opposite sides’ ends up aggrieved. The research may be of interest in international jurisdictions where statutory adjudication for the construction industry has been introduced or is being contemplated.

Keywords: Adjudication, Australia, delay claim, disruption claim, global claim

1. Introduction

This paper deals with the fusion of delay, disruption and global claims in the context of statutory adjudication in Australia.1 A detailed overview of the problem giving rise to the need for statutory adjudication in the Australian building and construction industry as well as contemporary discussions on the topic is provided in Brand & Davenport (2012), Brand & Davenport (2011), Brand & Uher (2010) and Commonwealth of Australia (2002).

† Lawyer of the Supreme Court of New South Wales, Rockliff Chambers, Level 5, 50 King Street, Sydney, NSW, 2000, Australia. Email: dmichael@rockliffs.com.au

* Director, Adjudication Research + Reporting Unit, Faculty of the Built Environment, The University of New South Wales, Sydney, NSW, 2052, Australia. Email: michaelb@fbe.unsw.edu.au

1 Statutory adjudication is adjudication which takes place under legislation. All Australian States and Territories have comparable legislation for the building and construction industry: see Building and Construction Industry Security of Payment Act 1999 (NSW); Building and Construction Industry Security of Payment Act 2002 (Vic); Building and Construction Industry Payments Act 2004 (QLD); Construction Contracts Act 2004 (WA); Construction Contracts (Security of Payments) Act 2004 (NT); Building and Construction Industry Security of Payment Act 2009 (Tas); Building and Construction Industry (Security of Payment) Act 2009 (ACT); and Building and Construction Industry Security of Payment Act 2009 (SA).

Delay, disruption and global claims often arise within a contractual setting or from principles of common law. The one thing that these claims have in common is that they arise due to an act, default, or omission by the principal, or a third person who is the responsibility of the principal.

The courts have recognised that delay, disruption, and global claims are claimable and can be determined by an adjudicator under statutory adjudication. The common law principles of those types of claims have been adopted by the courts, but the application of such claims remain inconsistent within the area of statutory adjudication. This is particularly where the accepted doctrines of such claims have not been fully appreciated by the courts and where there can be a regular theme that delay, disruption and global claims are categorised as claims in damages arising from a breach of contract.

This paper shows that delay, disruption, and global claims are frequently unappreciated within the framework of statutory adjudication. There are varying degrees of consideration to be taken into account where there can be compensable, non-compensable, and modified or apportioned claims. There is also causation, criticality, and concurrency to be considered. These are generally complicated factors that adjudicators are requested to consider in statutory adjudication. Those matters often lead to the unfortunate results that one of the parties on opposite sides’ ends up aggrieved.

2. Delay and Disruption

It has been argued in the past that the recovery of costs on account of delay and disruption through statutory adjudication are excluded by the operation of the Building and Construction Industry Security of Payment Act 1999 (NSW) (‘the NSW Act’)2 and the Building and Construction Industry Payments Act 2004 (Qld) (‘the Queensland Act’).3 The Building and Construction Industry Security of Payment Act 2002 (Vic) (‘the Victorian Act’)4 expressly prohibits the recovery of any time related costs5 that would conceivably extend to claims for delay and disruption costs.

Whilst the Victorian Act expressly bars the recovery of any time related costs, the same cannot be said for its New South Wales and Queensland counterparts. It has been claimed that delay and disruption costs amount to a claim in damages that is not claimable under the NSW and Queensland Acts. This is because damages are not referable to the performance of construction work and damages arise from a breach of contract. The exclusion of damages from the NSW Act was confirmed in Quasar Construction v Demtech [2004] NSWSC 116, wherein Barrett J said (at [34]):

The clear message throughout the Act is, in my opinion, that any “progress payment”, including

one within paragraph (a), (b) or (c) of the definition of “progress payment”, can only have that

2 New South Wales (abbreviated as ‘NSW’) is one of six states of the Commonwealth of Australia. 3 Queensland (abbreviated as ‘Qld’) is one of six states of the Commonwealth of Australia. 4 Victoria (abbreviated as ‘Vic’) is one of six states of the Commonwealth of Australia. 5 Building and Construction Industry Security of Payment Act 2002 (Vic), s.10B(2)(b)(ii).

character if it is “for” work done or, where some element of advance payment has been agreed,

“for” work undertaken to be done. The relevant concepts do not extend to damages for breach

of contract, including damages for the loss of an opportunity to receive in full a contracted lump

sum price. Compensation of that kind does not bear to actual work the relationship upon which

the “progress payment” concept is founded.

The proposition was put that delay costs were claimable under the NSW Act where the contract sets out a mechanism for such amounts to be claimed in progress claims. In Kembla Coal & Coke v Select Civil [2004] NSWSC 628 (‘the Kembla Coal case’), McDougall J decided where the contract provides a mechanism for quantification of a progress payment, it is the mechanism that is to be adopted and where the contract provides for assessment of a progress payment, the effect of s 9(a) of the NSW Act is to be given.

Deciding whether an amount is actually damages for breach of contract or part of the consideration payable under the contract for the work, goods or services is not always easy to ascertain. Hodgson JA in Coordinated Construction Co v JM Hargreaves [2005] NSWCA 228 (‘the Hargreaves case’) (at [41]) says that any amount that a construction contract requires to be paid as part of the total contract price of construction work is generally an amount due for that construction work, even if the contract labels it as damages or interest.

Those matters were indeed taken further by the New South Wales Court of Appeal in the Hargreaves case (at [41]) and in Coordinated Construction Co Pty Ltd v Climatech (Canberra) Pty. Ltd. & Ors [2005] NSWCA 229 (‘the Climatech case’) (at [40]). Those decisions stood for the proposition that where a contract provides that progress payments include certain amounts; section 9(a) of the NSW Act strongly suggests that such amounts are to be included in a progress payment under the NSW Act.

In the Climatech case, Hodgson JA discussed the circumstances in which ‘damages’ may validly fall within the jurisdiction of the NSW Act. This is where the contract contains mechanisms for such amounts to be claimed, such that the requirement in section 9(a) of the NSW Act is engaged. His Honour said:6

In my opinion, the circumstance that a particular amount may be characterised by a contract as

‘damages’ or ‘interest’ cannot be conclusive as to whether or not such an amount is for

construction work carried out or for related goods and services supplied. Rather, any amount

that a construction contract requires to be paid as part of the total price of construction work is

generally, in my opinion, an amount due for that construction work, even if the contract labels it

as ‘damages’ or ‘interest’; while on the other hand, any amount which is truly payable as

damages for breach of contract is generally not an amount due for that construction work.

Under the contract in this case, delay damages are payable only if an EOT is for a compensable

cause, that is, in general some act or omission of the head contractor or the superintendent or

the sub-contract superintendent; but nevertheless, they are not of their nature damages for

6 Coordinated Construction Co Pty Ltd v Climatech (Canberra) Pty. Ltd. & Ors [2005] NSWCA 229 at [41] and [42].

breach but rather are additional amounts which may become due and payable under the

contract...and which are then to be included in progress payments...They are therefore prima

facie within section 9(a) of the Act.

It is now generally accepted that amounts on account of delay and disruption costs are claimable under the NSW Act providing there is a contractual right for the claimant7 to pursue such claim for costs of delay or disruption. However, intertwined with that entitlement to delay and disruption costs generally stems from an extension of time entitlement under the contract.

The above authority indicates that an entitlement to a delay cost claim only arises where there has been a positive determination under the contract for an extension of time claim. This is assuming the contract makes such a positive determination, which in most instances will be the case. Therefore, this creates the concept of an extension of time acting as a condition precedent to an entitlement to a delay cost claim under the NSW Act and this is not easily reconcilable with the claimant’s entitlement to a delay cost claim in circumstances where an extension of time was not granted by a superintendent under a contract. Whilst this may be accepted, the Adjudicator is left with having to decide whether the claimant was entitled to an extension of time with respect to any delay or disruption.

In Hervey Bay (JV) Pty Ltd v Civil Mining and Construction Pty Ltd and Ors [2008] QSC 58, McMurdo J considered that it was open to the Adjudicator to decide what the superintendent should have done in response to the claims made and to conclude that the superintendent, acting fairly, would have granted the extensions which the Adjudicator found were justified. The decisions in the Hargreaves and Climatech cases demonstrate that a claimant does not have a right to include in a payment claim under the NSW Act a claim for costs of delay or disruption as part of the value of construction work carried out under the contract, in the absence of a contractual right for the claimant to pursue such claim for costs of delay or disruption.

The above authority with respect to delay and disruption claims made under the NSW Act commonly suggests that if the contract permits a claim for delay and disruption costs arising from an extension of time under the contract, the claimant will be entitled to such claims providing an extension of time has been granted, or the Adjudicator decides that an extension should have been granted in the circumstances of the claimant’s claim for delay or disruption costs.

The position, however, is different if the contract does not deal with delay or disruption claims. This is particularly where a person, who the claimant is not responsible for, causes the claimant to incur additional cost from delay or disruption. On one view this could be a breach of contract or tort by the person that caused delay or disruption and the claimant’s only remedy is in damages. On another view, this could not be a claim for damages of any kind, but rather, a claim for additional costs that the claimant incurred for, among other

7 The “claimant” is the person by whom a payment claim is served (e.g., see: Building and Construction Industry Security of Payment Act 1999 (NSW) ss. 4, 13).

things, the provision of labour to carry out construction work, based on certain disruption. This proposition can lend support from the High Court decision in Carr v JA Berriman Pty Ltd (1953) 89 CLR 327, followed by Council of the City of Sydney v Goldspar Australia Pty Limited [2006] FCA 472 (3 May 2006), which highlights the meaning of damages as being distinct from cost of works. Either way, there is difficulty in reconciling the concepts, particularly where a claim for any delay or disruption by the claimant may be in connection with the work under the contract and for construction work done or related goods and services supplied under the NSW Act or the Queensland Act.

3. Global Claims

A global claim is where a claimant does not seek to attribute any specific delay, cost or loss to a specific breach of contract, variation or direction, but alleges a composite loss as a result of all the breaches, variations or directions where it is impractical to disentangle part of the loss which is attributable to each head of claim, and none of the delay, cost or loss has not been brought about by delay or other conduct of the claimant.8

The concept of global claims has previously been considered by the Supreme Court of New South Wales in the context of the NSW Act. For the purpose of this paper, it is apt to refer to global claims interchangeably with total cost claims.

In Shell Refining (Australia) Pty Limited v A J Mayr Engineering Pty Limited [2006] NSWSC 94 (‘the Shell Refining case’), Bergin J accepted that a global claim for disruption and delay can be made in a payment claim, valued and determined under the NSW Act. In the Shell Refining case, the claim was a global claim stemming from disruption, with quantification based on a modified total cost method. Bergin J upheld the Adjudicator’s determination in the Shell Refining case regarding the validity of a claim under the total cost method, where her Honour said:9

The defendant submitted that the type of claim put forward by it in its application is not a novel

one. It was submitted that it was an extremely common, simple way of putting forward a claim

for loss and expense in circumstances where it is difficult to link each item to a particular

breach. It was submitted that what the defendant did was to add up all the hours it had spent on

the job; compare that total with the hours allowed in the tender; deduct the latter from the former

to represent the unrecovered number of hours and multiply that figure by the contract rate to

obtain the unrecovered cost. In this regard the defendant submitted that the Contract envisaged

that in respect of such costs, what was required to be done was the making of an “estimate”

(see cl 2.3(2)(e) of the General Conditions). It does not seem to me that such description can

assist the defendant. That was an estimate to be provided in the Notice to the Company of a

claim for an “eligible delay”. What was claimed was not merely an estimate, but a figure that had

been calculated pursuant to a specific methodology. In the claim made by the defendant the

method used to calculate the amount or, perhaps put more accurately, to make a judgment of its

worth, was clearly set out.

8 John Holland Construction & Engineering Pty Ltd v Kvaerner RJ Brown Pty Ltd (1996) 13 BCL 262 at [267]. 9 Shell Refining (Australia) Pty Limited v A J Mayr Engineering Pty Ltd [2006] NSWSC 94 at [28].

In Siemens v Tolco; Tolco v Siemens [2007] NSWSC 257, Macready J, considered a claim based on a total global costs method made under the NSW Act, based on the allegation that Siemens had breached the contract, which caused Tolco loss.10 His Honour had occasion to consider Siemens’ proposition that Tolco’s claims were claims for damages which are not permitted under the NSW Act.11 The Court did not ultimately decide the question in the context of the NSW Act on the validity of the total global costs method, nor whether such a claim amounted to damages.

In Laing O'Rourke Australia Construction v H&M Engineering & Construction [2010] NSWSC 818 (‘the Laing O'Rourke case’), McDougall J considered in the context of the NSW Act claims for disruption that were characterised as global claims or total cost claims by Laing O'Rourke. H&M Engineering advanced in the adjudication as part of its overall claim that it had not sought to particularise the nexus between the individual alleged disruptive matters and the alleged consequences in terms of time and cost.12

H&M Engineering referred to the decision of Byrne J in John Holland Construction Engineering Pty Ltd v Kvaerner RJ Brown Pty Ltd (1996) 13 BCL 262 and to what his Honour, writing extra-curially, had said in Total Costs and Global Claims (1995) 11 BCL 397 , together with other decisions and writings dealing with global claims or total cost claims. McDougall J outlined the premises of H&M Engineering’s claims by saying:13

H&M denied, in its adjudication application, that claim 110 was a “global claim” (and,

presumably, took the same position in relation to claims 115 and 122). It said that it had

“provided more than sufficient evidence to demonstrate that as a result the [sic] vast number of

breaches of the contract and acts of prevention caused solely by LORAC, H&M has incurred

substantial additional work-related costs for which LORAC must reimburse H&M.

However, although H&M identified many of what it said were acts of disruption, delay or

prevention, it did not seek to describe a connection between any individual act (or related

groups of acts) and any particular loss of time. H&M’s case was that, taken together, it was all

those acts of LORAC that had caused H&M to incur the number of man hours of labour over

and above those, in effect, budgeted. (Indeed, as I have noted, H&M appeared to recognise this

in its adjudication application.) It is clear that H&M asserted, at least implicitly, that there were

no other causes. That is because, as I have said, it claimed for each and every one of the hours

in question.

McDougall J considered that it was unnecessary to exhaustively review all of the cases that dealt with global claims, or total cost claims, but considered that it was necessary to refer briefly to the decision of Byrne J in John Holland Construction Engineering Pty Ltd v Kvaerner RJ Brown Pty Ltd (1996) 13 BCL 262 and to Byrne J’s paper Total Costs and Global Claims (1995) 11 BCL 397.14 This was because those materials were relied on by

10 Siemens v Tolco; Tolco v Siemens [2007] NSWSC 257 at [28]. 11 Kembla Coal & Coke v Select Civil & Ors [2004] NSWSC 628; Quasar Construction v Demtech Pty Ltd [2004] NSWSC 116). 12 Laing O'Rourke Australia Construction v H&M Engineering & Construction [2010] NSWSC 818 at [42]. 13 Laing O'Rourke Australia Construction v H&M Engineering & Construction [2010] NSWSC 818 at [44] and [45]. 14 Laing O'Rourke Australia Construction v H&M Engineering & Construction [2010] NSWSC 818 at [74].

both parties in relation to the aspect of their debate in the Laing O'Rourke case. In that case, McDougall J did not ultimately consider the permissibility of a global or total cost claim in the context of the NSW Act, nor did his Honour consider that such claims amounted to damages.

The important theme in all of the above decisions15 is that the Supreme Court of New South Wales did not find that global or total cost claims were incapable of being claims made and determined under the NSW Act. It is more probable than not to conclude on the basis of those decisions that global or total cost claims are allowable under the NSW Act.

This paper advocates for the proposition that global or total cost claims are available remedies under the NSW Act and Queensland Act. This is especially where a contract between a claimant and respondent16 does not expressly recompense the claimant for delay or disruption caused by the respondent or by a person who is the reasonability of the respondent. This paper also puts forward the proposition that if a global or total cost claim is not an available remedy to a claimant due to principal factors, the notion of a modified total cost claim is open to a claimant and is an available remedy that can be pursued and determined under the NSW Act and Queensland Act.

The principles that underpin an entitlement to a global or total cost claim are supported by a number of authorities and have been derived for the purposes of this paper from English and Australian case law. It can be deduced from Smith J’s decision in Nauru Phosphate Royalties Trust v Matthew Hall Mechanical & Electrical Engineers Pty Ltd [1994] 2 VR 386 (‘the Nauru case’) that there are four conditions that must be satisfied in order to maintain the validity of a total cost claim. These can be summarised as the following:

1. it is impossible or highly impracticable to determine the losses with any reasonable degree of accuracy;

2. the claimant’s contract price must be shown to have been realistic;

3. the actual cost incurred must be reasonable; and

4. the claimant must be shown not to have contributed in any marked degree to added expense, or added to any other events for which the respondent is not responsible, subject to any of the qualifications outlined in John Doyle Construction Ltd v Laing Management (Scotland) Ltd [2002] Scot CS 110.

Smith J expressed the view that it may be permissible to maintain a composite delay/disruption claim (a ‘global claim’) where it was impossible and impractical to identify a specific nexus between each of the alleged events and the particular delay/disruption

15 Shell Refining (Australia) Pty Limited v A J Mayr Engineering Pty Limited [2006] NSWSC 94; Siemens v Tolco; Tolco v Siemens [2007] NSWSC 257; Laing O'Rourke Australia Construction v H&M Engineering & Construction [2010] NSWSC 818.

16 The “respondent” is the person on whom a payment claim is served (e.g., see: Building and Construction Industry Security of Payment Act 1999 (NSW) ss. 4, 13).

caused. In considering the matter in the Nauru case, Smith J distinguished Wharf Properties Ltd v Eric Cumine Associates No 2 (1991) 52 BLR 1, but followed J Crosby & Sons Ltd v Portland Urban District Council (1967) 5 BLR 121 (‘the Crosby case’)17, London Borough of Merton v Stanley Hugh Leach Ltd (1985) 32 BLR 51, and Mid Glamorgan County Council v J Devemald Williams & Partner (unreported, Queens Bench Division decision of Official Recorder, Mr Tackaberry QC, 17 September 1991).

Smith J demonstrated in the Nauru case that it is permissible for a disruption claim to be framed globally where the claimant can demonstrate that it is not possible to identify the nexus between the interaction of events and their relationship to the quantum claimed.

In John Holland Construction & Engineering Pty Ltd v Kvaerner RJ Brown Pty Ltd (1996) 8 VR 681 (‘the Kvaerner case’), Byrne J said (at [11] and [12]):

Further, this global claim is in fact a total cost claim. In its simplest manifestation a contractor,

as the maker of such claim, alleges against a proprietor a number of breaches of contract and

quantifies its global loss as the actual cost of the work less the expected cost. The logic of such

a claim is this: (a) the contractor might reasonably have expected to perform the work for a

particular sum, usually the contract price; (b) the proprietor committed breaches of contract; (c)

the actual reasonable cost of the work was a sum greater than the expected cost.

The logical consequence implicit in this is that the proprietor’s breaches caused that extra cost

or cost overrun. This implication is valid only so long as, and to the extent that, the three

propositions are proved and a further unstated one is accepted: the proprietor’s breaches

represent the only causally significant factor responsible for the difference between the

expected cost and the actual cost. In such a case the causal nexus is inferred rather than

demonstrated. For present purposes, I ignore any adjustment that may have to be made for

variations and extras. The unstated assumption underlying the inference may be further

analysed. What is involved here is two things: first, the breaches of contract caused some extra

cost; second, the proprietor's cost overrun is this extra cost. The first aspect will often cause

little difficulty but it should not, for this reason, be ignored. The likelihood and nature of some

extra cost flowing from the breaches of contract may be readily apparent from the nature of

each of the breaches and a general understanding of its impact on the building project. It may

also be apparent in what precise way this breach led to the extra cost. In most, if not all, cases,

however, there is an intervening step relating the extra cost to the breach. For example, it may

be that a breach means that work has to be redone, or that work takes longer to perform, or that

its labour or material cost increases, or perhaps that there was extra cost due to disruption or

loss of productivity. Again, in the given case this may be readily apparent but difficulties will

arise for the parties and the tribunal of fact where the global nature of the claim involves the

interaction of two or more of these intervening steps, particularly where they and their role are

not, in terms, identified and explained. It is the second aspect of the unstated assumption,

however, which is likely to cause the more obvious problem because it involves an allegation

17 In the Crosby Case, reliance on that method is justified in cases where the claim depends on an extremely complex interaction of events and where it may well be difficult or even impossible to make an accurate apportionment of the total extra cost between several causative events.

that the breaches of contract were the material cause of all of the contractor's cost overrun. This

involves an assertion that, given that the breaches of contract caused some extra cost, they

must have caused the whole of the extra cost because no other relevant cause was responsible

for any part of it.

Based on the above extract, it can be seen that Byrne J set out four elements that are required in order to succeed in a global claim, which are not dissimilar to the four set out in the Nauru case. The four elements can be identified as the following:

1. the claimant might reasonably have expected to perform the work for a particular sum, usually the contract price;

2. the respondent committed breaches of contract;

3. the actual reasonable cost of the work was a sum greater than the expected cost; and

4. the respondent’s breaches represent the only causally significant factor responsible for the difference between the expected cost and the actual cost.

The concepts of the total cost method have been well illustrated by the extra judicial writings of Byrne J in two articles named Total Cost & Global Claims (1995) 11 BCL 397 and Global Claims: Maze or Way Forward (1996) 15 ACLR 113.

Byrne J’s decision in the Kvaerner case indicates that a global claim may be relied upon where it is impractical to disentangle part of the loss which is attributable to each head of claim, and this situation has not been brought about by delay or other conduct of the claimant, and the proprietor’s breaches represent the only causally significant factor responsible for the difference between the expected cost and the actual cost. In fact, Byrne J was of the view that where it is found to be impossible or impractical to identify each aspect of the nexus, a demonstration of its probable existence is sufficient.

It can be accepted that the total cost method can be used in claims relating to disruption where the claimant has had difficulty in assessing the impact of individual acts or omissions in financial terms. Where a respondent caused disruption and loss of productivity, it was found: (a) that it was permissible to establish the threshold nexus between the alleged breach and the alleged disruption by establishing that there is no other explanation for the disruption18; and (b) that the capacity of the events that caused disruption may be inferred.19

Furthermore, where a respondent has been responsible for interruptions beyond the control of a claimant and for acts or omissions by the respondent’s agents, this may support a global claim.

18 Nauru Phosphate Royalties Trust v Matthew Hall Mechanical & Electrical Engineers Pty Ltd (1992) 10 BCL 179 at [192]; Ralph M Lee Pty Ltd v Gardner & Naylor Industries Pty Ltd SC Qld, Moynihan J, 1753/1991, 11 February 1993, unreported, BC9302590 at [5].

19 Nauru Phosphate Royalties Trust v Matthew Hall Mechanical & Electrical Engineers Pty Ltd (1992) 10 BCL 179 at [192].

Those propositions were demonstrated in the Crosby case, whereby Wilcox J said:20

…In the manner of pointing a blunderbuss at a target it is maintained that there were many

RFI’s, and there was considerable delay. The delay in part can be explained by other causes

but a balance is left which must be caused by the volume of RFI’s. In addition, by reason of the

volume of them negligence must be concluded. It is termed a global claim. It can properly be

described as a global claim in the sense that it is the antithesis of a claim where the causal

nexus between the alleged wrongful act or omission of the defendant and the loss of the plaintiff

has already been clearly spelt out…

In other words, a total cost claim is a claim in which the nexuses between cause and effect in individual cases is ‘globally’ and not on an item-by-item basis. It is not necessary to prove that all the matters, which formed part of the total cost claim, were the responsibility of the respondent. However, it is necessary for the claimant to demonstrate that any liability for disruption, which falls on the claimant, has no material effect. This was considered in John Doyle Construction Ltd v Laing Management (Scotland) Ltd [2002] Scot CS 110, where Lord McFadyen said (at [37]):

…Failure to prove that a particular event for which the defender was liable played a part in

causing the global loss will not have any adverse effect on the claim, provided the remaining

events for which the defender was liable are proved to have caused the global loss…

The claimant is not required to demonstrate causation, the nexus of the facts with causation and the adequacy of the information relied upon as the basis for the total cost claim. This was addressed in John Holland Pty Ltd v Hunter Valley Earthmoving Co Pty Limited [2002] NSWSC 131, whereby McClellan J said:21

The description of a claim as a “global claim” is familiar to those involved in the construction

industry. Generally, it is used as a “short-hand” method of describing a claim, which does not

readily permit of the individual identification of each of its component parts.

The consequence from the above is that the burden of proof effectively passes to the respondent to produce evidence of non-compensatory events, which caused or contributed to the overrun.22 This places a considerable tactical burden on the Respondent.23

In the event that the respondent can demonstrate that the claimant caused or contributed to the overrun of the costs claimed on a global basis, the question arises whether the claimant’s whole global claim should fail. The answer must be no because the figures forming part of the global claim can be adjusted under the principle of a ‘modified total cost claim’ in order to provide a just measure of extra cost. This proposition would arise if an allocation of responsibility were attributable to the claimant, whereby the Adjudicator should

20 London Underground Ltd. v Kenchington Ford plc and others (1999) CILL 1452. 21 John Holland Pty Ltd v Hunter Valley Earthmoving Co Pty Limited [2002] NSWSC 131 at [12]. 22 See Nauru Phosphate Royalties Trust v Matthew Hall Mechanical & Electrical Engineers Pty Ltd (1992) 10 BCL 179 and

Byrne J, Total Costs and Global Claims (1995) 11 BCL 397. 23 Saccharin Corp Ltd v Wild [1903] 1 Ch 410.

apply a ‘modified total cost’ approach to the task of assessment. Such an approach was accepted in the Crosby case, where Donaldson J said:24

I can see no reason why (the arbitrator) should not recognise the realities of the situation and

make individual awards in respect of those parts of individual items of the claim which can be

dealt with in isolation and a supplementary award in respect of the remainder of these claims as

a composite whole.

The concept in the Crosby case was somewhat expanded in John Doyle Construction v Laing Management (Scotland) Ltd [2004] Scots CS 141 (11 June 2004), whereby Lord Drummond Young LJ said (at [16]):

...if it cannot be said that events for which the employer is responsible are the dominant cause

of the loss, it may be possible to apportion the loss between the causes for which the employer

is responsible and other causes. ...Where the consequence is delay as against disruption, that

can be done fairly readily on the basis of the time during which each of the causes was

operative. During [that period] each should normally be treated as contributing to the loss, with

the result that the employer is responsible for only part of the delay during that period. Unless

there are special reasons to the contrary, responsibility during that period should probably be

divided on an equal basis...

Where disruption to the contractor’s work is involved, matters become more complex.

Nevertheless, we are of opinion that apportionment will frequently be possible in such cases,

according to the relative importance of the various causative events in producing the loss. ... It

may be said that such an approach produces a somewhat rough and ready result. This

procedure does not, however, seem to us to be fundamentally different in nature from that used

in relation to contributory negligence or contribution among joint wrongdoers.

The concept of apportionment in John Doyle Construction v Laing Management (Scotland) [2004] Scots CS 141 has not been entirely appreciated within the context of the NSW Act and Queensland Act. The present authority in Australia within the confines of statutory adjudication has only gone so far as supporting global or total cost claims on the dictum in John Holland Construction Engineering Pty Ltd v Kvaerner RJ Brown Pty Ltd (1996) 13 BCL 262.

4. Conclusion

It is implicit that delay, disruption and global claims can be permissibly made by a claimant and determined by an Adjudicator under the NSW Act. The Supreme Court of New South Wales considered such claims within the context of the NSW Act and generally supported their application. Whilst the authority in New South Wales is not binding on the Supreme Court of Queensland it is submitted that the available remedy for delay, disruption and global

24 J Crosby & Sons Ltd v Portland Urban District Council (1967) 5 BLR 121 at 136.

claims within the context of the Queensland Act is persuasively supported by the dicta of New South Wales.

The contract is the genesis to support the right for a claim on account of delay or disruption costs arising from an extension of time granted under the contract, or where an Adjudicator decides that an extension of time ought to have been granted under the contract. The remedy of global or total cost claim concepts under the NSW Act and the Queensland Act are not curtailed in the absence of a contractual right to claim for delay or disruption costs. This is especially where it is not possible to identify the nexus between the interaction of events and their relationship to the quantum claimed. This is however subject to common law precedent that encapsulates the elements that are required to be made out to support global or total cost claims and the concept of apportionment.

Acknowledgements

The authors wish to acknowledge the support provided by the NSW Department of Finance & Services for the Adjudication Research + Reporting Unit (ARRU). The authors wish to thank the anonymous reviewers for their constructive comments on the manuscript.

References

Brand MC & Davenport P (2012) ‘Adjudication in Australia: An analysis of the amendments introduced by the Building and Construction Industry Security of Payment Amendment Act 2010 (NSW)’ International Journal of Law in the Built Environment, 4(3), pp. 189-202.

Brand M C & Davenport P (2011) ‘Proposal for a ‘Dual Scheme’ model of statutory adjudication for the Australian building and construction industry’, International Journal of Law in the Built Environment – Special Issue on Construction Law, 3(3), pp. 252-268

Brand M C & Uher T E (2010) ‘Follow-up empirical study of the performance of the New South Wales construction industry security of payment legislation’, International Journal of Law in the Built Environment, 2(1), pp. 7-25.

Commonwealth of Australia (2002), ‘Royal commission into the building and construction industry: security of payment in the building and construction industry’, Discussion Paper 12, Commonwealth of Australia, Canberra.

Assessing Outstanding Payment Issues in the Hong Kong Construction Industry

Paul H K Ho1

Abstract

In Hong Kong, multi-layered sub-contracting is common, with sub-contracts typically providing ‘pay-when-paid’ arrangements for progress payment. When no payment is made by the employer to the main contractor, all lower-tier sub-contractors and suppliers suffer. To help resolve payment disputes, relevant professional institutions and organisations have suggested the security of payment legislation. Nevertheless, any new legislation requires strong justification to earn legislative councillors’ support. Therefore, the main objectives of this study are to (1) assess the durations, amounts and major causes of outstanding payments, (2) identify the common methods adopted to resolve payment disputes, including the assessment of their effectiveness and (3) evaluate whether some common legislative provisions adopted in overseas countries can effectively secure payments in the construction supply chain. This study was conducted by questionnaire with main contractors, sub-contractors and suppliers as the target respondent. Of the 1,000 questionnaires dispatched, 423 were returned, of which 23 cases were subsequently identified as incomplete. Hence, there were 400 successful cases representing an overall response rate of 40%. It was found that while the delay in progress payments was not intolerable, the delay in the settlement of final payments was very long. Many respondents identified variation as the most common source of disputes, generating difficulties in work measurement and valuation along with entitlement to interim payments and final accounts. The amount of the outstanding payment reported by respondents was very serious. With the exception of negotiation, the adopted common dispute resolution methods were considered ineffective for resolving payment problems. The respondents also believed that some of the common legislative measures adopted in overseas countries could promptly resolve the majority of payment disputes in the local construction industry.

Keywords: Outstanding Payment, Dispute Resolution Method, Security of Payment.

1. Introduction

The construction industry has a low capital support and heavy reliance on cash flows to sustain business. Operating under a hierarchical chain of contracts within the construction industry, the financial failure of any one party such as the employer or main contractor can have a domino effect on lower-tier parties in the contractual chain. Extremely tight margins in

1 Principal Lecturer; Division of Building Science and Technology; City University of Hong Kong; Tat Chee Avenue, Kowloon, Hong Kong SAR, PR China; bshkho@cityu.edu.hk

the industry, restricted cash flows and payment default can force the lower-tier parties to carry bad debts or, if the burden of debt becomes too much, force such parties into insolvency. Nevertheless, some lower-tier parties are reluctant to take the necessary actions available under the contract due to the high cost and time delays involved and concern regarding future work opportunities. Under such circumstances, they may choose to waive their legal rights when faced with promises of future payment (Royal Commission into the Building and Construction Industry, 2002).

Given the seriousness of payment problems, the governments in the United Kingdom, Australia, New Zealand, Singapore and Malaysia have passed specific legislation to help secure payments along the construction supply chain. As the next section reveals, the payment problem in Hong Kong may be more serious than in these countries. Some professional institutions, associations and contracting organisations have recommended that the government pass similar legislation. Nevertheless, any new legislation requires strong justification to earn legislative councillors’ support. Therefore, the main objectives of this study are to (1) assess the durations, amounts and major causes of outstanding payments, (2) identify the common dispute resolution methods adopted to resolve payment disputes and assess their effectiveness and (3) evaluate whether some common security of payment legislations adopted in overseas countries would effectively secure payments in the local construction supply chain.

2. Review of Payment Issues in the Hong Kong Construction Industry

Cash flow is the lifeblood of main contractors, subcontractors and suppliers because their businesses’ viability tends to depend more on cash flow than profit margin. However, most contracts in the Hong Kong construction industry contain a ‘pay-if/when-paid’ provision. When the payment is not forthcoming from an employer, all lower-tier subcontractors and suppliers suffer, even though the default is solely due to the main contractor.

In 2001, the Construction Industry Review Committee (CIRC) noted that some overseas countries such as the United Kingdom and Australia had enacted a security of payment legislation to deal with payment-related issues in their construction industry. For instance, the Housing Grants, Construction and Regeneration Act 1996 in the United Kingdom provides the right to progress payments through payment claims for the completed work. Other legislative provisions include prohibiting the conditional payment (i.e. ‘pay-if-paid’ and ‘pay-when-paid’ clauses) in a construction contract, providing a right to refer any dispute arising under the contract to adjudication, requiring security for disputed amounts following adjudication, and allowing to suspend performance of obligations for non-payment after adjudication. The CIRC recommended that the need for enacting security of payment legislation be considered, given overseas experiences (CIRC, 2001).

In response to the CIRC’s recommendation in 2004, the HKSAR government took the view that security of payment legislation was unnecessary under local circumstances; instead, a voluntary adjudication was introduced in public work contracts to help resolve disputes. Although the objectives of this voluntary adjudication are to achieve a ‘simple, speedy and…

effective method of resolving disputes’, it cannot improve the payment problem for a few reasons. First, it is limited to government projects and does not apply to projects in the private sector. Second, even in a government project, the voluntary basis means that one party can request adjudication and the other can refuse. Third, it does not apply to subcontractors and suppliers. Finally, it does not affect the unfair ‘pay-if-paid’ or ‘pay-when-paid’ contractual provision. In other words, the payment problems in local construction industries have remained unresolved since the CIRC report.

Many of the payment problems that have occurred overseas have also occurred in Hong Kong. However, there are also specific problems in the local construction industry. Many clauses in the standard forms of contract are amended to allocate most risks to main contractors, who have no choice but to accept these inequitable contract provisions in view of the keen competition for any project. When a risk event occurs, some main contractors look for ways to make contractual claims that will allow them to recover their losses, whereas architects and engineers in the same situations are pressed by their employers into a harsh position in which any delay or extra cost is either the main contractor’s or their responsibility. Under such circumstances, architects and engineers may not act impartially and fairly when administering the contracts. When a dispute arises, the current adjudication process does not resolve the cash flow problem of lower-tier parties in a speedy and cost-effective manner because it is complex and akin to short form arbitration.

According to a survey of outstanding payments jointly conducted by the Public Opinion Programme and the Construction Industry Council (2010), the top ten most serious problems faced by main contractors, subcontractors and suppliers in the private sector were ‘delayed resolution of dispute’, ‘delayed settlement of final accounts’, ‘various unreasonable obstacles for payments’, ‘have to continue works even when arrears are not settled’, ‘disagreement on substantial completion of works’, ‘delayed certification of interim payments’, ‘unreasonable allocation of risk’, disputable or wrongful contra-charges’, ‘contracts contain payment terms like “pay-when-paid” or “pay-if-paid”’ and ‘failure of agreement on variations’. To understand the payment issues in detail, it is necessary to assess the duration of delays in progress and final payments, along with the major causes of outstanding payments and their corresponding amounts.

Moreover, main contractors, subcontractors and suppliers tend to resolve payment disputes through commercial negotiation. While mediation and arbitration are typically specified in contracts as the dispute resolution methods, these are not considered effective enough in securing payments. Common reasons may include concerns about breaking up the business relationship with their clients; imbalance in negotiation positions; mediation’s voluntary, non-binding nature; and the fact that arbitration is costly and time-consuming. At present, adjudication is not common in the local construction industry. Before introducing new legislative measures, it is essential to re-examine the effectiveness of the current methods adopted to resolve payment disputes.

A review of the security of payment legislation in the United Kingdom, New South Wales and Singapore indicates that there are some common legislative provisions. These include the provision of default payment periods if the contracts do not contain any payment schedule,

the prohibition of conditional payment terms such as ‘pay-if-paid’ or ‘pay-when-paid’, the right to suspend work, the right to adjudication for prompt resolution of construction dispute and recovery of payment and the enforcement of adjudicators’ decisions. Before introducing the security of payment legislation, it is important to assess whether these legislative provisions can effectively secure payments in the local construction supply chain.

3. Research Method

3.1 Research Design

This study was conducted using an email questionnaire survey consisting of seven questions. Questions 1-4 collected information on the durations, magnitude and causes of outstanding payments. Questions 5 and 6 collected details on the common methods adopted to resolve payment disputes and their effectiveness. Question 7 elicited information on the effectiveness of some common security of payment legislative provisions for enhancing payment practices, the details of which are as follows.

1. As the timeliness of settling payments is a major concern, question 1 assessed the extent of delays in receiving progress payments from main contractors, subcontractors and suppliers. Respondents were asked to provide information on the interim payment period specified in the contract and the actual period taken to settle the interim payment. As interim payment is a generic term, this study includes a single or one-off payment, a milestone payment and other progress payments.

2. If there are more contractual disputes, the contracting parties take a longer time to agree on the final account. Question 2 assessed the extent of delays for final accounts. The respondents were asked to provide information about the final account period specified in the contract and the actual period taken to settle the same.

3. Question 3 assessed the amount of outstanding payments withheld by upper-tier contracting parties. A snapshot approach was adopted, whereby respondents were asked to provide data on the amount of payments applied and the corresponding amount actually received. The difference between these two payments can be construed as the estimated amount of outstanding payments. In addition, the respondents were asked to provide data on the total amount of annual business receipts. Different grossing-up factors were calculated for different respondents, taking into sampling fractions and response rates. The total amount of outstanding payments could thus be estimated.

4. Question 4 identified the causes of major payment disputes between the contracting parties. Nine major types of payment disputes were identified, including (a) disagreement on workmanship and quality of work done, (b) disagreement on measurement and valuation of variations, (c) disagreement on, and delay in, the settlement of progress payments, (d) disagreement on claims for prolongation of or disruption to the progress of works, (e) disagreement on amount of liquidated damages, contra charges or set-offs, (f) disagreement on issuance of certificate of practical/substantial completion of the works including delay in release of retention money, (g) disagreement on issuance of certificate for making good defects including delay in release of retention money, (h) disagreement on, and delay in, settlement of final account, and (i) disagreement on noncompliance with specified standards. The respondents were asked to provide a breakdown of the

total amount of outstanding payments previously reported based on these nine causes of payment disputes.

5. Question 5 identified common methods adopted for the resolution of payment disputes. The respondents were asked to report the approaches they adopted for the resolution of payment disputes from amongst six methods: (a) dispute resolution adviser, (b) commercial negotiation, (c) mediation, (d) adjudication, (e) arbitration and (f) litigation. Choosing more than one method was allowed because more than one dispute can be encountered in a contract. A distribution analysis of the dispute resolution methods adopted was then prepared to indicate the relative frequency of use.

6. Question 6 evaluated whether the common dispute resolution methods could effectively resolve the payment problems. The respondents were asked to evaluate whether the six identified dispute resolution methods were ‘effective’ or ‘not effective’, considering the cost, time, binding/non-binding effect and any other relevant considerations.

7. Question 7 evaluated the potential effectiveness of common legislative provisions, if adopted, to secure payments along the construction supply chain. Five common security of payment legislative provisions used in overseas countries were identified, including the (a) right to progress payments, (b) right to suspend works for non-payment, (c) prohibition of conditional payment provisions, (d) right to rapid adjudication and (f) enforcement of adjudicators’ decisions. Because the security of payment legislation is still under consideration, a brief description of these legislative provisions was provided in the questionnaire. The respondents were asked for their opinions on the effectiveness of these legislative provisions, expressed in percentages of the total amount of outstanding payments withheld.

3.2 Data Collection

The target respondents consisted of three groups: main contractors, subcontractors and suppliers. The security of payment legislation in many countries also includes professional consultants, but they are excluded from this study because they do not suffer payment problems to the same extent when compared to the main contractors, subcontractors and suppliers who undertake the physical construction. This study’s sampling frame was based on various government registers such as the Registered General Building Contractors and the List of Approved Contractors for Public Works (for main contractors), Registered Specialist Contractors (for subcontractors) and the List of Approved Suppliers of Specialist Contractors (for suppliers). The data were collected between early June and the end of September 2012. Of the 1,000 questionnaires dispatched, 423 were returned, of which 23 cases were subsequently identified as incomplete. Hence, there were 400 successful cases representing an overall response rate of 40%.

4. Findings and Discussion

Table 1 shows the distribution of respondents in respect to the number of questionnaires delivered and successfully returned. The overall response rate was 40% (42.5% for subcontractors, 40% for suppliers and 35% for main contractors). Statistically, the sample sizes for main contractors and subcontractors are acceptable. However, because there are a

relatively small number of returned cases from suppliers, the results derived are subject to a relatively larger sampling error. The key findings of this study are summarised below.

Table 1: Distribution of respondents

Type of respondents No. of

questionnaires delivered

No. of questionnaires

completed Response rate

Subcontractor 600 255 42.5%

Main contractor 300 105 35.0%

Supplier 100 40 40.0%

Overall 1000 400 40.0%

4.1 Delay in Settlement of Interim Payments

The interim payment period specified in the contract and the actual period taken to settle the same are shown in Table 2. The average interim payment periods were 31, 38 and 36 days for main contractors, subcontractors and suppliers, respectively, whereas the average actual periods taken to settle interim payments were 42, 52 and 52 days as reported by main contractors, subcontractors and suppliers, respectively. In other words, there were average payment delays of 11, 14 and 16 days for main contractors, sub-contractors and suppliers, respectively, due to various disputes and delays. This finding indicates that upper-tier parties did not fulfil their contractual obligations to make interim payments within the specified periods. Nevertheless, respondents generally considered such delays to be less serious; rather, they were more concerned with the amount of payments being withheld and how to resolve such withholding.

Table 2: Delay in settlement of interim payments

Durations taken for settlement of interim payment (days)

Main Contractor Subcontractor Supplier

Interim payment periods specified in the contract 31 38 36

Actual interim payment periods taken 42 52 52

Difference 11 14 16

4.2 Delay in Settlement of Final Accounts

The final account period specified in the contract and the actual period taken to settle the same are shown in Table 3. The average final account periods were 12, 12 and 6 months for main contractors, subcontractors and suppliers, respectively, whereas the average actual periods taken to settle final payments were 24, 21 and 9 months as reported by main contractors, subcontractors and suppliers, respectively. In other words, the average delays in the settlement of final accounts were 12, 9 and 3 months for main contractors, sub-contractors and suppliers, respectively. This finding also suggests that upper-tier parties could not fulfil their contractual obligations to settle final accounts within the specified

periods. The respondents generally considered these delays to be unreasonably long and reported serious affects to cash flow due to a low profit margin, a high percentage of retention monies and a long period of final measurement and valuation.

Table 3: Delay in settlement of final accounts

Durations taken for settlement of final account (months)

Main Contractor Subcontractor Supplier

Final account periods specified in the contract 12 12 6

Actual final account periods taken 24 21 9

Difference 12 9 3

4.3 Estimated Amount of Outstanding Payments

Based on the amount of payments applied and the corresponding amount of payments actually received, the amount of outstanding payments and its corresponding percentage were calculated as shown in Table 4. The percentages of outstanding payments were 8.5%, 11.6% and 4.8% for main contractors, subcontractors and suppliers, respectively. Taking the amount of outstanding payments as a percentage of the total business receipts reported by respondents, the total amount of outstanding payments per annum was estimated to be HK$11,500 million for main contractors, HK$11,000 million for subcontractors and HK$500 million for suppliers. It is noted that the security of payment legislation in the United Kingdom and New Zealand (but not Australia, Singapore or Malaysia) does not cover supply contracts, probably because payment problems in these two countries are not serious. This finding indicates that suppliers also suffer from serious payment problems (4.8%), although the extent is less severe than that experienced by main contractors (8.5%) and subcontractors (11.6%).

Table 4: Estimated amount of outstanding payments

Estimated amount of outstanding payments Main Contractor Subcontractor Supplier

Outstanding payments (HK$ million) $11,500 $11,000 $500

Business receipts (HK$ million) $135,000 $95,000 $10,500

Outstanding payment as percentage of business receipts

8.5% 11.6% 4.8%

Remark: The amount of outstanding payments to main contractors, subcontractors and suppliers are susceptible

to overlapping due to conditional payments in the subcontracting chain. Adding the two figures would result in

double counting.

The respondents considered their profit margins in many projects to be far below the percentages of outstanding payments. Operating under this business environment, they had to balance the negative cash flows during the course of the contract and could only realise the profit after the settlement of the final account. Given the substantial amount of outstanding payments, coupled with the considerable delay in settlement of final accounts mentioned above, the security of payment in the local construction industry should be improved by some means.

4.4 Major Causes of Outstanding Payments

Table 5 provides a breakdown of the total amount of outstanding payments (i.e. the difference between payments applied and payments received) into nine identified cause categories. The three most common causes, as reported by main contractors and subcontractors, were ‘disagreement on measurement and valuation of variations’ (37% for main contractors and 30% for subcontractors), ‘disagreement on, and delay in, settlement of final account’ (20% for main contractors and 22% for subcontractors) and ‘disagreement on, and delay in, settlement of progress payments’ (18% for main contractors and 20% for subcontractors).

Table 5: Breakdown of major causes of outstanding payments

Major causes of outstanding payments Main Contractor Subcontractor Supplier

Disagreement on measurement and valuation of variations

37% 30% -

Disagreement on, and delay in, settlement of final account

20% 22% 25%

Disagreement on, and delay in, settlement of progress payments

18% 20% 40%

Disagreement on claims for the prolongation of and disruption to progress of works

7% 5% -

Disagreement on issuance of certificate of practical completion of works including a delay in the release of retention money

6% 7%

Disagreement on workmanship and quality of work done

5% 7% -

Disagreement on issuance of certificate of making good defects including delays in the release of retention money

4% 5% -

Disagreement on amount of liquidated damages, contra charges or set-offs

3% 4% 5%

Disagreement on noncompliance with specified standards

- - 30%

Total 100% 100% 100%

Due to high land costs, many clients set a tight schedule for both design and construction so that completion can be achieved as soon as possible to generate income. Under the clients’ pressure, some projects are inevitably tendered based on incomplete designs and/or specifications. As a result, architects and engineers are required to issue a large number of variations during the construction stage. Disputes often arise in relation to the procedural requirements in respect of the notice of claims, discrepancies among drawings, specifications, bills of quantities and other parts of contract documents, different interpretations between the work specified in original contract documents and the work changed by architects and the measurement and valuation of some variations. All of these disputes lead to underpayments to main contractors and subcontractors. In addition, interim payments, which typically include the estimated values of works done, preliminaries, materials on- and off-site, re-measurements and contractual claims, are generally evaluated

on the conservative/low side. There are various reasons behind. For instance, because so many variations are issued each month, quantity surveyors do not have sufficient time to accurately measure and evaluate all variations. As a result, only approximate values of these variations are included in interim payments. These values are, in many cases, under- rather than over-estimated by quantity surveyors. Furthermore, if there are serious delays in the settlement of variations, contractual claims and other disputes, these will also result in more serious delays in the settlement of final accounts.

The three most common causes of outstanding payments reported by suppliers were ‘disagreement on, and delay, in settlement of progress payments’ (40%), ‘disagreement on noncompliance with specified standards’ (30%) and ‘disagreement on, and delay in, settlement of final account’ (25%). As most supply contracts contain the ‘pay when/if paid’ clause, this seriously affects the timely settlement of both interim and final payments received by suppliers. In addition, one of the major disputes is whether the materials supplied comply with the specified standards. They cannot normally get payments unless this type of dispute has been resolved.

4.5 Methods for Resolving Payment Disputes

A distribution analysis of the methods adopted to resolve payment disputes is shown in Table 6. The three most common methods, as reported by main contractors, were ‘commercial negotiation’ (55%), ‘mediation’ (15%) and ‘arbitration’ (10%). Indeed, these three dispute resolution methods are commonly specified in most local construction contracts. So it is rational that main contractors would first try to settle disputes through commercial negotiation. If unsuccessful, they would then pursue mediation. If the disputed amount is relatively small, then the dispute can be satisfactorily resolved through mediation. Main contractors still suffer from cash flow problems during the mediation process, which may take few months. However, if the amount in dispute is substantial, it is not likely that the dispute will be resolved by mediation because the losing party may subsequently refer the case to arbitration for a final decision. Nevertheless, arbitration is considered both costly and time-consuming. In many cases, both parties in arbitration have incurred significant legal costs that may not be affordable for small main contractors.

Table 6: Methods adopted to resolve payment disputes

Methods adopted to resolve payment disputes Main Contractor Subcontractor Supplier

Commercial negotiation 55% 65% 70%

Mediation 15% 15% 17%

Arbitration 10% 7% 2%

Litigation 8% 6% 10%

Adjudication 7% 4% 1%

Dispute resolution adviser 5% 3% -

Total 100% 100% 100%

The three most common methods reported by subcontractors for resolving disputes were ‘commercial negotiation’ (65%), ‘mediation’ (15%) and ‘arbitration’ (7%). Compared with main contractors, subcontractors relied more on commercial negotiation to resolve payment disputes, suggesting that subcontractors rely heavily on cash flows to sustain their businesses. Even if they have strong cases to succeed, they may choose to waive certain legal entitlements for the sake of promptly settling the disputes. Arbitration is considered a last resort for resolving payment disputes.

The three most common methods reported by suppliers for resolving disputes were ‘commercial negotiation’ (70%), ‘mediation’ (17%) and ‘litigation’ (10%). Compared with main contractors and subcontractors, suppliers relied even more on commercial negotiation to settle payment disputes for reasons similar to subcontractors. However, if commercial negotiation and mediation are not successful, suppliers prefer to litigate rather than arbitrate because most supply contract disputes are relatively straightforward and litigation is better than arbitration in terms of the time and cost involved.

4.6 Effectiveness of Payment Dispute Resolution Methods

The effectiveness of the six common payment dispute resolution methods is illustrated in Table 7. The majority of the respondents considered commercial negotiation to be the most effective method, ranging from 80% for main contractors, to 85% for subcontractors and 90% for suppliers. Slightly more than half of respondents considered mediation an effective method, ranging from 55% for main contractors, to 65% for subcontractors and 60% for suppliers. Realising that any formal dispute may break up the business relationship with their clients, main contractors, subcontractors and suppliers prefer to resolve their payment disputes through informal commercial negotiation whenever possible and, if not successful, they would then pursue formal mediation. As lower-tier parties are often in a weak negotiation position, they are sometimes forced to compromise by waiving certain entitlements if the disputes can be settled promptly. Therefore, while commercial negotiation appears to be very effective in dealing with payment disputes, it may not be a fair and equitable solution.

Less than half of the respondents considered adjudication an effective method, ranging from 42% for main contractors, to 45% for subcontractors and 40% for suppliers. First, there are better methods, such as mediation, and second, adjudication is operated in a similar process as the short-form arbitration, which in many cases cannot resolve the disputes in a timely and cost-effective manner. Dispute resolution advisers are only available in government contracts and are not applicable to subcontractors and suppliers, which limits the applications. Other dispute resolution methods, such as arbitration and litigation, were considered ineffective because they were time consuming or expensive. Arbitration or litigation might only be used in cases where the amount in dispute is very substantial. Under such circumstances, no party can afford to lose their cases.

Table 7: Effectiveness of payment dispute resolution methods

Effectiveness of payment dispute resolution methods Main Contractor Subcontractor Supplier

Commercial negotiation Effective 80% 85% 90%

Not effective 20% 15% 10%

Mediation Effective 55% 65% 60%

Not effective 45% 35% 40%

Adjudication Effective 42% 45% 40%

Not effective 58% 55% 60%

Dispute resolution adviser Effective 32% - -

Not effective 68% - -

Arbitration Effective 20% 17% 12%

Not effective 80% 83% 88%

Litigation Effective 8% 6% 15%

Not effective 92% 94% 85%

4.7 Effectiveness of Security of Payment Legislative Provisions

The effectiveness of each of the security of payment legislative provisions expressed in terms of percentages of the total amount of outstanding payments is shown in Table 8. For main contractors, the three most effective legislative provisions for resolving payment disputes were the ‘right to rapid adjudication’ (50%), the ‘right to suspend works for non-payment’ (20%) and ‘enforcement of adjudicators’ decisions’ (12%). For subcontractors and suppliers, the three most effective legislative provisions were the same, i.e. the ‘right to rapid adjudication’ (40% for subcontractors and 45% for suppliers), ‘prohibition of conditional payment provisions’ (20% for subcontractors and 18% for suppliers) and the ‘right to suspend works for non-payment’ (17% for subcontractors and 15% for suppliers). The use of ‘others’ suggests that these legislative provisions would not resolve all payment problems. If the amount in dispute between parties is substantial, one or both parties may refer the case, at the beginning or after the adjudication, to count or arbitration proceedings for a decision. Nevertheless, past experiences in overseas countries indicate that the security of payment legislation can resolve the majority of payment disputes.

Table 8: Effectiveness of security of payment legislation

Effectiveness of security of payment legislation Main Contractor Subcontractor Supplier

Right to rapid adjudication 50% 40% 44%

Right to suspend works for non-payment 20% 17% 15%

Prohibition of conditional payment provisions - 20% 18%

Enforcement of adjudicators’ decisions 12% 10% 8%

Right to progress payments 10% 7% 5%

Others 8% 6% 10%

Total 100% 100% 100%

For all types of respondents, the right to adjudicate disputes is the most important provision in the security of payment legislation. Based on that legislative provision in overseas countries, adjudicators’ decisions are binding unless and until the underlying dispute is resolved in count or arbitration proceedings. The decisions are enforceable even if there are errors of law or fact provided that the adjudicator acted within his jurisdiction and reached his decision in accordance with the principles of natural justice. Following service of the referral, the adjudicator in the United Kingdom must reach a decision within 28 calendar days. This requirement makes it easier for the lower-tier parties to recover their payments without a substantial delay.

The rationale behind the right to suspend is to prevent main contractors and subcontractors from having to continue working without payment, essentially enabling them to legitimately cease the works without fear of breaching the contracts. Suspension also provides an incentive to the upper-tier contracting parties to pay fairly and on time.

Conditional payment terms such as ‘pay-if/when-paid’ are prevalent in the local construction industry. Arguments in favour of such terms include freedom of contact and allocation of risks. However, the prohibition of conditional payment is based on the principle that a minimum level of clarity and fairness should be maintained in a contract so that the crystallisation of payments due does not depend on factors external to the contract and beyond the power of subcontractors or suppliers to fulfil. This legislative provision would effectively prevent the upper-tier contracting parties from withholding any payments on the grounds that they have not received a payment from a third person, thus protecting the smaller, more vulnerable subcontractors and suppliers in the supply chain.

5. Conclusions

Many of the respondents attributed variations as the most common source of disputes because they generate difficulties in measurement and valuation of the works done as well as agreeing on the entitlement to interim payments. A payment schedule is usually specified in a contract, but there are always delays due to slow certification, conditional payment terms and variation disputes. While respondents could generally get paid from interim payments, they were left in uncertain positions when facing the unduly long time lag in the settlement of final accounts. Under the current settings, the respondents tended to resolve their payment disputes through informal commercial negotiation because the other dispute resolution methods specified in the contract were considered to be ineffective. Under such situations, it was not uncommon that they would have to compromise by accepting a final account less than the amount that they were supposed to be entitled. The total amount of outstanding payments was reported to be substantial which should warrant the introduction of legislative measures to secure payments in the construction supply chain. The respondents also believed that some of the common legislative measures adopted in overseas countries could effectively resolve the majority of payment disputes along the construction supply chain. The way ahead is to consider the exact scope and details of the security of payment legislation appropriate for the local construction industry. This would be a good area for further research.

References

Construction Industry Review Committee (2001) Construct for Excellence, Report of the Construction Industry Review Committee (CIRC), Hong Kong.

Public Opinion Programme of the University of Hong Kong and Construction Industry Council (2010) Survey on Problems of Outstanding Payments in Construction Supply Chain, Hong Kong.

Royal Commission into the Building and Construction Industry (2002) Security of Payments in the Building and Construction Industry, Commonwealth of Australia.

Construction Mediation Training: A Case of Pedagogical Principle-based E-learning

Sai On Cheung1, Yingying Qu2

Abstract Title

Mediation is becoming popular as a means to settle dispute in Hong Kong. There is a cogent need for mediation training to support its wider use. This paper reports the use of network technology to deliver training is the latest trend in the training and development industry and has been heralded as the ‘e-learning revolution’. Many institutions are resorting to e-Learning as an important tool in teaching and learning. One of the most crucial prerequisites for successful implementation of e-Learning is the need for careful consideration of the underlying pedagogy, or how learning takes place. In practice, however, this is often the most neglected aspect in any effort to implement e-Learning. The purpose of this paper is first to identify the pedagogical principles underlying the teaching and learning activities that constitute effective e-Learning. Application of the principles and ideas is by way of an online user-interface mediation training system. The primary aim of the online mediation training course is to explore the logrolling methods and strategies for achieving “win-win” settlement in mediation. On completion of the course, students shall be able to demonstrate that i) they have acquired knowledge on the key concepts of logrolling in mediation, namely reality test and preference identification; ii) they have the ability of putting the theories they learnt into practice, i.e. generating an optimal bargaining range and reach a “win-win” agreement; iii) they have acquired knowledge on the evaluation of their e-learning performance. The online learning program provides 3 teaching and learning activities (reality test, preference identification and logrolling) together with 3 learning progress reports to achieve the intended learning outcomes. Finally the logrolling-difference degree (L-DD) is used to evaluate students’ learning performance by comparing their logrolling outcomes with the system’s logrolling suggestions. The learning assessment report also includes the peers’ L-DD results for the reflection by the participating student.

Keywords: Mediation, bargaining range, reality test, preference identification and Logrolling

1. Introduction

During the past two decades, serious disputes have become increasingly common on construction projects in Hong Kong. Mediation has gained wide acceptance as an effective

1 Professor; Department of Civil and Architectural Engineering; City University of Hong Kong; Tat Chee Avenue, Kowloon, Hong Kong SAR; Email: bcsoc@cityu.edu.hk 2 PhD Candidate; Faculty of Built Environment; The University of New South Wales; Sydney, NSW 2052, Australia; Email: yingying.qu@student.unsw.edu.au

informal means of resolution. It has become an integral part of the dispute settlement provisions in most of the standard forms of construction contract in Hong Kong (Cheung, 2010). In addition to this contractual use, voluntary mediation has been introduced in the civil procedures of the High Court as part of the Civil Justice Reform that came into force on 2nd April 2009. Under Practice Direction 6.1, adverse cost order is used to discourage ‘refusal to mediate’ and ‘failing to attempt to mediate’. The Hong Kong Department of Justice in 2010 published a draft report giving recommendations on how to promote and develop mediation services in Hong Kong. One of the key recommendations is to provide mediation training widely in order to arouse public awareness. There is a cogent need for mediation training to support its wider use.

In recent years, the knowledge-based economy has exhibited a pervasive and ever-increasing demand for innovative ways of delivering education, which has led to dramatic changes in learning technology and organizations. As the new economy requires more and more people to learn new knowledge and skills in a timely and effective manner, the advancement of computer and networking technologies are providing a diverse means to support learning in a more personalized, flexible, portable, and on-demand manner (Zhang et al. 2004). With the advance in information technology, the use of network technology to deliver training is the latest trend in the training and development industry and has been heralded as the ‘e-learning revolution’. One of the most crucial prerequisites for successful implementation of e-Learning is the need for careful consideration of the underlying pedagogy, or how learning takes place (Govindasamy, 2002). In practice, however, this is often the most neglected aspect in any effort to implement e-Learning (Bixler & Spotts, 2000). Most e-learning providers perceive themselves as mere providers of technology. For example they can only provide tools for e-Learning, but cannot tell educators how to use these tools to teach (Govindasamy, 2002). E-Learning cannot continue to exist without incorporation and consideration of pedagogical principles. This paper firstly identifies the pedagogical principles underlying the teaching and learning activities that constitute effective e-Learning. These principles are then applied and illustrated by an online user-interface mediation training system.

2. Guidelines for development of e-learning programs

Guidelines have been developed to help assure the quality of e-learning programs and courses (Hirumi, 2009). Notable examples include: (1) The Council of Regional Accrediting Commissions (2000), statement of the regional accrediting commissions on the evaluation of electronically offered degree and certificate programs. The Best Practices generated by C-RAC (2000) seek to address concern that regional accreditation standards. Based on the Principles of Good Practice, initially drafted by the Western Cooperative for Educational Telecommunications (WCET, 1997), the Best Practices are meant to assist institutions in planning electronic e-learning activities and provide a framework for self-assessment. (2) The Institute for Higher Education Policy (2000), Quality on the line: Benchmarks for success in Internet-based distance education. The National Education Association (NEA) and Blackboard Inc. jointly commissioned The Institute for Higher Education Policy (IHEP) to examine existing guidelines for distributed learning. An initial list of 45 benchmarks was then analyzed by faculty, administrators, and students from six colleges and universities. The final

outcome of 24 benchmarks for success in Internet-based distance education was published by IHEP in 2000. Subsequently, 16 higher education leaders reviewed the IHEP benchmarks for a symposia sponsored by The Pew Learning and Technology Program, providing further insights into e-learning and quality assurance from a provider and consumer perspective (Hirumi, 2009). (3) The American Council on Education (ACE, 1997), Guiding Principles for Distance Learning in Learning Society. A national task force created by the American Council on Education and The Alliance: An Association for Alternative Programs for Adults generated The Guiding Principles for Distance Learning in a Learning Society (ACE, 1997) that focused on the changing nature of education and training, not on specific delivery systems or methods. The purpose of the guidelines is to “help learners, educators, trainers, technologists, and accreditors/state regulators to develop, deliver, and assess formal learning opportunities” (Sullivan & Rocco, 1997). (4) The American Federation of Teachers (2000), Distance Education: Guidelines for Good Practice. The Guidelines for Good Practice, published by the American Federation of Teachers (2000), is based on a 1999 survey of 200 members. The guidelines are to be applicable to all types of distance education, including job and skill training “because they are simply about good teaching” (AFT, 2000, p. 6). The guidelines are designed to help faculty negotiate distance education issues with management, as well as to help administrators and public officers who want to put quality at the centre of their initiatives. (5) Open and Distance Learning Quality Council (ODLQC, 2001), Standards in open and distance education. Set up by the British government in 1968, the Open and Distance Learning Quality Council (ODL QC) operates as a voluntary distance learning registration system. Course providers must meet the Standards in Open and Distance Education published by ODLQC (2001) to register courses.

E-learning courses and guidelines do not include underlying pedagogical principles. E-learning program and courses focus on the interoperability and reusability of learning objects. The published guidelines do address important instructional variables, such as objectives, content, assessment, feedback, and media use. However, the pedagogical and instructional design principles are seldom deliberated. For example, the following design principles are not addressed by published guidelines. (1) The alignment of objectives and assessments: Alignment between explicit objectives and criteria is fundamental to high-quality instruction (Berge, 2002; Welsh, et al., 2003). High-quality learning environments present learners with explicit and congruent learning objectives and assessment criteria. (2) The alignment of objectives and instructional events: Research suggests that how to teach should be based on the contents to be delivered. The methods to be used to teach verbal information should be different from the methods to be used to teach a procedure that, in turn, should differ from the methods to teach complex problem solving, and so forth (Hirumi, 2009). (3) The nature of feedback: Feedback is vital to e-learning (Yacci, 2000). Feedback may also (a) increase response rates or accuracy, (b) reinforce correct responses to prior stimuli, and (c) change erroneous responses (Jonassen, 1995; Rosenberg, 2001). (4) The design and sequencing of e-learning interactions: In traditional classroom settings, key interactions that affect learner attitudes and performance often occur spontaneously (Zhang, et al., 2004). During e-learning, opportunities to interact in “real-time” are relatively confined (Alexander, 2001; Mason, 2001). (5) Motivational design: Educators recognize that motivation is essential to student learning. Students must be presented with the appropriate

skills and knowledge and they must be motivated to learn and use them (Hirumi, 2009; Reisetter and Boris, 2009).

3. Pedagogical Principles for E-learning

Pedagogical principles are theories that govern the good education practice. The “Seven Principles for Good Practice in Undergraduate Education” were first published in 1987 by the American Association for Higher Education. The “Seven Principles” form a sound model for quality collegiate instruction. While these principles have formed a foundation for traditional classroom instruction, it is important to consider them when developing and designing instruction in technology-based environments (Sorensen and Baylen 2009). The “Seven Principles” can also be adapted to many learning environments (Chickering and Gamson 1987). They support the notion that good teaching is good teaching. They describe some essential components that are important in effective learning environments. The “Seven Principles of Good Practice” (Winona State University, 2003) includes (1) encourage student-faculty contact; (2) encourage cooperation among students; (3) encourage active learning; (4) give prompt feedback; (5) emphasize time on task; (6) communicate high expectations, and (7) respect diverse talents and ways of learning. Based on Jonassen (1995), Ruokamo and Pohjolainen (1998) summarised “Seven Qualities of Learning”. (1) Active - Learners' role in learning process is active; they are engaged in mindful processing of information and they are responsible for the result. (2) Constructive - Learners construct new knowledge on the basis of their previous knowledge. (3) Collaborative - Learners work together in building new knowledge in co-operation with each other and exploiting each other's skills. (4) Intentional - Learners try actively and willingly to achieve a cognitive objective. (5) Contextual - Learning tasks are situated in a meaningful real world tasks or they are introduced through case-based or problem-based real life examples. (6) Transfer - Learners are able to transfer learning from the situations and contexts, where learning has taken place and use their knowledge in other situations. (7) Reflective - Learners articulate what they have learned and reflect on the processes and decisions entailed by the process. All these qualities are interactive, interrelated, and interdependent with each other. Govindasamy (2002) further proposed 5 pedagogical attributes for successful e-learning as developing content, storing and managing content, packaging content, student support, and assessment. The pedagogical principle-based e-learning attributes are summarised in Table 1.

4. Pedagogical Principle-based E-learning Exploration: Case of Construction Mediation Training

Student-cantered approach is a major feature of the change in universities, which sets an orientation to the responsibility of teaching. There has been a concern with anchoring performance in student learning outcomes, teaching according to how students learn as well as evaluating how well students learn (Biggs and Tang, 2011). Outcome-based Teaching and Learning (OBTL) is a student-centred approach for the delivery of educational programs. OBTL includes three items: Course Intended Learning Outcomes (CILOs), Teaching and Learning Activities (TLAs) and Assessment Tasks (ATs). The curriculum topics in a program

and courses are expressed clearly as the intended learning outcomes. Teaching and learning activities are then designed to directly facilitate students to achieve those outcomes.

Table 1: Pedagogical Principle-based E-learning Att ributes

Phrase Reference Learning Activates Pedagogical E-learning Attributes Deliverable

Design Berge (2002) Determine learning objectives Intended Learning Outcomes (ILOs)

Teaching and Learning

Jonassen (1995);

Ruokamo and Pohjolainen (1998);

Govindasamy (2002);

Hirumi (2009);

Instructional events; online organization and design; Instructional design and

delivery; Teaching based on the contents to be delivered; instructional methods;

Instructional media; E-learning and instructional system design; Differentiate Teaching; Construct new knowledge on the basis of their previous knowledge;

Learning tasks are situated in a meaningful real world tasks or introduced through case-based or problem-based real life

examples; Innovative teaching with technology

Learning Contents Development (LCD)

Chickering and Gamson (1987);

Jonassen (1995);

Yacci (2000)

Rosenberg (2001);

Winona State University (2003)

Students feedback;

Response;

Encourage student-faculty contact;

Engaged in active learning process; Learning Progress

Report (LPR);

Learning Interaction and Students Support

(LISS)

Jonassen (1995);

Ruokamo and Pohjolainen (1998);

Zhang et al. (2004);

Alexander (2001);

Mason (2001);

Govindasamy (2002);

Winona State University (2003)

Design and sequencing of learning interaction;

Encourage cooperation among students;

Student’s support

Assessment Govindasamy (2002);

Welsh et al. (2003);

Assessment is to test whether the learning performances achieve the learning objective or not; Assessment and evaluation of student learning and

performance outcomes

Learning Assessment Report (LAR)

Assessment tasks address what students are supposed to learn and achieve as well. As stated earlier, in order for any e-Learning implementation exercise to be successful, it must be rooted in strong pedagogical foundations. The followings illustrate the ideas underpinning in this paper. The online mediation training system is used here as an example. The online mediation training course is designed to assist negotiators and mediators to achieve “win-win” settlement. Reaching “win-win” settlement is the desired outcome of mediation. A “win-win” settlement can be seen as one that encourages parties to uphold their contracts when one party achieve its profits and the other party would still be better off. However, this desired outcome is not always achieved. The course includes 3 processes: reality test,

preference identification and logrolling. Reality Test is used to establish the concession rate of the disputing parties and assist them to get ready for “win-win” settlement. Preference identification assists parties to identify their preferences among the issues, through assigning weightings to the issues. Logrolling is to provide user-friendly strategies for parties to make efficient trade-off that involves (1) when to concede (2) on which issue (3) for which party and (4) how much should be conceded. The following pedagogical attributes will be discussed along five parameters: Intended Learning Outcomes (ILOs), Contents Development (LCD), Learning Progress Report (LPR), Learning Assessment Report (LAR), Learning, Learning Interaction and Student Support (LISS).

4.1 Intended Learning Outcomes (ILOs)

The intended learning outcomes (ILOs) are the core of the whole e-learning materials and all e-learning contents must meet and achieve the ILOs that are established. The primary aim of this experiment is to explore the logrolling methods and strategies for achieving “win-win” settlement in mediation. On completion of this experiment, students shall be able to demonstrate that: a) they have acquired knowledge on the key concepts of logrolling in mediation, namely reality test and preference identification; b) they have the ability of putting the theories they learnt into practice, i.e. making use of the logrolling system to generate an optimal bargaining range and reach a “win-win” agreement; c) they have acquired knowledge on the evaluation of their logrolling performance through the devise of “logrolling-difference degree” (L-DD). The OBTL based learning structure is shown in Figure 1.

Figure 1: Online Mediation Training Course-OBTL Lea rning Structure

4.2 Learning Contents Development (LCD)

The effective e-learning program is not only a mere instructor, but also is assumed as role of content experts, instructional designers, graphic artists, media player, et al. From functional perspective, the learning contents include introduction for course background, learning structure, learning and teaching activities (TLAs), and Assessment Task (AT), as well as some complementary materials like mediation case which is a hypothetical construction case “ABC property Management Limited vs. Peter & Bothers Gardening & Landscaping Limited” used in the course, and manuals to illustrate how to use the online course system. These functional contents are also shown in Figure 1. To achieve the ILOs, the TLAs in this course include three learning units: Reality Test, Preference Identification and Logrolling. Each learning unit has a corresponding exercise to help students better understand the learning contents and increase the learning performance. A learning progress report will also be delivered when students finished each unit. Assessment task is designed to evaluate the learning outcome; also a learning assessment report will be delivered to students finally. Learning contents development shall take the effective learning route for students in account. Constructivism is an essential theory for the research of technology-based learning environments. Constructivism learning is seen as a building process in which learners have an active role and learning is based on their cognitive functioning. The learners obtain new knowledge by constructing it on the basis of their earlier knowledge. The mediation course is designed a clear learning route for students to follow. The students are proposed to have acquired knowledge on the key concepts of logrolling in mediation--reality test and preference identification, by finishing Exercise 1and Exercise 2. Through Exercise 3A and 3B, the students are proposed to have the ability of making use of the logrolling system to generate an optimal bargaining range and reach a “win-win” agreement. Finally evaluation of their logrolling performance will be conducted through the devise of “logrolling-difference degree” (L-DD).

4.3 Learning Progress Report (LPR)

The real value of e-Learning lies not in its ability to train just anyone, anytime, anywhere, but in our ability to deploy this attribute to train the right people to gain the right skills or knowledge at the right time (Govindasamy, 2002). Thus it is important for e-learning program to track learner activities whether or not the appropriate learner is learning the right information at the right time. In mediation course, shown in Figure 2, the Exercise 3B “Logrolling Strategy Practice” is to assist students to reach win-win agreement. In each of the bargaining round, the students will be provided with a suggestion, through which each party concedes at minimum loss to himself while accordingly maximum benefit to the other party. The students need to confirm whether they accept the suggestion or not. If yes, click “Accept” button. If they click “Reject” button, the system will provide some alternative choices to choose. The figure 3 shows the logrolling progress report as the students logrolling record.

Figure 2: Online Mediation Training Course--Exercis e 3B: Learning Strategy Practice

Figure 3: Online Mediation Training Course--Exercis e 3B: Learning Progress Report

4.4 Learning Assessment Report (LAR)

Assessment is an indispensable part of e-learning program. Essentially, it is assessment that reinforces the learning approach a student adopts. Assessment is typically divided into two types, the summative assessment and the formative assessment. Summative assessment is used to grade students to demonstrate students’ achievement and it involves making a final judgment of the students’ achievement. Formative assessment is used as a diagnostic tool for students and teachers to identify and improve areas of weakness (Govindasamy, 2002). In mediation course, the logrolling-difference degree (L-DD) is defined to evaluate parties’ logrolling performance by comparison of the difference between system’s logrolling suggestions and the parties’ logrolling outcomes. The smaller the L-DD, the closer are the actual outcomes to the optimal bargaining that each party concedes at minimum loss to himself while according maximum benefit to other parties. Here is an example. The L-DD

between Subjects’ actual logrolling outcomes and Mediator’s expected logrolling outcomes of group i is 5%. The average L-DD of all experiment groups is 5.5%. Thus the group i’s logrolling performance is better than the average level. Seen from Figure 4 below, the system’s logrolling suggestions are marked in red and parties’ logrolling outcomes are marked in blue. M represents to system and H is for party. The parties are proposed to begin with their most preferred position. Client begins with point H1 and Contractor begins with point H16 (seen the arrow direction). Parties are proposed to concede at minimum loss in exchange for maximum benefit to the other party, and get convergence at point M9 which is marked as “����”.

Figure 4: Online Mediation Training Course—Learning Assessment Report

4.5 Learning Interaction and Students Support (LISS)

Learning interaction and student support is one area of e-Learning that is markedly different from the traditional classroom delivery method. In traditional classroom instruction, student support can be addressed on a supply-and-demand basis. In e-Learning settings, where students learn as a result of interaction with programmed instructional systems, all possible types of problems student are likely to face have to be foreseen in advance in order to introduce features for performance support. One way of doing this is by using a framework based on Laurillard’s Conversational Theory. This theory advocates a teaching strategy based on interaction between teacher and student; not on the actions required of the student by the teacher (Govindasamy, 2002). Role play is applied in the online mediation course to help students understand the mediation process. In this mediation training course, the

students were randomly assigned to the roles of Mediator, Contractor and Client in Exercise 1 “Reality Test”. Contractor is inputting the concession rate first. Mediator and Client receive the Contractor’s information. Client then responses a corresponding concession rate, after which Mediator has a record of both parties’ concession rate and make a judgment whether the concession rate are within the potential win-win agreement zone. The judgement will deliver to parties as well. If no, the Mediator would suggest adjustments. If yes, parties can continue after confirmation.

5. Conclusion

Disputes are common in construction projects in Hong Kong, and mediation has gained wide acceptance as an effective informal means of dispute resolution. One of the key recommendations is to provide mediation training widely in order to arouse public awareness. With the advance in information technology in the last few decades, the use of network technology to deliver training is the latest trend in the training and development industry and has been heralded as the ‘e-learning revolution’. One of the most crucial prerequisites for successful implementation of e-Learning is the need for careful consideration of the underlying pedagogy, or how learning takes place (Govindasamy, 2002). In practice, however, this is often the most neglected aspect in any effort to implement e-Learning (Bixler and Spotts, 2000). Most e-learning providers perceive themselves as mere providers of technology. In fact e-Learning cannot continue to exist without incorporation and consideration of pedagogical principles. This paper identifies the pedagogical principles underlying the teaching and learning activities that constitute effective e-Learning. These principles are then applied and illustrated by an online user-interface mediation training course. The following pedagogical attributes are discussed along five parameters: Intended Learning Outcomes (ILOs), Contents Development (LCD), Learning Progress Report (LPR), Learning Assessment Report (LAR), Learning, Learning Interaction and Student Support (LISS). The primary aim of the online mediation training course is to explore the logrolling method and strategies for achieving “win-win” settlement in mediation. On completion of the course, students shall be able to demonstrate that i) they have acquired knowledge on the key concepts of logrolling in mediation, namely reality test and preference identification; ii) they have the ability of putting the theories they learnt into practice, i.e. generating an optimal bargaining range and reach a “win-win” agreement; iii) they have acquired knowledge on the evaluation of their e-learning performance. The online learning program provides 3 teaching and learning activities (reality test, preference identification and logrolling) together with 3 learning progress reports to achieve the intended learning outcomes. Finally the logrolling-difference degree (L-DD) is used to evaluate students’ learning performance by comparing their logrolling outcomes with the system’s logrolling suggestions. The learning assessment report also includes the peers’ L-DD results for the reflection by the participating student.

Acknowledgements

The work described in this paper is fully supported by a City University of Hong Kong Teaching Development Grant (project number 6000372).

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Learning from the Past: Analysis of Factors Contributing to Construction Project Disputes in

Australia

Ana Laura Campos Gutierrez1, Kriengsak Panuwatwanich2 and Angela Walker3

Abstract

It is commonly acknowledged that the nature of construction projects is largely fragmented as it is invariably carried out by diverse parties having different aims and objectives. Such a lack of integration typifies the nature of construction industry and arguably makes it prone to project disputes. This paper presents a research study that investigated the key factors that contributed to actual disputes occurred in past construct projects in Australia. The research provides a review of underpinning background knowledge on construction project disputes, as well as their origins. In particular, the research focuses on five main types of disputes: breach, failure to settle and appeal, interpretation, insurance and indemnity and security of payments. Based on this theoretical framework, a qualitative analysis was conducted on 78 court cases data obtained from the LexisNexis database to determine key factors contributing to construction project disputes. The results of this investigation determined that the main factors contributing to disputes were damages, negligence, timing, payments and variations. The ‘payments’ factor was the highest contribution factor (more than 50%) across all the analysed dispute types. This suggested that most of the disputes originated from a payment disagreement. Additionally, “breach” was found to be the most frequent type of dispute occurred, with ‘damages’ as the main contributing factor within this type of dispute. The main implication derived from the research findings is that the identified factors contributing to disputes have some element to them that can be specified in the contract and potentially help prevent a dispute, for instance: the amount of general damages that an alleged party can claim; the specification of materials to avoid defective work and thus negligence; the procedure to follow when an extension of time is required; a description of progress and payment claims following its respective legislation; and an appropriate agreement when a contract variation is needed. If these issues are carefully described and understood in the contract, potential disputes can be avoided.

Keywords: Construction, Disputes, Factors, LexisNexis, Australia

1 Former Industry Affiliates Program (IAP) student; Griffith School of Engineering; Griffith University; aniluc@gmail.com 2 Lecturer; Griffith School of Engineering, Griffith University; k.panuwatwanich@griffith.edu.au 3 Adjunct academic staff; Griffith School of Engineering; Griffith University; angela.walker@griffith.edu.au

1. Introduction

The construction industry is of great significance to Australia. In 2009, it was reported to employ 9.1% of the country’s workforce, making it the fourth largest industry and contributor to Australia’s GDP (Gross Domestic Product) (Australian Bureau of Statistics, 2010). Furthermore, Campbell (1997) explains that the construction industry is extensive, formed by diverse types of professions, and fragmented, including different aims and objectives according to the participating parties. Consequently, these characteristics make the industry prone to construction project disputes.

The Australian Bureau of Statistics recorded that in 2004-2005 the construction industry was responsible for almost 50% of all industry disputes. During 2008 and 2009, the dispute percentage compared to the rest of the industries decreased to 27% (Australian Bureau of Statistics, 2010). Such improvement could possibly mean that Australia is embracing various dispute resolution and avoidance methods; however the industry still needs to encourage these approaches further.

Diekmann and Nelson (1985) state that construction industry frequently fails to analyse the actual costs associated with dispute occurrences. For instance, disputes have a great impact on the number of working days lost in the construction industry as opposed to any other industry. The construction industry lost nearly one additional day of work, when compared to employees involved in industrial disputes across all industries (Australian Bureau of Statistics, 2010). Therefore, it is in the industry’s benefit to be aware of the factors contributing to disputes to be able to control and minimise any legal expenses resulting from such disputes. In addition, companies need to take into account that there are not only direct financial costs incurred when experiencing a dispute. Hidden costs, including time-value of money, damage of reputation and long-term business relationships, and opportunity costs, among others, should also be considered (Cushman and Carter, 2001). Because of the high cost of disputes identified above, it is important to understand the critical factors that lead to disputes so they can potentially be minimised, or avoided altogether. The aim of the study presented in this paper is to highlight significant sources of disputes that are evident in past construction projects. It is also aimed to provide some recommendations on dispute resolution and prevention methods, as many of the analysed disputes could have been prevented.

The paper details an analysis to identify the most significant factors contributing to construction project disputes in Australia. Although there are a number of past research studies that investigated the similar issue using survey questionnaire and interview techniques, this study took a different approach in determining the most recurrent ‘factors’ contributing to construction project disputes amongst 78 real-life court cases publicly available from an Australian law database. A qualitative analysis using NVivo 9 which involves the factors’ contribution to each court case, as well as their frequency is presented. These factors were analysed to determine how, and the extent to which, they contribute to various types of construction project disputes.

In the next section, a theoretical background related to construction disputes, origins of disputes and types of disputes is presented to establish some key conceptual framework adopted in the study. The methodology employed to carry out the analysis is then explained, followed by the presentation and discussion of the identified factors contributing to construction project disputes. The paper concludes with the summary of key findings and recommendations.

2. Theoretical background

2.1 Construction disputes

According to Black (2009), a ‘dispute’ is a conflict or controversy; a conflict of claims or rights; an assertion of a right, claim, or demand on one side, met by contrary claims or allegations on the other. Tillett (1991) defines a dispute as something that typically highlights the existence of incompatibilities between the parties. For Morgan (2008), dispute is a contentious issue that the parties to a construction contract disagree upon, or would be likely to disagree upon, and which needs to be resolved by some means or other, either within or outside the contract.

Based on these overarching definitions, and for the purposes of this study, a construction dispute is defined as a disagreement between two or more parties involved in a construction project where litigation is needed. In order for a dispute to arise, an aggrieved party usually serves a written notice either by hand or by certified mail to the party in default. Therefore, it is only called a dispute when all of the parties involved have been notified with the details of the contention (Standards Australia, 1997).

2.2 Origin of disputes

Many problems, arguments and contract variations arise every day in a construction project. The leaders of the project make vital decisions daily to keep the project flowing; these decisions may differ from what the contract specifies. Nevertheless, in most projects the problems are resolved between the people on site, without it becoming a dispute (Campbell, 1997). So, if the involved parties are dealing with these contract changes regularly, what is it that transitions them into a dispute? Construction problems manifest themselves when errors are revealed; changes and ineffective communication create bottlenecks and thereby inefficiency. Cheung and Yiu (2006) summarise specific sources of construction disputes based on an extensive review of past research. Some of the common sources of disputes identified in their research include:

• Variations (due to site conditions, client changes, design errors, etc.); • Ambiguities in contract documents; • Failure to comply with payment provisions; • Timing (schedule delays, delayed design information, delayed site possession, etc.); • Damages; and • Professional negligence.

2.3 Types of disputes

Within the context of Australian construction industry, Hollingdale et al. (2009) categorise disputes into five main types: (1) Breach of contract; (2) Failure to settle and appeal; (3) Insurance and indemnity; (4) Contractual interpretation; and (5) Security of payments. Each of these types of disputes is described below.

2.3.1 Breach of contract

The objective of a contract is to represent in writing, the sole declaration of an agreement made between the parties involved. However, the lack of knowledge or understanding of it makes the contract likely to be broken. The primary obligation of a contractor is to carry out the work required, to agreed standards, in a specified time; characteristics that should be detailed in the related contract (Adriaanse, 2005). Therefore, if any of the agreements have not been honoured by one or more of the participating parties on the contract, it may provoke a dispute. The disputes that arise by not following the specifications of the contract are classified as breach.

2.3.2 Failure to settle and appeal (arbitration and dispute resolution)

The construction industry is trying to embrace and encourage alternative dispute resolutions (ADR) as a process to follow in the appearance of a conflict, before or instead of the contractual parties proceeding to litigation. It involves various processes that help prevent and/or manage a conflict between the contractual parties. In order to make sure that the industry is aware of these techniques, it became a compulsory action to be described in the contract. The aim of arbitration and mediation strategies is to make the construction industry realise that the best approach to dealing with disputes is to avoid them altogether (Feld and Carper, 1997). However, the process of managing a conflict is still fairly new to the construction industry of Australia. Therefore, it is reasonable to think that it will take time for the industry to fully recognise it as a primary option before litigation. Nevertheless, there are companies that are already using ADR. Some contracts nowadays dedicate a particular clause for Arbitration and Dispute Resolutions; the breach of such a clause could cause a dispute.

2.3.3 Insurance and Indemnity

In the construction industry it is of common practice to have a management plan for a project; this plan usually includes risk assessment, risk allocation and risk management. The parties to a construction contract carry particular types of insurance that reflect the risks that they are taking on in connection with the project (Hollingdale et al., 2009). The nature of a contract of insurance, commonly referred to as an insurance policy, is that the insurer undertakes to make payments to or for the benefit of the insured on the occurrence of some event (Uff, 2009). Three common insurance policies in the industry are works/property insurance, public liability insurance and workers’ compensation. The insurance provisions in construction contracts are closely associated with those for indemnity and care of the works. It is common nature for the contractor to be responsible for the safety and protection of all

the work, temporary work, plant and materials and for any damage to property or injury to the person. A dispute is likely to happen if the responsible party fails to protect any of these previously mentioned elements; consequently the respective party could be entitled to a breach of duty and could face severe consequences for it.

2.3.4 Contractual interpretation

Contractual interpretation, as the name implies, refer to contracts that leave room for personal interpretation. When the interpretation of the contract differs from one party to the other, a dispute is likely to arise. If the contracting parties attach different meanings to the same term, then neither is bound by the understanding of the other. Nevertheless, if one of them knew or had reason to know what the other understood the disputed term to mean, and did not follow their definition, a dispute is probably going to occur. The words of a contract are normally given their ordinary and popular meaning; this is unless the parties use them in a technical sense or if a special meaning is given to them. Therefore, the contract should be drafted carefully to accurately reflect the agreement between the parties, which would also possibly prevent a dispute associated with its interpretation.

2.3.5 Security of payments

There are generally two main participants in a construction contract: the client and the contractor. The client, who proposed a project, expects to see the works specified in the contract in exchange for the agreed amount of money. On the contrary, the contractor expects the payments in exchange for the agreed works. There are generally implied terms in the contract in relation to the payments, their distribution, and sometimes retention of a percentage of it. Given the fact that the parties which are performing the works depend on this payments in order to maintain functioning, a delay or an absence of payment could easily provoke a dispute. Nowadays, it is common practice to withhold a percentage of the payment from the principal contractor to its subcontractor(s) in appropriate circumstances. However, if the principal contractor withholds payment and a request to do so happens to be invalid, they may be liable for breach of contract. Unfortunately, it is not always clear when a principal contractor is required and allowed to withhold part of the payment (Bampton et al., 2011).

3. Methodology

The methodology employed in this study involved an extensive review of relevant literature to provide a theoretical understanding of construction disputes followed by the mining and analysis of qualitative data obtained from real court cases relevant to the Australian construction industry. The details of this analysis and the sample used for the analysis are presented in the following sections.

3.1 Sample

The sample used in this study consisted of 78 court cases extracted from LexisNexis database. The simple selection criterion of the cases was that they had to be relevant to the

construction industry in any State or Territory of Australia. The cases were heard in a number of different courts mainly including the High Court of Australia and the Court of Appeal, Supreme Court and Administrative Tribunal of every State and Territory.

The extraction of the cases from LexisNexis includes 78 cases from 1966 to 2012, involving companies or organisations participating in the construction industry; whether they were contractors, designers, builders, insurance companies, investors, or clients. The court cases used in this investigation have been made public and are available online; therefore, there is no breach of privacy or confidentiality towards any company or organisation. Nevertheless, the cases were only used to investigate the source of the dispute, rather than the outcome of the case. Also the identities of the parties involved in each case are not disclosed in the findings.

3.2 Analysis approach

The data from the selected cases were imported into NVivo 9 to perform a text analysis. NVivo 9 is a qualitative data analysis program that can perform two types of word queries: word frequency and word search. The word frequency feature (Figure 1) allows the user to identify the most repeated words. It provides an option to adjust the search; for instance, the number of letters was increased to a minimum of 4 to avoid common words that were not useful. Furthermore, it allows for deleting words that are of no interest; for example, Australia, Queensland, New South Wales, which were common words and were not needed for this particular query. This feature was used to identify the most significant factors contributing to disputes in the construction industry with reference to the list of factors presented in Section 2.2.

Figure 1: Word frequency queries in NVivo 9

Once the significant (most frequent) factors were identified, a word search was carried out in order to find any cases involving those terms or words with similar meanings. The word search facilitated the coding of the court cases. The coding feature allows each court case to be tagged in a ‘types of dispute’ and ‘factors contributing to disputes’, creating nodes and relationships between them. It is important to mention that each case can be tagged (or coded) into more than one dispute type and factor.

Following the coding of all cases, matrix coding was conducted. Matrix coding allows the user to compare items and display the results in a table or matrix. This feature was used to determine the frequency between the five types of disputes (as presented in Section 2.3), and the top five factors contributing to these disputes. Therefore, the matrix consisted of two parameters: types of disputes and factors contributing to disputes. Every court case was also coded into these parameters.

4. Results and discussion

4.1 Overall frequency of factors contributing to disputes

The factors contributing to construction project disputes found in this study were attained from the analysis of the 78 court cases and queries done through NVivo 9. By using word frequency queries, five factors having highest frequencies were identified. These factors are damages, negligence, payments, timing and variations. Word search queries were then carried out to identify how many of these court cases were associated with each of the identified factors contributing to construction project disputes, as illustrated in Figure 2. According to the figure, the most frequent factor was payments, accounting for 50 disputes out of the 78 analysed cases. It was closely tailed by damages (45 disputes); timing (38 disputes); variations (23 disputes); and lastly, negligence (17 disputes).

Not surprisingly, payments dominated as a root cause in more than 50% of the disputes. This is one of the most basic yet critical sources of disputes in the construction industry (and perhaps in any other industries). Fundamentally all of the parties involved in the contract require cash flow to maintain the business operations, whether it is for staff, materials, plant, administration, or any general construction expenses that arise every day. Consequently, and as stated previously, it is critical to describe, in detail, any payment related clauses in the contract. Although this does not guarantee that a dispute will not arise, it may prevent it from happening. Moreover, the factor of payments was also predominantly an additional ‘indirect’ source of dispute for the rest of the factors contributing to disputes. Some of the cases were not coded into the factor of payments, as that was not the primary source of the dispute. However, it is monetary compensation that parties to a contract generally seek to repair any damage done.

The factor of damages, similar to payments, was a strong factor contributing to construction disputes. Different events happened in the court cases generally came down to damages. In the appearance of a claim for damages, the cases analysed generally proceeded to ask for payment compensation. Therefore, it is recommended to include in the contract the amount

of general damages that the parties to it would be entitled to in case of a claim of damages being needed.

Figure 2: Top five factors contributing to disputes (by number of cases)

4.2 Frequency of the factors contributing to different types of disputes

Following the identification of the top five factors, the court cases were coded into one or more of the five types of disputes described in Section 2.3. Table 1 presents the numbers of court cases (as well as its respective percentage) that were coded into each factor as well as each type of disputes.

Table 1: Frequency of Factors Contributing to Different Types of Disputes

Type of dispute Contributing Factors

Damages Negligence Payments Timing Variation

Breach of Contract 20 (26%) 7 (9%) 11 (14%) 7 (9%) 5 (7%)

Failure to Settle & Appeal 9 (12%) 1 (1%) 11 (14%) 10 (13%) 4 (5%)

Insurance & Indemnity 4 (5%) 6 (8%) 3 (4%) 3 (4%) 2 (3%)

Contractual Interpretation 7 (9%) 3 (4%) 8 (10%) 8 (10%) 5 (7%)

Security of Payments 5 (6%) 0 (0%) 17 (22%) 10 (13%) 7 (9%)

According to the table, it can be seen that the highest number of cases is associated with damages as a contributing factor to breach of contract (26% of the total number of cases). Bailey (1998) stated that any breach will be entitled to a claim for damages. Damages are therefore a major factor contributing to construction disputes because it is commonly involved in the classification of a breach of contract. The party alleging a claim for damages usually receives monetary compensation. Nevertheless, it is also common to request specific performance from the party which performed the breach in order to repair the damages caused (Adriaanse, 2005). The most common form of damages is defective work. This factor contributing to a dispute would usually be dealt with by covering the necessary expenditure to rectify the works plus any consequential losses.

The second highest number of court cases is associated with the payments factor that causes dispute in terms of security of payments (22%). This factor also accounts for reasonably high proportions of dispute cases related to breach of contract (14%) and failure to settle and appeal (14%). Therefore, it can be inferred that the payments factor is as equally important as damages because it can result in a considerable number of litigations across different types of disputes. The payments factor is likely to contribute to disputes as every entity from the construction industry depends on payments in order to maintain the on-going operation of a business. In a construction contract, the contractor is usually entitled to carry out and complete the specified works, as well as required to provide everything necessary for completion. On the contrary, the employer’s part of the contract is typically the payment of money. Disputes may arise in deciding when the contractor’s obligations are satisfied, what amount of money is payable and at what date. Consequently, all of these elements should be clearly stated in the contract in order to avoid a subsequent related dispute (Uff, 2009).

Similar to the payment factor, but to the less extent, timing factor also resulted in considerable number of cases with disputes related to security of payments (13%), failure to settle and appeal (13%) and contractual interpretation (10%). In the construction industry, numerous variables make it hard to be bound to a definitive completion date. There are endless unexpected and uncontrollable events that could cause a delay on the works. These events could compromise the progress of the works, and therefore prevent the responsible party from not finishing by the agreed date on the contract, making timing the source of the dispute. In an attempt to be reasonable with the respective parties within a contract, the construction industry has modified most current standard contracts in order to entitle the contractor to an extension of time (EOT). However, an EOT would only be granted where the delay was caused by events beyond the control, or reasonable control of the contractor (Bailey, 1998).

Variation factor is present as a cause of dispute fairly equally across all the five dispute types. Although this factor is not the most prominent within the context of this study, variation is one of the most common sources of disputes. The expression ‘variation’ is commonly used in the construction industry to identify an alteration to the contract, whether this is made by an addition or omission to the works and terms specified in it. Disputes often arise in relation to these variations due to misconceptions as to what the consequence of what appears to be relatively simple changes (Bailey, 1998). Moreover these changes could alter

the scope of works under the contract to such an extent that it could be viewed as creating a separate contract from the original. Therefore, the involved parties should not only thoroughly know and understand their contract, but also any variation that was made to it. Variations to a contract should be given the same importance than the original contract, and therefore both of these should be acknowledged and understood thoroughly. Because these agreements are commonly done through an oral agreement in the construction industry, there is a possibility that the parties could interpret what was said in a different way, or perhaps the person that ordered the variation did not have the power to do so.

Among the sample court cases analysed, ‘negligence’ appears to be the only factor that resulted in all types of dispute except security of payments. Negligence seems to mainly cause the disputes associated with breach of contract and insurance and indemnity. Negligence, in its tortious context is a breach of duty, which means not taking reasonable care to prevent damage to others from occurring when engaged in anything that requires careful performance a reasonable person would do (Bailey, 1998). It is an action, or omission of an action, that could endanger the life, health, properties, morals or comfort of the public. Nevertheless, negligence can also be found in the context of breach of contract. Common participants in this context are engineers and architects, who can be accountable for carrying out a noncompliant or negligent design or supervision (Uff, 2009). Defective work as a consequence of a negligent design can also be reflected as a negligent act, whether it arises during or after the construction phase of the project.

5. Conclusion

The construction industry, as one of Australia's largest and most important industries is also one of the biggest contributor to disputes. To better understand this issue, the study presented in this paper was conducted to examine significant sources of disputes that were evident in past construction projects and to provide some recommendations on dispute resolution and prevention methods, based on lessons learnt from the past.

By analysing 78 documented historical court cases related to construction disputes, the study determined that the five most frequent factors among the construction industry were damages, negligence, timing, payments and variations. It was also found that these factors were related to each other. Their relationships were identified through a common pattern of events. For example, when the factors of disputes were of negligence, timing and/or variations, a claim for the damages would be justified. Damages as another recurrent factor in construction disputes are usually compensated financially. Thus, most of the cases end up recurring to the factor of payments. Not surprisingly payments was the most common factor contributing to disputes, being responsible for causing more than 50% of the analysed disputes.

Furthermore, the contribution of the factors were also analysed with respect to the classification of disputes, which include: breach of contract, failure to settle and appeal; insurance and indemnity; contractual interpretation; and security of payments. The factor having the highest frequency was damages, particularly, those that caused breaches of contract. However, payments and timing factors were found to have a broader effect,

causing disputes fairly equally across multiple types of disputes. Negligence and variations factors appeared to be less prominent within the context of this study.

Based on the above findings, practical implications can be drawn. All of the identified factors contributing to disputes have some element to them that can be specified in the contract and potentially help prevent a dispute. For instance, the amount of general damages that an alleged party can claim; the specification of materials to avoid defective work; the procedure to follow when an extension of time is required; a description of progress and payment claims following its respective legislation; and an appropriate agreement when a contract variation is needed. If these examples are carefully described and understood in the contract, then both parties will appreciate the consequences of failing to comply with any of them. Although this may not help to completely prevent disputes, it would significantly help reduce the likelihood of them. To better understand and prevent disputes, future research can build on the existing study by examining the dynamic relationships between the identified factors. Such research would help to depict a more complete network of dispute sources to which relevant project stakeholders can refer in order to develop preventative strategies to effectively reduce and manage dispute risks.

References

Adriaanse J (2005), Construction Contract Law, Wales, Palgrave Macmillan.

Australian Bureau of Statistics (20120) A Statistical Overview of the Construction Industry, (available online http://www.abs.gov.au)

Bailey I (1998) Construction Law in Australia, Sydney, LBC Information Services.

Bampton M, Blanch S and Wright M (2011) “Hidden Traps in New Withholding Provisions of The Security of Payment Act”, Construction Law Insight, Henry Davis York Lawyers, (available online http://www.hdy.com.au/Media/docs/HDY_Insight_Construction%20Law_Dec%2011-5dc7466f-7f59-4cce-9d6d-de5b2e48208a-0.pdf)

Black H C (2009) Black's Law Dictionary, Minnesota, West Publishing.

Campbell P (1997) Construction Disputes, Scotland, Whittles Publishing.

Cheung S O and Yiu T W (2006) “Are Construction Disputes Inevitable?”, IEEE Transactions on Engineering Management 53: 456-470.

Cushman R F and Carter J D (2001) Construction Disputes: Representing the Contractor, New York, Aspen Publishers.

Diekmann and Nelson (1985) “Construction Claims: Frequency and Severity”, Construction Engineering and Management 111: 74-81.

Feld J and Carper K (1997) Construction Failure, New York, John Wiley & Sons.

Hollingdale M, McComish S and Luttrell D S (2009) Australian Construction Law 2009: A Review of Recent Developments and Their Implications, Australia, Allens Arthur Robinson, (available online http://www.allens.com.au/pubs/pdf/const/AustralianConstructionLaw2009YearinReview.pdf)

Morgan B D (2008) Dispute Avoidance: A Non-Confrontational Approach to the Management of Construction Contracts, London, RIBA Publishing.

Standards Australia (1997) General Conditions of Contract - AS 4000, Sydney, Standards Australia.

Tillet G (1991) Resolving Conflict: A Practical Approach, Sydney, University of Sydney.

Uff J (2009) Construction Law, London, Thomson Reuters.

Measuring Enrichment Liability in the Context of Unfinished Construction Projects

Aimite Jorge1

Abstract

Most aspects of construction projects mainly fall under contractual regime. However, when things go wrong such as when the project is abandoned for various reasons, they may create two different scenarios: A contract that is breached and a fixed structure left on the land of one party, which constitute an incomplete benefit transferred. The transfer of such benefit is initially made with a legal ground, but that ground has since ceased to exist. If some aspect of that benefit cannot be recovered under a contract, enrichment rules may be competent to solve the problem. How to measure the different aspects of that enrichment is however a problem that may have different interpretations according to different conceptions of the foundations of enrichment liability in a particular legal system. This article explores the measure of enrichment in such cases of failed bilateral contracts scenarios working from South African perspective. It argues that in cases of failed bilateral contracts generating an enrichment situation, sanctioning a dual measure of enrichment in a legal system may be an appropriate avenue.

Keywords: Remedies, Unjust Enrichment, Failed Bilat eral Contracts

1. 1. Introduction

Where parties enter into a contractual relationship, it is not always the case that the contract will be performed without mishaps. The source of that mishap may be a previously undiscovered situation or a subsequent event. But it is germane to a contractual relationship that it is a risk taking endeavour in the sense that the parties to such an endeavour will have expectations as to the outcome of the contracting process, some of which may not be fulfilled. Where the contractual relationship comes to a halt for any unforeseen reason, the courts, in the absence of prior agreement to the contrary, will play the role of risk allocator. Cases of unfinished construction projects are illustrative of this risk allocation situation. In these cases what exactly happens is that a risk of loss has emerged or materialized and it must be decided by the court where that risk lies. Depending on how the agreement comes to a halt, the situation may create an unjust enrichment of one party at the expense of the other. However, although the availability of an enrichment remedy does not depend on a breach of contract, nevertheless there is usually an overlap between enrichment and contractual liabilities where the breach of contract does result in an unjust enrichment.[1]

1 Senior Lecturer; School of Law; University of Western Cape (Cape Town); Modderdam Road, Private Bag X17, Bellville 7535, South Africa; ajorge@uwc.ac.za.

In this paper I explore the issue of enrichment liability in failed bilateral contracts in the form of abandoned or unfinished construction projects. The aim is to analyze the extent to which unfinished construction projects transcend the realm of mere contract breach, as they are prone to creating residual enrichment claims. Depending on the particular circumstances of each case, failed bilateral contracts generating an enrichment liability should be scrutinized more carefully when it comes to measuring the extent of the enrichment. The analysis and discussion is mainly worked out from South African perspective but with wider view in mind.

The discussion is structured as follows: First, a very brief excursus of the notion of ineffectiveness of contracts due to breach and frustration of purpose. Second it describes what an unfinished project is and uses an illustrative example of an unfinished motorway among others. Third, brief description of various payment/pricing methods and their possible implications. Fourth, a brief analysis of the measure of enrichment, and finally the conclusion.

2. 2 Ineffectiveness of contracts due to breach an d frustration for 'impossibility.

The situation of an ‘enrichment claim’ arising from breach of contract in so far as the measure of recovery is concerned may be complex and ambivalent. It may depend on whether the claim is for services rendered pursuant to a contract which is subsequently terminated by breach, or whether it concerns other contractual situations. There is also no single encompassing view on the issue for all legal systems. Amongst the practical answers is the view that the calculation of the enrichment relief in cases of breached contracts should be made by reference to the market value, because a contractually based limitation is flawed for two reasons: (i) first because such 'limitation may not reflect a number of benefits financial and otherwise, that may flow from the ability to complete performance’ (Maddaugh and McCamus (1990) pp427-428) [2],. Secondly, such measure may deprive the innocent party of ‘an opportunity to reduce the anticipated losses to be sustained by full performance through a possible range of cost reduction techniques’.

Another practical view contends that in cases of contracts for services, there should be two different approaches in cases of breach. It first should depend on whether the alleged breach is related to what is sometimes described a breach a warranty or a breach of a condition. If the defendant merely breached a warranty, that is to say, the defendant’s breach of contract does not substantially deprive the plaintiff of what he expected to receive, then, the solution is that neither party is excused from further performance (McInnes (2002) pp 163, 214).[3]

In contrast, if it is a breach of a condition, that is to say, the defendant’s breach does deprive the plaintiff of what she/he expected to receive (a fundamental breach), then, the innocent party should generally have a choice as follows: first, he may affirm the contract and insist upon completion of the agreement as initially contemplated. If he does so, he must then fulfil his end of the bargain. However, he is also entitled, under an action in breach of contract, to claim compensatory relief with respect to losses arising from the defendant’s act of breach. secondly, as alternative solution, he may terminate the contract and thereby release both

parties from the need to perform any primary obligations that remain outstanding. If he exercises this later option, he again may have a choice as follow: he can bring an action in breach of contract and claim compensatory relief with respect to losses arising from the defendant’s act of breach. Alternatively, he may be able to bring an enrichment action and claim restitution of any benefits that he conferred upon the defendant (Waddams (1999) ch.16).[4] Despite the above said, normally even if the claimant terminated the contract on the basis of the defendant’s breach of a 'condition' (fundamental breach), the plaintiff cannot escape the consequences of a bad bargain by means of contractual relief. He is generally entitled to choose between expectation damages and reliance damages. Obviously each option is compensatory in so far as it aims to repair a loss. The former pertains to benefits that the plaintiff expected to receive under the contract, whereas the latter pertains to losses that the plaintiff incurred as a result of relying upon the agreement. In either event, however, relief will normally be refused to the extent that the claimant entered into a losing contract (McInnes, (2002) 52 Univ Toronto LJ pp211-212); Byan (2007) pp150-155.[5]

If termination is not due to breach, but due frustration of purpose on account of impossibility, then the solutions of common-law systems differ from the civilian-legal systems. One of the main differences between the legal systems on the doctrine of impossibility of performance comes down to the primary remedy for breach each system subscribes to. On the one hand, if a system provides that its primary remedy is specific performance,(Schwartz (1979) 89 Yale LJ p271)[6] then, as a logical consequence, if performance of the obligation becomes impossible, the obligation is discharged.[7] That is so because the courts cannot enforce an obligation that is impossible – impossibilium nulla obligatio.[8] On the other hand, if a system subscribes to the damages (compensation) approach as the primary remedy for contractual breach, save exceptions, then on the occurrence of the ‘impossibilium’, the value can always be given, unless it is entirely infeasible.

3. 3. What is an Unfinished Construction Project?

An unfinished construction project normally is a building (or any other architectural structure such as a bridge, a road or a tower) where construction work was either abandoned or put on hold at some stage in the process. In extreme cases, the project may actually exist in a design form only. Some unfinished projects in design forms are in a blueprint or a white print alone.[9] But the concept of unfinished construction projects in this paper refers to an actual building or structure which either has been started but been abandoned during construction; or is actually being built, but the process is constantly delayed or the progress of the work is at the speed of a snail. Sometimes a construction or engineering project remains unfinished at various stages of its development. Examples of unfinished works abound around the world and there is no need to single out one example, save to say that some buildings or structures are partially constructed and can be used in their current unfinished state or forms, while others remain mere shells. In some interesting cases the projects are intentionally left with an unfinished appearance.[10] But other projects or works are in the process of a near-perpetual construction.[11] A home example in South Africa of an unfinished structure is the Cape Town freeway Eastern Boulevard12 in Foreshore. This Cape Town project was conceptualized as part of a ring-road in the 1960s (Morris (1951)[13] and has yet to be completed. Construction was halted in 1977 allegedly at the time that there

was no justification in terms of traffic demand for the completion of the inner viaduct. Close to the 2010 Soccer World Cup in South Africa residents were asking what response the city would give to visitors of such an unfinished project in a very touristic area leading to the Cape Town world cup stadium. Unofficial justifications given varied but all seemed to agree that the motorway would not be finished any time soon due to Cape Town municipality budget constraints (Kane (2011)[14]. In its current design form apparently there are no private companies willing to take up the project to finish it either at a reasonable cost.

For the purpose of this paper the descriptive example of the unfinished Cape Town Eastern Boulevard freeway will partially serve to illustrate some features of the construction-contract model that might have been used in that process and other related problems. Recent announcement in the news state that the Cape Town freeway structure is finally now at the mercy of University of Cape Town civil engineering students to come up with innovative ideas, new designs and proposals to resurrect the project by 2014.[15] Obviously when the students' ideas are put into proposals and plans, new tenders will be invited again after an existing plan idling for 30 years. This Cape Town freeway gives us insight into common problems facing unfinished projects. Such problems usually have roots at the inception stage. Nonetheless, the aim of this paper is on enrichment measures on failed bilateral contracts. One will simply look at the model of construction contract used in such projects to understand the implications on the remedies.

One of the questions that arises in such examples is whether ordinary allocation of risks in breach of contract resolved all the problems or whether the unfinished work might have produced an enrichment situation for one of the parties or both. Before addressing specifically this question, a quick look at some prominent payment and pricing methods in construction contracts used within the industry today.

3.1 3.1. Lump sum payments and unfinished projects.

One potential problem that can create enrichment scenario in unfinished project is a contract for a lump sum and cost-plus payment.

Amongst the functions of construction contracts is serving as means of pricing construction. At the same time the contracts also structure the allocation of risk to the various parties involved. Because of this, normally the owner is a position to decide the type of contract to be used for his/her project and to set forth the terms in a contractual agreement. For this reason it is important to understand the risks of the contractors associated with different types of construction contracts. In the process of contracting, the parties my have chosen a specific pricing models to their contract such as a lump sum contract,[16] unit price contract, cost plus fixed percentage contract,[17] cost plus fixed fee contract,[18] cost plus variable percentage contract, target estimate contract or guaranteed maximum cost contract. A detailed discussion of each of these pricing methods is beyond the scope of this paper. A single illustration of the architectural services may suffice to highlight the main point for this paper.

Normally architects (and other specialty services) are often remunerated a certain percentage of the overall cost of the project.[19] Sometimes other pricing criteria are used, as just mentioned above. The question that arises here is to what extent such percentage of the project is fully due to the architect/engineer where their work and role in the project, for example, would involve not only supplying the drawings for the contractor, but also ensuring that those drawings are implemented as specified in the contract documents such as a continuous observation role of the contractor’s work at different stages? Is the full percentage due if the project is unfinished?

To illustrate this point let me consider the following: In many construction projects, earthwork covers foundations and underground plumbing, while a gypsum board covers ceilings and wall framing.[20] In a normally progressing construction project the timing of such observations would be different. The task of earthwork and underground plumbing would be at the initial stage of the construction. The task of observing the gypsum board and wall framing at a later stage. That is so because if the architect were to observe the work after the components are hidden would defeat the purpose of observation. Despite these tasks being at different stages of the project, an architect may have billed the owner a lump sum for the whole work. When the project is left unfinished, the problem may arise as to what sum is the owner liable in the process. If the owner is liable for the full percentage amount of the original overall cost of the project, part of that sum would be paid to the architect when it was not due. Conversely, if the contract provided that the architect would only be paid for the observation task at the end of the project, the owner would be left with a standing structure that may constitute an actual enrichment a benefit acquired. In the first example, there is a possibility of partial payment, or if deposits were already made, a set-off could be used for the part performance. But that does not solve the whole problem.

3.2 3.2. Unfinished projects transferred to new inv estors

When unfinished buildings can partially be used in their unfinished state or where the project was initially publicly funded and the right to the structure is directly transferred to investors either to finish the project, or to completely alter it, several problems may develop. Some projects, such as for example apartment buildings, may have had certain buyers pay in advance of construction for their future apartments in order to secure the best spots in the building. When that project is abandoned or progresses extremely slowly and at some stage the right to the building is directly transferred to an investor, original buyers who might still be willing to keep the same apartments may find themselves paying significantly extra amounts for essentially the same product they bought earlier. In these situations, a double sword problem arises. If the new investors willing to finish an unfinished building project opt to stick with the previous buyers at the same price they bought the apartments at the project’s inception stage, the investors stand to lose because the market price might have shifted significantly at that stage. If the buyers relinquish their right to the previously bought property in an unfinished building, the investor may gain an undue benefit for keeping the structure that is more valuable than they will refund to the buyers. What are the remedies in these circumstances?

Can the buyers simply be satisfied for a claim for damages when the building project goes unfinished? Do damages solve the whole problem in these circumstances or are there residual remedies available to the buyers?

And where buyers had paid in advance but the currency significantly fluctuated between the time the building was abandoned and the time the rights to the building are transferred to a new investor, and the currency is now weaker, there arise the possibility of an unjustified enrichment of one of the parties.

3.3 3.3. What can be gleaned from the situation of unfinished construction projects?

In effect the situation of unfinished construction projects is to an extent a reflection of a losing contract. There is no unanimity about what exactly a losing contract entails. The expression ‘losing contract’ itself is ambiguous. There, is however, some convergence: all legal systems abhor applying enrichment liability to contractual relationships. Such an aversion of the legal discourse in applying enrichment rules to contractual settings usually protects the contract itself. The rationale of not applying enrichment liability is to prevent opening unnecessary loopholes where one of the parties might be tempted to terminate a losing contract thereby subverting the regime of risk allocation voluntarily undertaken under the agreement. The difference however with unfinished projects is that the contract has in effect come to an end. What is really at issue is winding up the consequences of such a failed bilateral contract. The fact that the work has been left unfinished, obviously shows that prima facie the contract was breached, because there is no reasonable person who would enter into a contract to leave the project unfinished.

Be that as it may, in principle, all contract breaches occur because the contract is a loser for one side, although not all such contracts are considered ‘losing contracts’. Using illustratively using an economic concept of profitability, sometimes it is observed that ‘not all ‘losing contracts’ are jointly unprofitable, and not all jointly unprofitable contracts are ‘losing contracts’’ (Cohen (1994) 80 Virginia LR p1270).[21] A 'losing contract’ is one in which the breaching party is not the ‘loser’ but the party who appears to be advantaged by the contract; that is to say, the (apparently) wrong person breaches’. The problem can occur, ‘in contracts that are jointly profitable and contracts that are jointly unprofitable. However the restoration remedy is normally appropriate in both cases’.[22] In losing contract cases the court need not decide whether the contract is jointly profitable. The joint profitability determination matters when the court must choose between expectation and reliance.[23]

The interrelation of contractual and enrichment actions in the losing contract scenarios is however a difficult issue.[24] Basically the theoretical difficulty encountered in determining whether or not an enrichment claim ought to be available in the case of a losing contract lies in the fact that the question can be approached from different perspectives. It 'may be viewed in terms of contractual principles only or from the point of view of unjust enrichment or a combination of both’ (Harker (1980) Acta Juridica pp84-85).[25] If the problem is approached exclusively in terms of contractual terms, then unfinished projects should simply

be seen as mere cases of rescission or cancelation of a contract. In this case the reliefs available under these forms of breach should suffice to satisfy the aggrieved party.

On the other hand, ‘a defaulter’s contention that the aggrieved party’s negative expectancy be taken into account certainly will lack appeal where he has been given nothing, except a broken promise, in exchange for the performance received’.(Palmer (1978) § 4.8)[26] Therefore, in such cases considerations of unjust enrichment become applicable. Since justice does not require the party in default be permitted to retain an amount (or value-benefit) for which he gave nothing, merely by reason of the fact that the aggrieved party would have lost that amount had he (the defaulter) performed the contract which in fact he did not perform. In essence, if the issue is viewed solely in terms of unjust enrichment, the focus is laid instead on the assets unjustly held by the party in default. Because considerations of enrichment do not emphasise the aggrieved party’s benefits and losses under the contract, he is therefore entitled to restitution, in kind or in value, of the performance rendered unless justice requires otherwise (Harker 1980) Acta Juridica pp 86-87); Du Plessis (2012) pp387-389).[27]

In essence the discussion of unfinished projects is really about risk allocation.[28] In pursuing the task of risk allocation in such cases the obvious starting point will always be to consider the parties’ own intention in relation to the risk at the inception of the agreement. Such intention may be ascertained by reference to the terms of the contract. Normally it will be assumed that a rational individual entering into reciprocal exchanges will have made arrangements for events which create a risk of loss. (Visser (2008) pp173-174).[29] Some parties are naturally risk averse; others are risk neutral, and yet others are naturally risk takers. Accordingly, those who are risk averse may have made arrangements through the use of different mechanisms to ward off any supervening risk. Ordinary mechanisms are the use of ‘force-majeure’ clauses, exemption clauses, the designation of a term as condition or a warranty or a cancellation clause (Oughton and Davis (2000) pp246-247).[30] These and like devices serve to allocate the risk of loss according to the terms of the contract. If the other party was prepared to accept the risk , a normal risk taker, the reason may be that he believed to have been in a better position to cover the risk either by insurance or otherwise. If such party is less risk averse than the other party and was prepared to take the consequences if the risk did arise, then he should suffer the consequences. But that is not necessarily clear in the cases of unfinished construction contracts. In these cases, it is also necessary to take into account the type of contract used and other ancillary issues.

For example, the parties may have made provisions for the use of a CMAA contract style. The CMAA model is mostly used in complex projects ((Metha (2010) pp13-38)[31]. This Construction-contract method makes a general contractor redundant as it envisages an independent construction manager (CM). In this CMAA contractual model, the owner retains a CM (construction manager) as the owner's agent to advise on several issues, including costs, scheduling, site supervision, site safety, construction finance administration, and the overall building construction. It must also be observed that the CM is not a contractor, but simply a manager who plays no entrepreneurial role in the project (unlike the general contractor, who assumes financial risks in the project).

In the CMAA construction-contract model the owner usually awards multiple contracts to various trade and specialized contractors, whose work is coordinated by the CM (Metha 2010) p 23; Pressman (2012).[32] Hence using this model, for example, the structural framework of the building may be erected by one contractor; masonry work done by another, interior drywall work by yet another, and so on. In this model, each contractor is referred to as the prime-contractor who may have one or more subcontractors.

Thus, the owner, by assuming part of the role of the general contractor, eliminates the general contractor's mark-up on the work of the subcontractors. The owner may also receive a reduction in the fee charged by the architect for contract administration. Although these savings are partially offset by the fees that the owner pays to the CM, there can still be substantial savings in large but technically simple projects.

The CMAA construction contract model is particularly attractive to owners who are knowledgeable about the construction process and can participate fully in all of its aspects, from bidding and bid evaluation to the closeout phase. However, this advantage comes at a price. In the CMAA construction contract model essentially occurs that the owner assumes liability risk. In the design-bid-build (Meyers (2004) pp118-121); Metha (2013) p23) [33] model such liability risk is assumed by the general contractor. Again, because of the multiple prime-contractors and subcontractors the CMAA model does not localize the ultimate responsibility at single point among the various prime contractors. In this model, each prime contractor has a direct contract with the owner. Because of such direct contract with the owner, the CM (contract manager) does not have much leverage to ensure timely performance. Therefore, the likelihood of a project being left unfinished also increases.

From the above example it becomes evident that it is important to construe the language of the contract when it fails. When the project is left unfinished it is important to ask whether the problem is one of ‘impossibility’ or frustration or of mistake at the inception stage. For example, if the parties did make provisions for an event which would not otherwise be regarded as frustrating event, the court may ask whether the relevant provision is worded so as to cover the event of an unfinished project.

4. `5. Conclusion

The discussion above highlighted that an enrichment claim can arise from failed bilateral contracts. However, where an enrichment claim arises from those scenarios, one must be careful whether mutual exchanges have occurred. In the cases of unfinished construction projects the issue comes down to how the parties allocated the risk at the inception stage of the contract. If there was no clear allocation of the risk, an important consideration in the risk allocation process will be to establish what party is the least cost avoider. In this regard, a relevant factor is that one of the parties to a contract may have been in a better position than the other to prevent the risk of loss from materializing, in which case, rules of risk allocation may suggest that this is the person who should accept the risk of loss.

In the same vein, it is said that a person who brings about a frustrating event through his own actions cannot rely on the rules of frustration of contract, on the basis that the law does

not give relief in respect of self-inflicted frustration. Similarly, a person who could have performed his contractual obligation in some other perfectly reasonable manner may be required to accept the risk of loss and will not be able to treat the contract as frustrated when the manner of performance which he had contemplated is no longer possible. This principle is sometimes reflected in the rule that an external event must frustrate the common intention of both parties to the contract. Put differently, in cases of failed bilateral contracts generating an enrichment claim, the measure of enrichment is normally that which was received and not necessarily that which survives or remains in defendants’ hands at litis constatio. Loss of enrichment or change of position in these cases is normally not applicable.

ENDNOTES

1 The concepts of unjust and unjustified enrichment have different meanings, but in this paper they will

be used interchangeably when they refer an enrichment claim as a whole.

2 Maddaugh P and McCamus J (1990), The Law of Restitution, 1st Edition pp 427-428.

3 McInnes M (2002) 52 Univ. Toronto LJ 163, 214 footnote 181.

4 Waddams S, The Law of Contract, 6th Ed. (Toronto, 2010) ch. 16.

5 McInnes M (2002) 52 Univ. Toronto L J 211-212.

6 See Schwartz A (1979) 89 Yale LJ 271. For view see Holmes OW (1998) 78 Boston Univ. LR 699 (originally

published in 1897); Posner R, Economic Analysis of Law (5th Ed. Boston, 1998). See also Bank of America

Canada v Mutual Trust Co (2002) 211 DLR (4th) 385, para. 31).

7 Where a contract becomes impossible of performance after it has been entered into, the general rule in

(Roman law) is that it then ceases to be binding (Wilson v Smith 1956 (1) SA 393 (W) at 396ff.

8 D. 50.17.185 and also D. 45.1.140.2; Wilson v Smith 1956 (1) SA 393 (W) at 396 and Bischofberger v Van Wyk

1981 (2) SA 607 (W) at 610-612.

9 An example of this is the California-Santa Fe Bullet train Project that was never built; its costs at the

time was estimated at US$ 2.1 Billion, but according to many other estimates, it would have escalated

to more than US$ 5.3 Billion by the time the project would have been completed.

10 Intentionally leaving a building in unfinished state was more the follies of Europe in the 16th and

17th Centuries.

11 An extreme example of these perpetual constructions is Antoni Gaudi's Sagrada Familia in

Barcelona, Spain, which has been in construction for 120 years and is now projected to finish in the

year 2026.

12 A completed section of Easter Boulevard is now partially renamed Nelson Mandela Boulevard.

13 Morris SS, (1951) Metropolis of Tomorrow: Report of the City of Cape Town, City Engineer

Department. Morris was the Cape Town City engineer from 1949 to 1977 and was influential in

conceiving the Eastern Boulevard.

14 Kane L (2011) "Building the Foreshore Boulevard: The Politics of Freeway 'Artefact'" SATC 2011 at

repository up.ac.za (university of Pretoria) [accessed 28/11/2012]

15 City of Cape Town News: Cape Town freeways and future (all available online

http://futurecapetown.com/wp-content/uploads/2012/09/aereal_freeway.jpg

http://futurecapetown.com/2012/10/finishing-the-foreshore-freeways/#.UK-V6YeTyNA

http://futurecapetown.com/tag/cape-town-freeways/#.ULh-jKyTyNA [accessed 28/11/2012]).

16 In a lamp sum contract, he owner in effect assigned all the risk to the contractor. The contractor, in

turn, can be expected to ask for a larger mark-up in order to cater for unforeseen contingencies.

17 Cost plus fixed percentage contract is normally used for constructions involving new technologies

or in cases of extremely pressing needs such as in the urgency of construction of military installations.

In this type of contract, the owner usually assumes all risks of costs overrun, because the contractor

will receive the actual direct job plus a fixed percentage. In these cases the contractor has little

incentive to reduce job cost.

18 In this type of contract, the contractor receives the actual direct job cost plus a fixed fee. The

contractor will have some incentive to complete the job quickly since its fee is fixed regardless of the

duration of the project. The downside here is that the owner still assumes the risks of direct job cost

overrun while the contractor may risk the erosion of its profits if the project is dragged on beyond the

expected time.

19 Current Fees tariff in South Africa were published on 2 December 2011 for the year 2012;

Government Gazzette N. 34788; Board Notices 194 of South African Council for the Architectural

Profession, applicable 1 January 2012.

20 International Building Council (2009) International Construction Code 101.

21 Cohen GM (1994) "The Fault Lines in Contract damages" 80 Virginia LR 1225, 1270-1271.

22 Cohen (supra) 1270-1271.

23 Cohen (supra) 1271-1272.

24 Palmer GE (1978) The Law of Restitution § 4.9.

25 Harker JR (1980) “The Nature and Scope of Rescission a Remedy for Breach of Contract in American and

South African Law” Acta Juridica 61, 84-85.

26 Palmer GE (1978) The Law of Restitution § 4.8.

27 Harker JR (1980) The Nature and Scope of Rescission as Remedy for Breach of Contract in American and

South African Law” Acta Juridica 84; Du Plessis (2012) The South African law of unjust enrichment pp 387-389).

28 Because the issue is really about risk allocation in these cases, and if there is an enrichment claim,

it arises out of a failed bilateral agreement, the claim in these cases should always stick to the value

received ant not necessarily opting for value remaining.

29 Visser DP (2008) Unjustified Enrichment 173-174.

30 Oughton D and Davis M (2000) Sourcebook on Contract Law 246-247.

31 CMAA stands for ‘construction-manager-as-agent’ while CMAR (which is not described here)

stands for ‘construction-manager-at-risk’.). Other contract models are DNB (design-negotiate-build);

DBB (design-bid-build); DB (design-build); IPD (Integrated-project-delivery). For further details see

Mehta M et al (2010) Building Construction Principles, Materials and Systems, 2nd Ed 18-33.

32 Mehta M et al (2010) Building Construction Principles (supra), 2nd Ed 23; Pressman A, “An

Integrated Practice in Perspective. A New Model for the Architectural Profession” (2012) posted at

http://archrecord.construction.com/practice/projDelivery/0705proj-1.asp (retrieved 15 Nov 2012).

33 Mehta M et al (2013) Building Construction: Principle, Materials and Systems 3rd Ed 21; Meyers D

(2004) Construction Economics 118-121.

REFERENCES

Bryan M (ed) (2007) Private Law in Theory and Pratice, (Routledge-Cavendish, New York).

Du Plessis JE (2012) The South African Law of Unjustified Enrichment (Juta, Cape Town).

Harker JR (1980) “The Nature and Scope of Rescission as Remedy for Breach of Contract in American and South African Law” Acta Juridica 61-115.

Kurtz JP (2004) Dictionary of Civil Engineering: French-English (Kluwer, New York).

Lodder AVM (2012) Enrichment in the Law of Unjust Enrichment and Restitution, (Hart Publishing, Oxford).

Mehta M et al, (2010) Building Construction: Principles, Materials and Systems 2nd Ed. 18.

Ochshorn, J (2010) Structural Elements for Architects and Builders, (Elsevier (BH),Amsterdam).

Schwartz A (1979) "The Case for Specific Performance" Yale Law Journal 271-308.

Oughton D and Davis M (2000) Sourcebook on Contract Law, 2nd Ed. (Cavendish Publishing-London).

Palmer GE (1978) The Law of Restitution (Little Brown, Boston 1978).

Visser DP (2008) Unjustified Enrichment (Juta Publishing, Cape Town).

Waddams S, (2010) The Law of Contract, 6th Edition (Toronto, Canada Law Book, 2010).

Websites :

http://futurecapetown.com/2012/10/finishing-the-foreshore-freeways/#.UK-V6YeTyNA

Pressman A, “ Integrated Practice in Perspective: A new Model for the Architectural Profession" at http://archrecord.construction.com/practice/projDelivery/0705proj-1.asp (accessed on 15/11/2012).

Monetary value as a proxy for vulnerability in statutory adjudication and other construction

regulation

Matthew Bell and Ravindu Goonawardene1

Abstract

By and large, statutory intervention into contracts for construction projects is limited to circumstances in which it is perceived by the legislature that one party is likely to be vulnerable to the other, and that this vulnerability is such that it is appropriate to constrain the parties’ freedom to contract as they wish.

It is in the nature of such legislation that inevitably it will be a somewhat blunt instrument for reforming parties’ commercial behaviour, applying as it must to firms and individuals which are deemed to be so vulnerable, regardless of whether they are in fact vulnerable.

This paper examines the use in statutes of monetary value – whether of the contract price, of claims or otherwise – as a means of determining such vulnerability. It focuses in particular upon whether any particular value has been – or should be – viewed as an appropriate proxy for such vulnerability.

The paper reviews the current situation in Australia in respect of two key areas of construction activity where the legislature has seen fit to intervene into parties’ freedom to contract on the grounds of protection of the vulnerable: the residential building sector (protection of owners as consumers) and security of payment (protection of subcontractors and suppliers). The latter is investigated in the context of recent proposals towards harmonisation of the various state-based legislation in Australia and, in particular, Jeremy Coggins’s suggestion that a dual system for regulation apply depending upon the monetary value of the claim.

It is concluded that, despite the inevitably somewhat arbitrary nature of nomination of a monetary value, it remains an essential element to any statutory test for vulnerability. This both supports the viability of a monetary trigger as an element within a harmonised model for Australian security of payment legislation (which of itself might be considered in other countries where similar legislation is in place) and invites further research into whether it is possible to nominate an optimal value for statutory intervention in respect of construction industry regulation.

Keywords: legislation, consumer protection, securit y of payment, statutory adjudication, construction industry .

1 Respectively, Senior Lecturer and 2012 Bachelor of Laws graduate, Melbourne Law School, The University of Melbourne. Correspondence to m.bell@unimelb.edu.au.

1. Introduction

Construction law has been described by Bruner (2007: 13-14) as “a primordial soup in the ‘melting pot’ of the law”. Perhaps the primary reason that such a description is apt is because the law – at its heart, a system of regulation which seeks to offer predictability of outcomes to parties subject to it – is applied in the construction sphere to an industry and to practices which display almost infinite permutations throughout the world and over time.

Drafters of standard forms of building contract, or of statutes applying to the industry, need to anticipate those permutations when devising schemes which intervene into construction participants’ freedom otherwise to behave as they think fit (provided, of course, that they comply with generally-applicable laws). These drafters seek to identify, in the abstract at the time of drafting, parties whose behaviour needs to be regulated or upon whom protections are to be conferred: that is, despite the drafter not having the actual party in their contemplation, the scheme they devise will deem parties displaying certain characteristics to fall within its bailiwick.

In turn, a statute which prescribes, for example, that parties are unable to include certain matters in their contract – or, on the other hand, that they must include certain things – will need to incorporate a mechanism which determines the types of arrangements will be subject to that scheme. A typical approach for these mechanisms is to identify the arrangements by reference to the type of work being undertaken and its monetary value. For example, under the Domestic Building Contracts Act 1995 (Vic), a statute of the state of Victoria, Australia, contracting arrangements are captured by the legislative scheme if they are for “domestic building work” (essentially, that in relation to a home) and the greatest level of intervention is applied to arrangements where the contract price exceeds A$5,000.

This paper examines the nature and content of these mechanisms. It seeks, in particular, to identify whether it is possible to propose an optimal basis for intervention into the parties’ contracting arrangements where one of the parties is identified as being “vulnerable” to the other in the sense that it is unable reasonably to protect its interests through negotiation of appropriate terms in the contract. It does so via the following structure:

• In section 2, undertaking a survey of mechanisms currently used for legislative intervention in construction contracts, focusing upon the approaches to residential building across the Australian states and territories; this reveals a lack of uniformity despite these statutes broadly seeking to “crack the same nut” in a policy sense – that is, protection of those who are deemed unable to protect themselves via the contract; it is noted, moreover, that there is little evidence to show that the drafters applied meaningful objective criteria to establishing the nexus between vulnerability and protection;

• In section 3, examining an area of legislative intervention where there was in fact detailed consideration given to the basis on which that nexus would be applied, with the result that the monetary value was retained as a limb of the test: the definition of “consumer” under the Australian Consumer Law (ACL); and

• In section 4, considering whether the approach applied in relation to the ACL may usefully be applied to construction industry regulation, especially in the context of recent proposals to harmonise the “security of payment”2 legislation in place across the Australian states and territories and, especially, Jeremy Coggins’s proposal (2011, 2012) that a dual system for regulation apply depending upon the monetary value of the claim.3

We conclude that, despite the inevitably somewhat arbitrary nature of nomination of a monetary value, it remains an essential element to any statutory test for vulnerability. This both supports the viability of a monetary trigger as an element within a harmonised model for Australian security of payment legislation (which might be considered in other countries where similar legislation is in place),4 and invites further research into whether it is possible to nominate an optimal value for statutory intervention in construction industry regulation.

Whilst this investigation is limited in its scope and therefore its conclusions, it is undertaken in the context of little previous research having been done in the area and therefore seeking to prompt further research and debate amongst the international construction community.

2. Mechanisms for legislative intervention

The stated purposes of the Domestic Building Contracts Act 2000 of the state of Queensland include achieving “a reasonable balance between the interests of building contractors and building owners” (s 3(a)). Legislation with similar aims is also in place across the seven other states and territories of Australia.5 The legislation operates in varying ways across Australia, but features which apply across most jurisdictions include the prescription of matters which contracts for residential work must, or must not, include. These are explicitly designed to redress the disadvantage in relation to bargaining power, disparity of knowledge and lack of

2 This paper adopts “security of payment” as the prevailing generic term for legislation in Australia which seeks to regulate payment processes, and disputes, in order to facilitate cashflow within the contracting chain. This encompasses the “adjudication” element which represents the accepted terminology for similar legislation in the UK, New Zealand and elsewhere. 3 Having said that, this paper does not seek to engage directly with whether it is monetary value or the types of claim which provides the most appropriate differentiator for the application of the dual scheme. Essentially, as is noted in section 4, Coggins’s proposal rests upon monetary value as a proxy for vulnerability – hence, the attention paid to it in this paper. On the other hand, Brand and Davenport (2011 but see also the previous articles by the authors referred to in that paper) have cogently argued that the intent and policy objectives of the Australian security of payment legislation would more appropriately be promoted if the distinction was between “progress claims” – which would be processed under the “Defined Scheme” (currently reflected under what they term the “Australian model”, which is referred to as the “East Coast model” in section 4 below) – and more generalized “money claims”, which would be resolved under the West Coast model. See, further, n 26 below. 4 See the list in Coggins and Donohoe (2012: 196-7) and the discussion by Brand and Davenport (2011: 256-8). 5 See, primarily, Building Act 2004 (ACT), Home Building Act 1989 (NSW), Building Act 2005 (NT), Domestic Building Contracts Act 2000 (Qld), Building Work Contractors Act 1995 (SA), Housing Indemnity Act 1992 (Tas), Domestic Building Contracts Act 1995 (Vic), Home Building Contracts Act 1991 (WA). For a recent consideration of the Australian (and New Zealand) residential building legislation see Britton (2013: 17-21).

understanding of contractual principles which home owners, as a class, are perceived to suffer vis à vis builders.6 For example, warranties as to standards of workmanship and materials are implied into contracts on a basis that cannot be excluded by the parties,7 and “cooling off” periods are provided for (within which the owner may end the contract after signing it in certain circumstances).8

Having said that, there is little uniformity of approach across the various states and territories. This is especially the case when it comes to the trigger for application of these prescriptive aspects of the Acts. Whilst these triggers are by way of a combination of the type of work being undertaken and the value of the contract under which it is undertaken, both elements vary significantly across the country. By way of example, Table 1 illustrates the variation in respect of the minimum contract value to which the provisions apply.

Table 1: Contract values as trigger for application of residential building legislation

State/ Territory Relevant legislation Contract value A$

Australian Capital Territory

Building Act 2004 (ACT) (see rule 27 Building (General) Regulation 2008 (ACT))

12,000

New South Wales Home Building Act 1989 (NSW) s 7AAA 5,000

Northern Territory Building Act 2005 (NT) (see rules 41J and 41E Building Regulation (NT)

12,000

Queensland Domestic Building Contracts Act 2000 (Qld) s 9 3,300

South Australia Building Work Contracts Act 1995 (SA) s 27(2) 12,000

Tasmania Housing Indemnity Act 1992 (Tas) s 5 12,000

Victoria Domestic Building Contracts Act 1995 (Vic) ss 29-43 and definition of “major domestic building contract”

5,000

Western Australia Home Building Contracts Act 1991 (WA) s 3(1) 7,500

This type of disparity in legislative approach is to a certain extent an expected and inevitable result of a federal structure such as that in place in Australia where the former colonies (now States) retain legislative power over matters (in this case, residential building work) which have not been ceded to the central government. However, in a relatively small country like Australia (at least, in terms of population and the size of the construction industry), such

6 Explanatory memorandum, Queensland Domestic Building Contracts Bill 1999; Victoria, Parliamentary Debates, Legislative Assembly, 14 November 1995, 1140 (Mrs Wade). 7 See, eg, Domestic Building Contracts Act 1995 (Vic) ss 8, 20, 132. 8 See, eg, Domestic Building Contracts Act 1995 (Vic) s 31.

differences across state borders may be expected to hamper the efficiency of commerce or, at the very least, to cause confusion to builders and consumers alike.9

As was noted at the outset, this paper seeks to identify whether any particular monetary value might provide an optimal trigger for the imposition of provisions designed to protect vulnerable parties. As a first step, however, the figures cited above are of relatively little value to this task, not simply because of their level of disparity but also there is scant evidence available as to why these figures were chosen by the various legislatures. None of the supporting documentation produced by Australia’s Parliaments – primarily, explanatory memoranda and second reading speeches – provides a clear explanation or methodology for adopting these values. In turn, it is difficult to resist the inference that the trigger points have been framed in a somewhat arbitrary fashion.

3. Approach taken in the Australian Consumer Law

Whilst little evidence exists as to the basis on which contract values have been prescribed under the Australian residential building legislation, there is greater guidance available in respect of the regulation of consumer protection generally under the Australian Consumer Law (ACL).10 This is Commonwealth (federal) legislation which largely replaces, by dint of agreement with the states and territories, the patchwork which existed until 2011 comprising the Trade Practices Act 1974 (Cth) and various state-level laws.

The following section examines the process by which an element of the ACL akin to the residential building legislation was drafted in 2010. This seeks to illustrate that, whilst stipulating a monetary value as a proxy for vulnerability inevitably tends towards arbitrariness, it is a fraught exercise to frame a proxy which does not include such a value. Similarly to the residential building legislation, the ACL prescribes certain implied conditions and warranties, in this case in arrangements for the supply of goods and services. The conditions imposed on suppliers include providing adequate descriptions of goods,11 and ensuring that the goods are of merchantable quality12 and reasonably fit for their purpose.13

The application of the relevant provisions rests upon a definition of “consumer” in s 3 of the ACL. This is a complicated definition with a number of applicable further provisions and qualifications, but in essence it provides that a person acquires goods or services “as a consumer” if and only if the price paid or payable for them does not exceed A$40,000 or they are of a kind “ordinarily acquired for personal, domestic or household use or consumption”. The “or” is significant here: it effectively means that the “ordinarily acquired…” limb only has

9 For a discussion of the impact of such disparity in the context of security of payment legislation, see, eg, Coggins, Fenwick Elliott and Bell (2010: 19-20). 10 The ACL is contained in Schedule 2 to the Competition and Consumer Act 2010 (Cth). 11 ACL s 70. 12 ACL s 71(1). 13 ACL s 71(2).

relevance to goods the value of which exceeds A$40,000. In turn, purchasers of goods with a value of less than A$40,000 are (subject to the applicable qualifications) deemed to be worthy of the provisions’ protection regardless of the actual nature of the transaction.

This dual approach was and remains controversial. When the monetary trigger (then, A$15,000) was first enacted under the Trade Practices Act 1974 (Cth) (TPA), the Parliamentary committee acknowledged the arbitrary nature of adopting such a threshold but felt that allowing the figure to be altered by regulation addressed the concern (Griggs et al (2011): 63). However, when the time came to draft the revised version of the TPA which was to become the ACL, the Senate Standing Committee on Economics strongly advocated for the removal of the monetary threshold, and the Bills as prepared did not include it. The Committee (2010: [3.42]) noted that “[i]t has long been recognised that the monetary threshold is arbitrary and contentious. It is anomalous that a business should have the same protection as an individual consumer if they buy goods for less than $40,000”.

Despite this, the monetary threshold limb was reintroduced at the last minute. The Committee received submissions by various stakeholders proposing that the removal of the monetary ceiling would reduce consumer protection because, for example, goods that were purchased by small businesses for the use of employees (as “consumers”) would not meet the “personal, domestic or household” criterion.

4. Use of a monetary proxy in legislation regulatin g construction

4.1 The challenge

The previous section sought to illustrate, by reference to the experience under the ACL, that attempting to define vulnerability within a statute in the absence of a monetary threshold is a fraught exercise. This is arguably even more acutely the case when it is the construction industry which is being regulated by the statute. The diverse range of multidisciplinary activities, the complex relationships that exist between parties and the commercial sophistication of participants in the industry makes the appropriate framing of a “purpose” or “nature” test of universal application an extremely difficult task.

In the context of the ACL, Griggs et al (2011: 77) have rightly called for further work to be done in pursuit of a unifying definition of “consumer”, but have emphasised that such a quarry has thus far proved elusive. In the absence of such a definition, it is our view that a legislative scheme which combines the necessary element of defining the scope of the activity which is covered (for example, residential building work) with a monetary threshold as a proxy for vulnerability remains the most viable approach.

A monetary trigger has the key benefit of promoting certainty for parties – whether they be home owners, subcontractors or developers or the myriad other participants in the construction industry – albeit at the inevitable expense that the exact threshold chosen will be a somewhat “blunt instrument”. Moreover, it arguably provides the most realistic reflection of the way in which consumers decide whether to enter into contracts: Paterson (2009: 953) has summarised a number of relevant studies by noting that, being unable to process large

amounts of information, consumers tend to focus on key items within the contract, price being prominent amongst these.

4.2 Australian “security of payment” legislation

If it is accepted that some sort of monetary threshold is a necessary element in the test for vulnerability which is worthy of legislative intervention, the next key question is what the appropriate amount should be for that trigger. This is very much a live question in the context of proposals to harmonise Australia’s “security of payment” Acts – legislation which seeks, to varying degrees, to regulate project payment streams.

Over the past 14 years, security of payment legislation has been progressively passed in every Australian state and territory based upon the adjudication provisions of the UK Housing Grants, Construction and Regeneration Act 1996 to a greater or lesser extent.14 There are essentially two models in place in Australia: the so-called “West Coast” model incorporating the Western Australian and Northern Territory Acts and the “East Coast” model represented by the other states and territories’ Acts.

As characterised by Speranza (2011: 172), the West Coast model is generally less prescriptive as to what can, and cannot, be included in the contract than the East Coast model and therefore intervenes less into parties’ freedom to contract. Coggins and Donohoe (2012: 199) and Brand and Davenport (2011: 259) also note that, whereas the East Coast model is intended only to apply to matters arising directly out of the payment claim, adjudications under the West Coast model cover (like the original UK Act) disputes under the contract generally. However, as has been remarked upon by commentators including Brand and Davenport (2011: 259), “mission drift” has extended the ambit of claims under the East Coast model so that they routinely include substantial amounts generated by matters outside of the payment stream.15

As has been pointed out by Bell and Vella (2010: 567-8) and Coggins (2011: 36-7), whilst the specific aim of the legislation was to protect vulnerable participants in the supply chain by “stamp[ing] out the unAustralian practice of not paying contractors for work they

14 Building and Construction Industry Security of Payment Act 2009 (ACT); Building and Construction Industry Security of Payment Act 1999 (NSW); Construction Contracts (Security of Payments) Act 2004 (NT); Building and Construction Industry Payment Act 2004 (Qld); Building and Construction Industry Security of Payment Act 2009 (SA); Building and Construction Industry Security of Payment Act 2009 (Tas); Building and Construction Industry Security of Payment Act 2002 (Vic); Construction Contracts Act 2004 (WA). These Acts are referred to in this paper respectively as the “ACT Act”, “NSW Act” and so forth, and collectively as the “SOP Acts”. A comprehensive bibliography in relation to them is provided by Collins (2013: 374-430).

15 For example, in John Holland Pty Ltd v Walz Marine Services Pty Ltd (2012) 28 BCL 62, the subcontractor submitted a claim under the Queensland Act for A$2.26 million in delay and disruption costs (albeit “styled [as] variations”: [5]). Similar examples are cited by Coggins and Donohoe (2012: 216).

undertake on construction”,16 it was clearly the case that the legislation was also intended to reform behaviours across affected sectors of the industry.17 This aim was sought to be achieved via provisions including prohibition of “paid when paid” clauses,18 granting a default right to progress payment if no such agreement exists,19 requiring prior notice for withholding payments,20 establishing the right to suspend performance of contractual obligations for non-payment21 and the right to refer disputes to fast-track adjudication.22

4.3 Further reform in 2013?

In early 2013, the Inquiry led by Bruce Collins QC into construction industry insolvency in New South Wales observed that, despite the legislative reforms, there has been little overall improvement in the cashflow outcomes for subcontractors. For example, he found (2013: 54) that more than A$1 billion was owed to subcontractors in NSW as a result of recent insolvencies during the 2011 financial year. The Report also confirms (2013: 61-64; 99-101) that inequality of bargaining power remains a root cause of the ongoing “subbie squeeze”. In turn, Collins has recommended a “thorough review” of the NSW Act (2013: 74) with a suite of specific reforms proposed including expansion of the matters which an adjudicator can review (recommendation 39), the setting of maximum periods for payment after certification (recommendations 24, 29, 34 and 35) and removal of the requirement that parties “opt-in” to the operation of the Act via payment claims (recommendation 38).

Whilst these changes might well be expected to increase the likelihood that a subcontractor could take advantage of the Act’s procedures, they do not directly address the issue that is the focus of this paper and discussed in detail in the next section: that the legislation does not allow for a qualitative assessment as to the vulnerability of the individual party before its potentially far-reaching interventions into the parties’ freedom otherwise to contract as they see fit are triggered.

4.4 Lack of a specific vulnerability test

The apparent intent to reform the culture of the industry, enshrined most strongly in the East Coast model through its more prescriptive intervention into contracts, is reflected by the

16 Morris Iemma MP, Second Reading Speech for the Building and Construction Industry Security of Payment Bill, NSW Legislative Assembly, 29 June 1999 (Hansard p 11). Similarly, Collins (2013: 14) has more recently identified, as one of the two pillars on which his Report into construction insolvency rests, that ‘”it is against the good conscience of the community… to stand by and tolerate… a repeatedly demonstrated inability of the existing legal system to protect subcontractors against the default and the financial mismanagement of [head contractors].” 17 Certain sectors and activities are excluded: see Coggins, Fenwick Elliott and Bell (2010: 16-19). 18 See, eg, NSW Act s 12; WA Act s 9. 19 See, eg, NSW Act s 8; WA Act s 15. 20 NSW Act s 14; WA Act s 17. 21 NSW Act ss 15, 24; WA Act s 42. 22 NSW Act s 17; WA Act s 25.

legislation being deemed to apply to all arrangements within affected sectors without reference to the value of the arrangement (except in Victoria and potentially in Queensland, as discussed below).

Thus, there is no test for application which relates to the vulnerability of specific parties. Rather, the East Coast model essentially provides (see, eg, the description by Speranza (2011: 171-2)) that, where a supplier of work or services captured by the Act chooses to “opt-in” to the use of the Act, they endorse their payment claim as prescribed and the Act’s provisions relating to the payment stream and adjudication then apply. As has been noted by Bell and Vella (2010: 570-2), the potential effect of this is to reverse the bargaining position which traditionally applied in the contracting chain: instead of those who do the work having to wait to get paid, those for whom the work is done must “pay now and argue later”.

It has for many years been recognised in Australia, the UK and other places where no vulnerability-based element applies, that the legislation is being used by well-resourced and arguably non-vulnerable parties to make substantial claims by way of “ambush”. The deliberately short time-frames23 leave little opportunity for a respondent (the party from whom payment is claimed) to put forward a fully-considered case.

This limitation on respondents’ rights, along with others embedded in the East Coast model, has led Coggins to propose (2011: 43) that the model tends inherently to the denial of procedural justice (this may, however, not be unintended given that the East Coast model is essentially a certification review process: Coggins and Donohoe (2012): 213) and therefore leads to the “disconcerting” result that “multi-million dollar progress claim disputes are being resolved, albeit on an interim basis, by means of a fast track adjudication scheme which limits the adjudicator’s power to investigate and potentially bars a respondent from having its arguments heard by the adjudicator.”24

4.5 Victorian approach: distinction based on contra ct value

In Victoria, however, elements of the scheme limit its application by reference to the type of claims and the value of the contracts. Provisions which currently are unique to the Victorian Building and Construction Industry Security of Payment Act 2002 (Vic), introduced in 2006, seek to limit the use of the Act’s provisions regulating payment (including expedited adjudication) to “pure” payment claims. Thus, “excluded amounts” such as in respect of latent conditions, claims for damages and delay-related claims, cannot be included in payment claims under the Act (see ss 10A-10B) and only certain types of non-agreed variations can be included.

The mechanism for deciding which variations can be included in payment claims under the Act depends upon the value of the contract, with the legislation essentially nominating three contract value-based thresholds. If it is below A$150,000, non-agreed variations of any

23 Generally, a matter of 5-8 weeks: see Bell and Vella (2010: 569) and Coggins (2011: 49). 24 Coggins (2011: 43). See n 15 for examples of these claims.

amount may be included; if between A$150,000 and $5,000,000, 10% of the contract value can be claimed by way of non-agreed variations; and if it exceeds A$5,000,000 and the contract includes a dispute resolution clause, no non-agreed variations may be claimed.

The Second Reading speech for the amending Act gave little guidance as to the detailed policy underpinning this regime, but confirmed that the aim of placing a maximum cap was to ensure that the smaller value contracting sector and the subcontracting sector would be subject to the scheme, while larger contracts would be exempt from it.

The Victorian approach seems unnecessarily complex, especially through its incorporation of three categories rather than the single point of distinction (between parties which are vulnerable and those which are not) favoured by this paper. Nonetheless, it explicitly addresses the “mission drift” referred to above by limiting the types of claims which can be funnelled through the Act to those relating directly to the payment stream and, more generally, narrows the scope of application of the Act as the value of the contract increases. In turn, parties regarded as not being vulnerable in the relevant sense – and, therefore, falling outside the legislative scheme – retain the freedom to stipulate their own means of resolving payment-related disputes under the contract.

In December 2012, the Discussion Paper released by the Queensland Government outlined the Victorian approach (at pp 15-16) and sought submissions from stakeholders as to whether the types of payment claims under the Queensland Act’s jurisdiction should be restricted in a similar manner or otherwise (including by reference to the contract price).

4.6 Dual scheme approach to harmonisation

The unique provisions in Victoria are but a more prominent example of a raft of differences which exist between the various Australian SOP Acts, and even within the two main models’ Acts. Many commentaries on these differences have been written25 but, generally speaking, the Acts vary significantly in relation to policy, procedure, terminology and physical layout. The potential impact on commerce having been recognised, attention has turned in recent years to models which could prove viable by way of a harmonised scheme across Australia.

Coggins (see, especially, 2010, 2011 and 2012) has proposed a “hybrid” adjudication scheme which utilises either the East Coast or West Coast models depending on the amount of the payment claim. In doing so, the proposal seeks to address both of the twin problems referred to above: lack of uniformity across jurisdictions and the expedited process being used inappropriately by those who arguably are not vulnerable.26 Essentially, according to

25 See, eg, Bell and Vella (2010), Coggins, Fenwick Elliott and Bell (2010), Brand and Davenport (2011) and Coggins and Donohoe (2012). 26 As is discussed above (see n 3), Brand and Davenport (2011) have proposed a dual scheme model the distinction for which rests upon the type, rather than monetary value, of the claim. The model is attractive as a potential cure to the lack of harmonization of Australian security of payment legislation, especially because it arguably offers a closer alignment with the key policy driver of the legislation – promoting cashflow – than is currently achieved in the various Acts. The proposal is not, however, considered in detail in this paper given the focus here upon monetary value as a proxy.

Coggins’s proposal, the “regulatory” East Coast model would be used for small purely progress payments below the threshold value of $25,000 and any other claims – whether above this value or under it but incorporating matters outside payment for work undertaken – would be determined using the West Coast model’s “evaluative” process.

Coggins chose the $25,000 figure as covering a substantial proportion of the subcontractors in the lower end of the hierarchical chain, based upon a study (see 2011: 360) comparing the adjudication claim values between Queensland and Western Australia during the period 2008-2009. According to the comparison, 52% of the claims in Queensland and 30% of the claims in WA were below the value of $25,000.

5. Where do we go from here?

Ultimately, any legislative scheme which seeks to intervene into contracting arrangements to protect parties seen as vulnerable needs to strike a balance between such protection and the maintenance of certainty within the contracting community. The Coggins “hybrid” proposal goes a significant distance towards achieving such a balance in respect of security of payment, thanks largely to its incorporation of a monetary trigger. This is, however, a feature which, as noted above, is currently absent from the various Australian Acts (with the exception, in relation to variations, of Victoria).

Having said that, the A$25,000 threshold for payment claims proposed as part of the scheme inevitably may be viewed as somewhat arbitrary. Thus, in the context of security of payment legislation and other areas of construction regulation, the challenge remains to find a principled basis on which an optimal – or, at least, defensible – mark can be framed. We think that this question ought be the focus of further, detailed research, both as to the appropriate principle and, ultimately, the monetary threshold chosen.

We also suggest that the following observation from John Akehurst, then Managing Director of Woodside Petroleum Ltd, might provide guidance in striking the right balance:

“For truly successful companies, the traditional master-servant relationship of project owner and project contractor is becoming obsolete. We have learnt that by sharing the risks, we share the rewards.” (Australian Constructors Association (1999: 3))

It reminds us to be wary of blanket legislative intervention across an industry – including in its highly sophisticated and experienced sectors – where the aim is to protect those who are vulnerable due to an imbalance in bargaining power or information asymmetry.

The exercise is, however, worth embarking upon. Figures cited by Brand and Davenport (2011: 254) indicate that nearly a million people – well over 5% of the country’s adult population – are employed in construction businesses in Australia and that the vast majority of trade service businesses have relatively small turnover, with income of less than A$100,000. It is the contention of this paper that an appropriately-framed monetary threshold can provide an umbrella of protection to these thousands of businesses whilst addressing the concerns of the large and sophisticated, but relatively few, non-vulnerable entities in the industry that their freedom to contract with like entities not be unnecessarily curtailed.

References

Bell M and Vella D (2010) “From motley patchwork to security blanket: The challenge of national uniformity in Australian ‘security of payment’ legislation”, Australian Law Journal 84: 565-582.

Brand M C and Davenport P (2011) “Proposal for a ‘Dual Scheme’ model of statutory adjudication for the Australian building and construction industry”, International Journal of Law in the Built Environment 3: 252-268.

Britton P (2013) “‘Make the Developer get the Job Right’: Remedies for Defects in Residential Construction”, Society of Construction Law Paper D154.

Bruner P (2007) “The Historical Emergence of Construction Law”, William Mitchell Law Review 34: 1-24.

Coggins J (2011) “From disparity to harmonisation of construction industry payment legislation in Australia: A proposal for a dual process of adjudication based upon size of progress payment claim”, Australasian Journal of Construction Economics and Building 11(2): 34-59.

Coggins J, Fenwick Elliott R and Bell M (2010) “Towards harmonisation of construction industry payment legislation: a consideration of the success afforded by the East and West Coast models in Australia”, Australasian Journal of Construction Economics and Building 10(3): 14-35.

Coggins J and Donohoe S (2012) “A Comparative Review of International Construction Industry Payment Legislation, and Observations from the Australian Experience” International Construction Law Review 29: 195-230.

Collins B (2013) Final Report of the Independent Inquiry into Construction Industry in NSW, Sydney, NSW Government.

Department of Treasury and Finance Victoria (2009) In Pursuit of Additional Value: A Benchmarking Study into Alliancing in the Australian Public Sector, Melbourne.

Griggs L, Freilich A and Webb E (2011) “Challenging the notion of a consumer: Time for change”, Competition and Consumer Law Journal 19: 52-77.

Paterson J (2009) “The Australian Unfair Contract Terms Law: The Rise of Substantive Unfairness as a Ground for Review of Standard Form Consumer Contracts” Melbourne University Law Review 33: 934-956.

Queensland Building Services Authority (2012) Payment Dispute Resolution in the Queensland Building and Construction Industry, Brisbane.

Speranza N (2011) “An evaluation of Australian security of payment and United States construction lien law”, Building and Construction Law Journal 27: 169-193.

Payment Scenario in the Malaysian Construction Industry Prior to CIPAA

Mohamed Nor Azhari Azman1, Natasha Dzulkalnine2, Zuhairi Abd Hamid3, Kamarul Anuar Mohd Kamar4, Mohd Nasrun Mohd Nawi5

Abstract

This report is literature reviews undertaken to re-establish the state of payment problems in the Malaysian construction industry. The findings from this study will be used as a guide for further survey to measure the situation of the payment problems before the enactment of Construction Industry Payment and Adjudication Act (CIPAA). There are journals selected to be included in this study. The purposes of the journal were to discover the financial issues of late and non-payment problem related to the causes of delay in construction projects. Most of the research in the journals was carried out by adopting a combination of document analysis, law cases and review of act and statue. The possible solution to overcome the issue to the late and non-payment in construction projects were also highlighted in the journals. Based on the discussion, this research gives a general view and provides a comprehensive result of the “Payment Scenario in the Malaysia Construction Industry Prior to CIPAA”. The result in this paper covered the factors contributed to the late and non-payment problem in construction industry, impact of late and non-payment and also the possible solution towards late and non-payment problem in construction industry.

Keywords: payment, contracts, legislation, delay, a djudication

1. Introduction

Payment problems are old age issues that permeate the Malaysian construction industry. So often, contractors and parties in the construction industry complain either not getting paid or payments have been unduly delayed by the employer. The issues of late and non-payment are paramount to the construction industry as compared to other industries. This is due to the following facts; unlike many other industries, the duration of construction projects are relatively long, the size of each construction project is relatively large and each progress;

1 Lecturer; Faculty of Technical and Vocational Education; Universiti Pendidikan Sultan Idris; 35900 Tanjong Malim, Perak, Malaysia ; mnazhari@fptv.upsi.edu.my. 2 Researcher; Construction Research Institute of Malaysia (CREAM); 55200 Kuala Lumpur, Malaysia; Natasha_dzulkalnine@yahoo.com. 3 Executive Director; Construction Research Institute of Malaysia (CREAM); 55200 Kuala Lumpur, Malaysia; zuhairi@cidb.gov.my. 4 Manager; Construction Research Institute of Malaysia (CREAM); 55200 Kuala Lumpur, Malaysia ; kamarul@cidb.gov.my. 5 Lecturer; School of Technology Management and Logistic,Northern University of Malaysia, Sintok, Malaysia ; mohdnasrun@gmail.com.

payment sum involved are often relatively large, payment terms are usually on credit rather than payment on delivery, services are rendered before progress payment is made, and products become fixtures disabling removal.

A failure of the contractor in getting regular and timely payment could result in project delay, reduced profitability and in the extreme case the company may go into liquidation. It will also have a knock-on effect on the entire construction value chain because when clients do not pay the main contractors on time, the sub-contractors, suppliers, hirers and everyone in the construction value chain will suffer.

In addressing the issues on payment in the construction industry, the government has introduced the Construction Industry Payment and Adjudication Act (CIPAA). CIPAA is expected to come into operations in early 2013. The act applies to all construction contracts made in writing and that which relates to construction work carried out wholly or partly within the territory of Malaysia. Under CIPAA, a statutory right has been created for unpaid parties to demand for payment for work done.

In preparing to measure the success of CIPAA, a detailed and more accurate study needs to be undertaken in re-establishing the state of payment problems in the Malaysian construction industry. The findings from this study will be used to measure the success of CIPAA in addressing the payment problems before and after its enactment.

1.1 Introduction on CIPAA

The Construction Industry Payment and Adjudication Act 2012 (CIPAA) was recently gazetted. CIPAA is a speedy dispute resolution mechanism. The process is quick and relatively cheap, particularly in comparison to litigation and to those arbitrations that have somewhat unfortunately, for whatever reason, been allowed to become more time consuming and costly than they should have been. The construction industry, in particular, the Construction Industry Development Board (CIDB) and Master Builders Association Malaysia (MBAM) and other related promoters have been instrumental in getting the government to enact this piece of legislation since 2003 to address the cash flow problems plagued by the industry. The primary objective of the Act is to address cash flow problems in the construction industry. It removes the pervasive and prevalent practice of conditional payment (pay when paid pay if paid) and reduces payment default by establishing a cheaper and speedier system of dispute resolution in the form of adjudication. The Act also provides for the recovery of payment upon the conclusion of the adjudication process in addition to a host of other remedies such as a right to reduce the rate of work progress or to suspend work or even to secure direct payment from the principal. It offers a relatively simpler, cheaper and faster process compared to arbitration and/or court proceedings by virtue of express provisions prescribed by the proposed Act itself. The adjudicator’s decision is regarded as void and that they cannot recover their payment if they fails to make a decision within forty five (45) working days from the completion of the reference by the parties who fail with the decision. The decision is temporarily binding in that

it can still be subjected to an arbitration or litigation in court i.e. if either or both the parties so desire. In the interim, the parties need to still comply with the adjudicator& decision and pay the disputed amount unless the decision is stayed (by application made to High Court). CIPAA applies to every "construction contract" (as defined by the Act) relating to construction work carried out wholly or partly in Malaysia. It therefore affects both local and international contracts that fall within the ambit of the Act. CIPAA identifies the particular construction contracts which are included within its scope. Generally, these encompass construction work contracts and consultancy services contracts. More importantly, CIPAA only applies to contracts which are made "in writing". The Act applies equally to the Government of Malaysia as well as the Private Sector. CIPAA is wide ranging and covers inter alia, the building industry, the oil and gas industry, the petrochemical industry, telecommunication, utilities, infrastructure, supply contracts and consultancy contracts.

Findings of this study may assist the government and relevant parties in addressing problems associated to late and non-payment in an effective and timely manner to create a win-win situation for all parties in the Malaysian construction industry. It is hoped that the government and relevant parties will adopt and implement the necessary plan of action in order to minimise disputes on payment in any construction project, so as to create a friendly and enjoyable working environment for all parties and to improve the payment flows in the Malaysian construction industry. The result of this research may be of significance to the introduction of a legislation known as the Construction Payments or Security of Building Payment Act, which already enacted in many advanced countries.

2. Identification of Late and Non-Payment Problem

A delayed payment by a party who is involved in the process of payment claim may have an influence on the supply chain of payment in whole. According to the Construction Industry Working Group on Payment (2007), problems in payment at the higher end of the hierarchy will lead to a serious knock-on cash flow problem down the chain of contracts.

The previous research done by Hasmori et al. (2012) stated that client’s employees are wrongfully holding the payment and most of the time they do this to obtain some kind of “gift” from contractors once they pay out the payment. According to Ye and Abdul Rahman (2010), identified clients deliberate delay for their own financial advantages, delay in releasing of the retention monies to contractor and wilful withholding of the payment for personal reasons are the cause of the paymaster’s withholding of payment.

Based on result analysis by Ye and Abdul Rahman (2010), contractors in Malaysia perceived that delay for few day less than 5 working days is acceptable and accepted late payment from the clients as they are always at the mercy of the clients. This could be due to the inherent culture of late payment in the Malaysian construction industry that the contractors perceived late payment for a few days were acceptable.

According to Ye and Abdul Rahman (2010), delay in certification by parties involve in the project might also cause of late payment issues. The parties involve may delay in approving the application for payment claim due to certain reasons which may arise because of his own or other parties involve. The journal/ paper/ report that included in the report of Payment Scenario in the Malaysia Construction Industry: A Literature Reviews and a Report of Industry Responses 2012 are as follows, Table 1: Table 1: Factors contributed to late or non-payment in construction

Factor Description Author Paymaster’s Poor Financial Management

1. Cash flow problems because of deficiencies in client’s management capacity

2. Client’s ineffective utilization of funds 3. Scarcity of capital to finance the project for instance, client’s need

money to roll 4. Poor cash flow because of lake of proper process implementation 5. Financial failure due to bankruptcy or winding up paymaster other

business activities 6. Overlook the ripple effect of economic downturn on cash flow 7. Client’s poor financial and business management

Abdul-Rahman et al. (2011); Hasmori et al. (2012)

Paymaster’s Withholding of Payment

1. Withhold of payment by client Hasmori et al. (2012)

Conflict among the Parties Involve

1. Contractor’s misinterpretation of client’s requirement of variation order

2. Heavy work load of consultant to do evaluation for variation order 3. Argument of the amount to be paid 4. Non-payment for certified sums

Abdul-Rahman et al. (2009)

The Use of Pay When Paid Clause In Sub-Contractor

1. The sub-contractor will only be paid after the main contractor himself has received payment from the employer

Ab. Halim et al. (2010)

Local Culture / Attitude

1. Delay for few days less than 5 working days is acceptable and accepted late payment from the clients as they are always at the mercy of the clients.

Hasmori et al. (2012); Abdul- Rahman et al. (2006)

Short of current year’s project

1. Over deduction of the sum payment 2. Bank line of credit constantly borrowed to the limit

Hasmori et al. (2012); Supardi, A. et al. (2011); Ab. Halim et al. (2010)

Delay in certification

1. Delay in valuation and certification of interim payment by consultant

2. Involvement of too many parties in the process of honouring certificates

3. Issuance of payment certificate by party not in construction contract

Supardi, A. et al. (2011)

Disagree on the valuation of work done

1. Inaccuracy of valuation for work done 2. Unpaid of work done due failed on defect work 3. Decreased in productivity 4. Unclear instruction and miscommunication due to language

barriers 5. Verbal instruction given is not confirmed in writing 6. Work carry out by contractor does not comply to the specification

IMohamad et al. (2012)

Contractual Provisions

1. Contract agreements do not bring any justice to both main contractors and sub-contractors

2. Disrespectful from parties involve regarding to the contractual provisions effectiveness

Ab. Halim et al. (2010)

Technical Problems

1. Delay in processing for approval 2. Delay in receiving progress payment from client 3. Absence of a comprehensive business plan 4. Wrongly calculated claims 5. Without using the right procedures 6. Claims without adequate supporting documents 7. Errors in submitting claims 8. Failure to identify technical problem and remedial action to be

taken 9. Insufficient information and poor documentation on work

progress 10. Inexperience of site supervisor and contractor’s representative 11. Unclear material description and details in specification and

drawing 12. Actual quantities does not match as stipulated in Bill Quantities

(BQ) 13. Incomplete claim document

Ab. Halim et al. (2010); Abdul - Rahman et al. (2009)

3. Impact of Late and Non-Payment

Haseeb et al (2011) identify the four major factors which caused the delay in construction and these are client problem, service provider problem, sources problem and universal problem. Based on the survey results, client factor is identified as a major factor causing the delay in construction with the inability to make payment due to economic background and lack of financial arrangement for the project (Hasseb et al., 2011). In addition, the breakdowns of equipment and labour disputes caused the delay in completion of the project.

Delays in construction projects lead to serious consequences that may retard the development of the construction industry and influence the overall economic condition of a country (Abdul-Rahman et al., 2009). According to Abdul-Rahman et al. (2009), delay in the completion of construction projects could be the greatest cause for extra cost and loss in financial return or other benefits from project. Thus, delay is costly for both owner and contractor. To the owner, a delay means loss of potential revenue, whereas to the contractor, a delay means increased costs in overhead.

Payment has been an issue of major concern in the construction industry and majority of contractors reported that they have went through late payment situation in government funded projects whilst more of them affirmed the same situation in private funded projects as told by Hasmori et al (2012).The late payment issues in the construction industry is a global phenomenon and in Malaysia the impact of this problem had cause a massive destruction to the country’s economic and this have tarnish the good image of the construction industry. The impact of late and non-payment are described in Table 2.

Table 2: Impact of Late and Non - Payment

Impact Description Author Creates negative chain effect on other parties

The construction payment blues have domino effects. A delayed payment by one party may affect the whole supply chain of payment of a construction project. For instance, if an employer delays in making payment to the contractor this in turn will result in contractor's delay in making payment to the sub-contractors and suppliers.

Mohamad et al. (2012)

Results in delay in completion projects

Late payment causes cash flow problems which in turn can affect the overall progress of works. Financial problem is confirmed by the top management as the main cause of delay in addition to manpower shortage.

Abdul-Rahman et al. (2009) Haseeb et al. (2011)

Leads to bankruptcy or liquidation

Late payment may affect the financial status of the contractor. It will influence a company’s cash position.

Ab. Halim et al. (2010)

Project delay A failure of the Contractor getting regular and timely payment could result in project delay, reduced profitability and in the extreme case, the company may go into liquidation

Judi and Rashid (2010)

Affect the contractors reputation

Frequent late payments could result in loss of reputation, trade credit constraints, and reduced credit ratings

Hasmori et al. (2012)

Profitability of the project

The profit margin is small and this situation can led a player to go on bankruptcy and there goes another project on abandoned list

Hasmori et al. (2012)

4. Potential Solution of Late and Non – Payment Iss ues

Regarding cash flow management, Abdul-Rahman et al (2011) suggested that the clients to be trained on cash flow management and financial management whereas the contractors should accessing risk management in managing material, transportation, labour and maintenance. Apply payment bond with bank and client is also the suggestion that should be taken in account.

Contractor need to be smart in accepting the contract and to choose a good paymaster (Abdul-Rahman et al., 2011). Before any payment is being certified, it is a contractual responsibility of the committee to also monitor whether the claim is made in accordance to the terms, product delivery and other criteria prescribed. In fact, 98 percent of such processing can be completed within 10 days. If the payment is late, the finance officer must inform the reason for the delay in writing (Hasmori et al., 2012).

Legislation should be amended to give a clear message to constructors and clients as to clarity the payment matters and refund procedures said by Abdul-Rahman et al. (2011). Termination at common law can only take place where one party commits a breach of contract, and that breach amounts to a repudiatory breach. A party is said to have repudiated a contract if he expressed by his words or conduct that he does not intend to be bound by the contract or to perform his obligations. Normally, refusal by the Employer to pay sums due is clearly a default and Contractor can take action based on such reason. But, failure to pay one installment out of many is not ordinarily sufficient to amount repudiation.

Hasmori et al. (2012) said that the remedies to overcome the late and non-payment is by adopting a new way of payment method among developers or clients whom wrongfully

withholding the payment. Penalties shall also be given personally to the employees if they are found wrongfully withholding the payment. Table 3 show the potential solutions of late and non-payment issues in construction industry.

Table 3: Potential solutions of late or non-payment issues

Solution Description Author Financial Management

1. To conduct training on cash flow management and financial management

2. Accessing risk management in managing material, transportation, labour, and maintenance.

3. To apply payment bond with bank and client.

Abdul- Rahman et al. (2011)

Contractual Matters

1. To be smart in accepting the contract and to choose a good paymaster. 2. Determining the contract with the Employer 3. The development of principles of modern construction contracts 4. There should be a specific clauses in the contract related to managing

construction failure.

Abdul-Rahman et al. (2011); Hasmori et al. (2012)

Legislation 1. Legislation should be amended to give a clear message to constructors and clients as to clarity the payment matters and refund procedures.

2. A right to a speedy dispute resolution mechanism 3. A right to suspend work 4. A right to regular periodic payment. 5. Applying charges to overdue payments. 6. A right to a defined time frame for payment 7. Collection period (CP) in 48 days. 8. A specific agencies or bodies must be existed for the party involved to

set guideline in resolving that matters.

Abdul- Rahman et al., (2011); Judi and Rashid (2010)

New way of payment method

1. Adopting a new way of payment method among developers or clients whom wrongfully withholding the payment.

Hasmori et al., (2012)

Local Attitude 1. Fundamental change in the mind-set towards timely payment and statutory enactment to deal with payment in construction industry

Hasmori et al. (2012)

Technical Issue 1. The detail and proper procedures of claim issuance to resolve matters arising

2. The relevant provisions of construction failure should be stated in separate clause due to its scope of event.

Mohamad et al. (2012)

Financial institution

1. Reduced interest rates/bank fees for businesses with robust cash flow management

2. Extension of credit facilities on a temporary basis 3. Seasonal repayment/ payment based on money flowing into the

business 4. Repayment holidays 5. Slow or delayed start to repayment terms 6. Access to free/ heavily subsidised cash flow software

Figure 1 illustrates the framework of the study which includes the factor, impact and solution of late

and non-payment in construction industry.

Paymaster’s Poor Financial

Paymaster withholding of

Conflict among the parties involved

The Use of Pay when Paid clause

Short of current year’s project

Local Culture/

Delay in certification

Disagree on the valuation of work

Contractual

Technical problems

Creates negative chain effect on other parties

Results in delay in completion projects

Leads to bankruptcy or liquidation

Project Delay

Affect the contractor’s reputation

Profitability of the project

Financial institution

Technical issue

Local attitude

New way of payment method

Legislation (CIPAA)

Contractual Matters

Financial Management

Factor

Impact

Solution

Figure 1: Framework of the study

5. Conclusion

The literature described above show that there are ten (10) factors that may contributed to the late and non-payment in Malaysian construction industry. The most significant factors that may contribute to the late and non-payment are short of current year’s project and technical problem. The problem caused late and non-payment in current year’s project include over deduction of the sum payment and bank line of credit constantly borrowed to the limit. The technical problem that may be the causes to the late and non-payment problem are mostly because of delay in processing for approval, delay in receiving progress payment from client, absence of a comprehensive business plan and wrongly calculated claims.

Based on the survey done by researcher mentioned above, the impact of those factors in late and non-payment problem are creates negative chain effect on other parties, results in delay in completion projects, leads to bankruptcy or liquidation, project delay, affect the contractors reputation and profitability of the project. The worst impact that may be happen when late and non-payment occur is the profit margin is small and this situation can led a player to go on bankruptcy and there goes another project on abandoned list.

The factors and impacts of the late and non-payment can be solved through financial management, contractual matters, legislation, new way of payment method, local attitude, technical issue and financial institution. Based on the survey done by the researcher, financial management is the best way to resolved late and non-payment issue.

References

Abdul-Rahman H, Wang C, Takim R and Wong S M (2011) “Project Schedule Influenced by Financial Issues: Evidence in Construction Industry.” Scientific Research and Essays 6: 205-212.

Abdul-Rahman H, Takim, R and Wong, S M (2009) “Financial-related Causes Contributing to Project Delays.” Journal of Retail & Leisure Property 8: 225-238.

Abdul-Rahman H, Danuri M S M, Munaim M E C and Chen W (2006) A Report of a Questionnaire Survey on Late and Non-Payment Issues in the Malaysian Construction Industry, Kuala Lumpur, Construction Industry Development Board (CIDB).

Cheng T Y W, Soo K L, Kumaraswamy M M and Wu J (2009) “Security of Payment for Hong Kong Construction Industry Workable Alternatives and Suggestions.” Building Journal Hong Kong China, 60-77.

Graydon (2012) Research on Payment Culture, Forum of Private Business.

Haseeb M, LU X, Dyian M, and Rabbani W (2011) “Problems of Projects and Effects of Delays in the Construction Industry.” Australian Journal of Business and Management Research 1: 41-50.

Hasmori M F, Ismail I and Said I (2012) “Issues of Late and Non-Payment Among Contractors in Malaysia”, 3rd International Conference on Business and Economic Research Proceeding, 12-13 March 2012, Golden Flower Hotel, Bandung, Indonesia.

Mohamad F M, Nekooie M A and Che Kamaruddin N (2012) “The Adequacy of Contractual Provisions in Managing Construction Failure in Malaysia.” European Journal of Business and Management 4: 22-37.

Judi S S and Abdul Rashid R (2010) “Contractor’s Right of Action for Late or Non-Payment by the Employer.” Journal of Surveying, Construction & Property 1: 65-95.

Maritz M J and Roberston A D (2011) “When Clients do not Pay: A Critical Analysis of the Legal Remedies Available to the South African Building and Civil Engineering Contractors and Consultants.” University of Pretoria.

Maritz M J (2007) “An Investigation into the Adjudication of Disputes in the South African Construction Industry.” The Construction and Building Research Conference of the Royal Institution of Chartered Surveyors, Georgia Institute of Technology, USA.

Nazir N Z (2006) Late Payment Problems Among Contractors in Malaysia, MSc, Universiti Teknologi Malaysia (UTM).

Ramachandra T and Rotimi J O (2011) “The Nature of Payment Problems in the New Zealand Construction Industry.” Australasian Journal of Construction Economics and Building 11: 22-33.

Sambasivan M and Soon Y W (2006) “Causes and Effects of Delays in Malaysian Construction Industry.” International Journal of Project Management 25: 517-526.

Saad H (2008) Revising Contract Sum: The Employer Right to Set-Off Payment, MSc Universiti Teknologi Malaysia (UTM).

Sim L C (2007). What Constitute A Variation in Construction From Legal Perspective, MSc Universiti Teknologi Malaysia (UTM).

Supardi A, Adnan H and Mohammad M F (2011) “The adequacy of Malaysian security of payment legislation for sub-contractors in construction industry”, Sixth International Conference on Construction in the 21st Century, 5-7 July 2011, Kuala Lumpur, Malaysia.

Ye K M and Abdul-Rahman H (2010) “Risk of Late Payment in the Malaysian Construction Industry.” World Academy of Science, Engineering and Technology 41: 538-546.

Should the application and practice of construction adjudication be underpinned by legislative

intervention in the South African construction industry?

Vaughan Hattingh1 and Marthinus Johannes Maritz2

Abstract

Adjudication has, through various initiatives of the South African government, the Construction Industry Development Board and the increased use of international standard form construction contracts, become relatively commonplace among both the public and private sectors, as the first tier for dispute resolution on construction projects across the South African construction industry.

This paper shall consider these initiatives and developments to confirm whether adjudication practice in the South African construction industry should be underpinned by legislative intervention and if so, then consider what key legislative measures could (and should) be incorporated into such legislation to effectively regulate the application and practice of adjudication in the South African construction industry.

Keywords: South Africa, ADR, construction adjudication, legislative intervention

1. Introduction

We do not intend that adjudication should be used simply to postpone resolving disputes. We have had enough of disputes within the construction industry. Government, the industry and its clients want to see an end to them; they are expensive and damaging to the industry’s productivity and reputation3.

It certainly seems that construction contracts go wrong; everybody knows that. It is one of the problems of construction. The problems have intrigued, one might say obsessed, the industry and government for 50 years4. Since 1995 the post-apartheid South African government have similarly obsessed in the pursuit of procurement reform, especially in

1 Director: MDA Consulting (Pty) Ltd, South Africa; PO Box 883, Northlands, South Africa , 2116;

vhattingh@mdaconsulting.co.za 2 Head: Department of Construction Economics; University of Pretoria, South Africa; Private Bag X20, Hatfield, South Africa, 0028; tinus.maritz@up.ac.za 3 Robert Jones, Minister for Construction Planning and Energy Efficiency, Hansard, 7.5.96 column 54. Quoted in Coulson

Peter (Sir), Construction Adjudication, Second Edition, Oxford University Press, 2011 at page 13. 4 Fenn. P, Why construction contracts go wrong (or an aetiological approach to construction disputes, a paper given at a

meeting of the Society of Construction Law in Derbyshire on the 5th of March 2002, (2002), at page 1, downloadable on www.scl.org.uk.

introducing appropriate methods for effective dispute resolution into the construction industry.

Recognising the entrenchment of alternative dispute resolution (ADR) procedures for resolving labour disputes in the Labour Relations Act No. 66 of 19955 and successful application of ADR procedures in the private sector, the White Paper on Creating an Environment for Reconstruction Growth and Development in the Construction Industry6 commits the public sector to promoting the application of ADR procedures, in particular adjudication, in the South African construction industry7.

In promoting adoption of adjudication into the South African construction industry the White Paper confirms that recommendations adapted largely from the Latham report will be introduced to the construction industry, specifically for public-sector contracts8. Latham9among other things recommended that a system of adjudication should be introduced within all the Standard Forms of Contract (except where comparable arrangements already exist for mediation or conciliation) and that this should be underpinned by legislation... 10.

2. South African government driven initiatives since 1995: putting adjudication into practice.

Through a series of interventions since 1995 the South African government has, particularly in public sector construction activities, ensured the general implementation of …an accelerated and cost effective form of dispute resolution that, unlike other means of resolving disputes involving a third party intermediary, the outcome is a decision by a third party which is binding on the parties in dispute and is final unless and until reviewed by either arbitration or litigation... that ...is not arbitration or litigation...11. The South African government’s interventions have unfortunately stopped short of implementing Latham’s principal recommendation that the system of adjudication introduced should be underpinned by legislation, typically referred as security of payments or construction contracts legislation.

The Inter-Ministerial Task Team on Construction Industry Development, Focus Group 512 published the ADR Guidelines for Public Sector Contracts, Working Document Draft 5, largely adopting Latham’s recommendations13 in twelve principles recommended for underpinning the application of adjudication in the South African construction industry. These

5 The Labour Relations Act No. 66 of 1995 was enacted to, inter alia, provide simple procedures for the resolution of labour

disputes through statutory conciliation, mediation and arbitration (for which purpose the Commission for Conciliation, Mediation and Arbitration is established), and through independent ADR services accredited for that purpose.

6 The “White Paper on Creating an Enabling Environment for Reconstruction, Growth and Development in the Construction Industry”, published under Notice 89 in Government Gazette No 18615, Volume 391 on 14 January 1998.

7 Refer to note 4 above under paragraph 4.1.5.3 [ADR]. 8 Refer to note 4 above. 9 Latham, M. (1993) Trust and Money. Interim Report of the Joint Government / Industry Review of the Procurement and

Contractual Arrangements in the United Kingdom Construction Industry, London: HMSO. Latham, M. (1994) Constructing the Team. Final Report of the Government/Industry Review of the Procurement and Contractual Arrangements in the United Kingdom Construction Industry, London: HMSO.

10 Refer to note 7 above, Constructing the Team, at paragraph 9.14. 11 Best Practice Guideline Number #C3: Adjudication, September 2005, Second Edition of CIDB document 1011,

downloadable on www.cidb.org.za 12 Inter-Ministerial Task Team on Construction Industry Development; Proposed ADR Guidelines for Public Sector Contracts,

Working Document Draft 5, Pretoria, Nov 1999. 13 Refer to note 7 above.

principles were subsequently incorporated into the South African National Standards Authority Standard for construction procurement processes, methods and procedures, edition one, 2004 (SANS 294: 2004)14, which requires that …[A]djudication shall be applied to all categories of construction contracts (viz. engineering and construction works services and supplies), at both prime and subcontract level, and shall be a mandatory requirement for the settlement of disputes before the completion of a contract...15.

Section 2 [Establishment of CIDB] of the Construction Industry Development Board Act 38 of 200016 established the Construction Industry Development Board (CIDB) as a schedule 3A public entity and juristic person with legislated authority to realise the objectives detailed in section 4 [Objects of CIDB] and perform the functions prescribed in section 5 [Powers, Functions and Duties of CIDB] of the CIDB Act 38 of 2000. The CIDB was formerly launched by the then Deputy President, Mr. Jacob Zuma, on 24 April 2001.

The CIDB’s mandate is to ...exercise leadership and foster the co–operation of industry stakeholders to pursue development objectives, improved industry practices and procedures – which will enhance delivery, performance and value for money, profitability and the industry’s long term survival in an increasingly global arena...17. In realising procurement reform and implementation of adjudication the CIDB issued two pivotal best practice guidelines during 2005.

Although the CIDB’s best practice guidelines do not carry the force of law (as do CIDB notices published in the Government Gazette) each one is a critical component of the CIDB’s uniform standards, which (together with the ethical standards) pursuant to Section 4 (f) and section 5 (4) of the CIDB Act 38 of 2000 …regulate the actions, practices and procedures of parties engaged in construction contracts... Through CIDB Notice 86 of 2010 titled “Standard for Uniformity in Construction Procurement” in Government Gazette No. 29138 of 18 August 2006 these uniform standards (incorporating the obligation to comply with and implement) the best practice guidelines when engaging in construction activities have become firmly entrenched in South African construction practice.

In March 2004 the CIDB issued its own adjudication procedure18 specifically requiring that …adjudication shall be conducted in accordance with the edition of the CIDB Adjudication Procedure which is current at the date of issue of a notice in writing of intention to refer the dispute to adjudication...19. This adjudication procedure is based on the adjudication procedure developed by the Institution of Civil Engineers detailed in the Institution of Civil Engineers Adjudication Procedure20, with minor changes made to incorporate South African requirements and to remove inapplicable references to the Housing Grants, Construction and Regeneration Act, 1996 (HGCRA) and the institute itself.

14 South African National Standard 294, published by Standards South Africa, 2004 downloadable on www.stansa.co.za 15

Refer note 12 above at page 85. 16 Published in Government Gazette No 121755, Volume 425 on 17 November 2000. 17 Refer note 4 above, item 8.4.1 [Aims] at page 54. 18 Construction Industry Adjudication Procedure, March 2004, First Edition of CIDB document 1014, downloadable at

www.cidb.org.za. 19 Refer to note 16 above, paragraph 2.1 on page 1. 20 The Institution of Civil Engineers Adjudication Procedure, published by Thomas Telford, December 1998.

Best Practice Guideline #C2: Choosing an appropriate form of contract for engineering and construction works21 requires that ...[I]n order to make procurement reform effective in the manner intended, employers in the engineering and construction industry need, amongst others, to revisit the standard forms of contract which are in use. The current approach of having, probably, as many standard forms of contract as there are disciplines in the industry, together with a considerable number of in-house forms of contract, neither makes for efficiency nor does it enable a focussed approach to skills training necessary for development and growth. This applies to both private and public sector work...22.

The standard form construction contract23 is negotiated at industry level through an inclusive consultative process with various industry stakeholders and specifically designed to reflect current industry norms and practices. The product is a set of documents representing industry norms and practices as they are perceived and experienced at a particular point in time by a constituent representative group.

Best Practice Guideline #C224 requires public sector employers to employ either the Fédération Internationale des Ingenieurs – Conseils 1999 first editions of four standard form construction contracts (FIDIC, First Edition, 1999), the General Conditions of Contract for Construction Works, First Edition (GCC 2004)25, the Joint Building Contracts Committee Series 2000 (JBCC 2000) and the New Engineering Contract Third Edition (June 2005) family of standard contracts (NEC 3) (with limited variations) to regulate construction activities.

Implementation of Best Practice Guideline #C226 has resulted in the practical introduction of multi tiered dispute resolution processes …spanning the area between the adjudicatory dispute resolution systems (including litigation, arbitration, adjudication, and expert determination) and simple negotiation … as an alternative or precursor to arbitration or litigation...27 as a norm in South African construction industry dispute resolution practice.

Best Practice Guideline #C3: Adjudication28 issued during September 2005 reconfirms the applicability of the principles underpinning adjudication practice (as specified in SANS 294: 2004). The guideline requires that adjudication …be introduced as a means of dispute resolution in all the CIDB recommended forms of contracts (supplies, services and

21 Best Practice Guideline #C2: Choosing an appropriate form of contract for engineering and construction works, Second

edition of CIDB document 1010, September 2005 downloadable on www.cidb.org.za, sets out in Annexure 1 at page 15, the essential and desirable criteria, as well as the rationale for such criteria, for acceptable forms of engineering and construction works contracts in South Africa.

22 Refer to note 19 above at page 1. 23 The South African courts have consistently interpreted industry standard form construction contracts as typical contracts

created by the parties before them, falling squarely within the parameters of the general principles of the law of contract with little (if any) regard for the fact that industry standard form construction contracts are industry specific, drafted after extensive input from stakeholders in every facet of the industry with the benefit of cross industry bargaining and consultation. This approach is typified in the judgement of McEwan J in Smith v Mouton 1977 (3) SA 9 (W) at paragraph 12.

24 Refer to note 19 above at page 1. 25 The South African Institute of Consulting Engineers (referred to as “SAICE”) sixth edition General Conditions of Contract for

Civil Engineering Works standard form construction contract was replaced in 2004 with the General Conditions of Contract for Construction Works, First Edition (GCC 2004) “... to satisfy the Construction Industry Development Board’s requirements for standard conditions of contract...” (at page (iii)).

26 Refer to note 19 above at page 1. 27 Capper, P. Robert Hunter R, Choice of Dispute Resolution Procedure (extract from a note), Lovells at page 8. 28 Best Practice Guideline Number # 3:Adjudication, September 2005, Second Edition of CIDB document 1011, downloadable

on www.cidb.org.za

engineering and construction works) identified in Best Practice Guideline #C1, Preparing procurement documents, and in all the forms of subcontract identified in Best Practice Guideline #D1, Subcontracting arrangements…29. The principle that adjudication ...shall be a mandatory requirement for the settlement of disputes before the completion of a contract...30 is unequivocally reinforced.

3. South African construction industry participation: adjudication in practice

In addition to the South African government’s interventions in ensuring the adoption of an ad hoc adjudication into the South African construction practice, the industry itself has largely embraced procedure ...whereby the parties agree to confer jurisdiction on an adjudicator to decide the particular dispute that has arisen between them…31 as a means ...to find some sensible resolution of their problem and then get back to their real business…32.

Bvumbwe and Thwala (2011) conducted a study to determine which of the spectrum of ADR procedures (including specifically mediation and adjudication) are most frequently deployed through the South African construction industry in resolving construction disputes. They concluded that although …mediation is the most frequently used method in resolving disputes in the construction industry ... the majority of respondents would prefer the inclusion of adjudication as the priority in resolving dispute before arbitration...33.

Van der Merwe (2009) conducted a comparative study of the application of both mediation and adjudication across the South African construction industry to determine which of the two dispute resolution methods is better suited to resolve construction disputes in the South African construction industry. In concluding that adjudication is preferable van der Merwe concludes …that both mediation and adjudication are effective alternative methods of dispute resolution as to litigation and arbitration. Although adjudication has a weakness in the enforceability of the decision of the Adjudicator, it still has an advantage over mediation...34.

Maritz (2007) overviews the development of adjudication in the South Africa construction industry, considering its effectiveness in resolving construction disputes, the extent to which adjudication has been utilised since its introduction into the South African construction industry and concludes that ...[E]xperience in other countries who have introduced adjudication has shown that adjudication without the statutory force is not likely to be effective. Enforcement of the adjudicator’s decision is critical to the success of adjudication and before South Africa introduces an Act similar to Acts such as the Housing Grants, Construction and Regeneration Act 1996 (UK), the Construction Contracts Act 2002 (NZ) or

29 Refer to note 26 above under paragraph 4.1 [General] at page 4. 30 Refer note 26 above. 31 Coulson Peter (Sir), Construction Adjudication, second edition, Oxford University Press, 2011 at page 185. 32 Mr. Justice Jackson, The Tower of Babel: What happens when a building contract goes wrong, The 2006 Denning Lecture

given in Gray’s Inn, London on 28th November 2006, downloadable from www.scl.org.uk. 33 Refer to page 35. 34 Refer to page 50.

Building and Construction Industry Security of Payment Act 2004 (Singapore) adjudication will remain largely ineffective and, therefore, underutilised in the South African context…35.

Gaitskil (2007), echoing Maritz’s observations, argues that …[I]n order for adjudication to have any real impact it had to be compulsory so that powerful employers or main contractors could not simply strike such clauses out of contracts they made. This meant that there had to be legislation which simply imposed adjudication on all parties in the construction industry...36.

Following an investigation into the implementation of ad hoc adjudication in the South African construction industry Maiketso and Maritz (2009) concluded …that adjudication has found acceptance in the SA construction industry. However, it still has some way to go before its potential can be realised in full. Certain challenges need to be overcome to enable this to happen, which range from the contractual, institutional and legislative framework, to matters of skills and training...37.

4. Finding the appropriate legislative framework to underpin adjudication practice

Statutory adjudication was first introduced into the United Kingdom through enactment of Part II of the HGCRA which came into force in May 1998. The Local Democracy Economic Development Act, 2009 subsequently effected changes to the adjudication and payment provisions contained in the HGCRA. Three years after enactment of the HGCRA the state of New South Wales (NSW) enacted the Building and Construction Industry Security of Payment Act, 1999 (the NSW Act), modelled on the HGCRA. The NSW Act served as the model upon which most other Australian jurisdictions, to varying degrees, based their construction contracts legislation, culminating in the Tasmanian Act which received Royal Assent on 17 December 2009.

Other states and territories across Australia including Victoria38, Queensland39, Northern Territory40, Western Australia41, Australian Capital Territory42, South Australia43 and Tasmania44 have each enacted similar legislation. The Western Australia and Northern Territory models differ significantly from the other Australian legislation in respect of the underlying conceptual framework and content. An examination of each act not only exposes differences between the West Coast and East Cost models but also significant disparities between the acts within each division revealing the ...law as a multi-headed hydra rather than a guardian angel....

35 Refer to page 9. 36 Refer to page 777. 37 Refer to page 1566. 38 The Victoria Building and Construction Industry Security of Payment Act 2002 (amended in 2006). 39 The Queensland Building and Construction Industry Payments Act 2004. 40 The Northern Territory Construction Contracts Act 2004. 41 The Western Australia Construction Contracts Act 2004. 42 The Australian Capital Territory Building and Construction Industry (Security of Payment) Act 2009. 43 The South Australia Building and Construction Industry Security Of Payment Act 2009. 44 The Tasmanian Building and Construction Industry Security of Payment Act 2009.

The CIDB has made a concerted effort to overcome the challenges referred to by Maiketso and Maritz (2009) by initiating the procedure stipulated in section 33 [Regulations] of the CIDB Act 38 of 2000 to put in place the legislative framework necessary to underpin adjudication practice in the South African construction industry.

During September 2012 the CIDB finally approved draft regulations consisting of Part IV C titled “Prompt Payment” and Part IV D titled “Adjudication” (the “draft regulations”45) including a Standard for Adjudication (“the Standard”) which have been submitted to the Minister of Public Works46, advising that the draft regulations be promulgated by the Minister of Public Works as regulations under and in terms of section 33(1)47 of the CIDB Act 38 of 200048.

4.1 Key features of the proposed legislative framework

Certain key features of the proposed legislative framework shall be considered in light of similar provisions in the HGRCA Act and the NSW Act.

Section 1 [Application] of Part IV C of the draft regulations make the regulations applicable across both public and private sectors where contracting parties have concluded either in writing or orally any contract regulating execution of ...construction works... or ...construction works related contract...49 (collectively referred to as the “construction contract”) despite the provisions of any of those contracts. The regulations will specifically not apply to a home building contract as contemplated in the National Home Building Regulatory Council Act50.

Unlike under the NSW Act, which restricts access to the adjudication procedure, under sub clause (1) of regulation 26 P [Right to refer disputes to adjudication] either party to the construction contract will acquire the statutory right to refer a dispute arising under the construction contract to adjudication.

What would constitute a dispute is specifically defined in sub clause (2) of regulation 26 P [Right to refer disputes to adjudication] as including …any difference between the parties in relation to the contract...51. The broad definition of a dispute arising under a construction contract defined in sub clause (iii) of Part 1: The Adjudicator [General Principles] accords with the general approach adopted in section 108 (1) of the HGCRA which provides that …a

45 A copy of the draft regulations dated 20 August 2012 shall be made available during the presentation of the paper. 46 Section 8 of the Construction Industry Development Board Act 38 of 2000 provides that the Board “ .. may advise the

Minister on policy and legislation impacting on the construction industry or propose amendments to this Act to the Minister..”.

47 Section 33 (1) of the Construction Industry Development Board Act 38 of 2000 provides that “…The Minister may, by notice in the Gazette, make regulations not inconsistent with this Act with regard to any matter that is required or permitted to be prescribed. In terms of this Act and any other matter for the better execution of this Act or in relation to any power granted or function or duty imposed by this Act...”

48 Refer to note 14 above. 49 “Construction works” are defined under sub paragraph (j) of section 1 [Definitions] of the Construction Industry

Development Board Act 38 of 2000 as “..the provision of a combination of goods and services arranged for the development, extension, installation, repair, maintenance, renewal, removal, renovation, alteration, dismantling or demolition of a fixed asset including building and engineering infrastructure ..”. The regulations supplement this definition by including a “...construction works related contract...” which defined under section 2 [Amendment of Regulation I of the Regulations].

50 Within the regulatory framework of the South African construction industry homebuilding does not fall under the auspice of the Construction Industry Development Board Act 38 of 2000, but is regulated under the National Home Building Regulatory Council Act. Amendments are being introduced into the National Home Building Regulatory Council Act which will mirror these Regulations.

party to a construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with this section. For this purpose, dispute includes any difference.... The HGCRA allows all types of disputes to be referred to adjudication and enables a contractual adjudication regime to run in parallel with statutory adjudication system. The NSW Act is purely statutory allowing only progress payment related disputes to be adjudicated.

Sub clause (1) of regulation 26 P [Right to refer disputes to adjudication] creates a statutory obligation on the parties to a construction contract to provide for an adjudication procedure to resolve disputes arising under the construction contract in the express terms of each construction contract.

Part 1: [The Adjudicator] of the Standard defines “adjudication” as the process contemplated in Part IV D, which procedure …shall be neither arbitration nor an expert determination...52. The characterization of the proposed statutory adjudication procedure as not being an arbitration accords squarely with the position taken by Katheree – Setiloane AJ in Freeman, August Wilhelm N.O, Mathebula N.O, Trihani Sitos N.O v Eskom Holdings Limited53 that the adjudication process ...is not an arbitration and it is therefore not subject to the common law, or section 3 of the Arbitration Act 42 of 1965...54.

The adjudication procedure provided for must …substantially comply... with Part IV D. Failing which the provisions of Part IV D read together with the Standard shall by default apply in each instance. In order to …substantially comply... with Part IV D the adjudication procedure provided for must be constructed around six fundamental requirements specified in sub clause (4) of regulation 26P [Right to refer disputes to adjudication]55. Should the adjudication procedure not incorporate all six requirements the adjudication procedure will by default be implemented in accordance with the provisions of Part IV D and, more particularly, the Standard.

Sub clause 1(a) of regulation 26 V [Period within which adjudicator must make decision] provides that the adjudicator must reach his decision …28 days after receipt of the referral notice contemplated in 26P... The twenty eight day time frame within which an adjudicator must reach a decision accords with the approach implemented under the HGCRA56. The NSW Act provides a ten business day period from the date of the adjudicators notification of appointment57 for the adjudicator to reach the decision.

53

Freeman, August Wilhelm N.O, Mathebula, Trihani Sitos de Sitos NO v Eskom Holdings Limited (unreported judgment of the South Gauteng High Court dated 23 April 2010).

54 Refer to note 51 above at paragraph 23

55 The six fundamental requirements which must be incorporated into the adjudication procedure provided for in each construction contract must “ …(a) enable a party to give notice at any time of his or her intention to refer a dispute to adjudication; (b) provide a timetable with the object of securing the appointment of the adjudicator and referral of the dispute to him or her within seven days of such notice; (c) require the adjudicator to reach a decision within 28 days of referral; (d) allow the adjudicator to extend the period of 28 days by up to 14 days, with the consent of the party by whom the dispute was referred; (e) impose a duty on the adjudicator to act impartially; and (f)enable the adjudicator to take the initiative in ascertaining the facts and the law ...”.

56 Section 108(2)(c) of the HGRCA and paragraph 19(1)(a) of the Scheme. 57 Section 21(3) of the NSW Act.

As Maritz (2007) correctly observes …[E]nforcement of the adjudicator’s decision is critical to the success of adjudication...58. Neither the HGCRA, nor the Scheme for Construction Contracts (the Scheme) entrenches a procedure for enforcing adjudicator’s decisions. The HGCRA simply provides that adjudicator’s decisions are binding unless and until overturned by agreement, arbitration or litigation59. Paragraph 23 (2) of the Scheme similarly provides that the decision is binding pending final resolution by agreement, arbitration or litigation. The absence of an enforcement mechanism entrenched in the legislation was initially perceived as a critical flaw in the legislation. Fortunately the English courts have consistently adopted a robust approach in the enforcement of adjudicator’s decisions60 ensuring that Parliaments intention in introducing the legislation was not thwarted. In contrast the NSW Act entrenches a procedure for enforcing adjudicator’s decisions in the legislation allowing the aggrieved party to recover an unpaid progress payment or an adjudicated amount as a statutory debt in court. These procedures provide certainty as to how the unpaid amount will be recovered.

The NSW decision in Brodyn Pty Ltd t/a Time Cost and Quality v Davenport & Anor61 has been relied upon by Australian courts as authority for refusing to interfere in erroneous adjudication decisions under the legislation. Favouring a policy shift towards a regime with minimum opportunity for court involvement in the statutory adjudication process Brodyn Pty Ltd t/a Time Cost and Quality v Davenport & Anor substantially limited the basis upon which adjudicator’s decisions were open to challenge to instances where there is shown to be some non-satisfaction of a basic and essential requirement(s)62 which the NSW Act prescribes for the existence of an adjudicator’s determination. The NSW Court of Appeal in Chase Oyster Bar v Hamo Industries63 overturned Brodyn Pty Ltd t/a Time Cost and Quality v Davenport & Anor significantly, widening the scope for challenging adjudicators’ determinations by holding that adjudicators’ determinations are open to judicial review by the courts on jurisdictional grounds.

Sub clause 1 of regulation 26 X [Effect of adjudicator’s decision] of Part IV D specifically obliges the parties to give effect to the adjudicator’s decision within ten days of the decision being notified to the parties irrespective of whether not the decision will be challenged. This approach has been upheld in Basil Read (Pty) v Regent Devco (Pty) Ltd64 with Mokgoatlheng J holding that where ...the contract and Adjudicator’s Rules state that the parties are bound to act in accordance with the adjudicator’s determination until such time as it is set aside by an arbitrator. Declaring a dispute in relation thereto does not relieve the respondent of its contractual obligation...

58 Refer to page 1566. 59 Section 108(3) of the HGRCA. 60 See for example Balfour Beatty Construction Ltd v the Mayor & Burgess of the London Borough of Lambeth [2002] EWHC

597. 61

Brodyn Pty Ltd t/a Time Cost and Quality v Davenport & Anor [2004] NSWCA 394. 62

The essential basic requirements are summarised by Hodgson JA at paragraph 53 of Brodyn Pty Ltd t/a Time Cost and Quality v Davenport & Anor [2004] NSWCA 394.

63 Chase Oyster Bar v Hamo Industries [2010] NSWCA 190.

64 Basil Read (Pty) v Regent Devco (Pty) Ltd (an unreported decision of the South Gauteng High Court handed down on 09

March 2010).

Sub clause 2 of regulation 26 X [Effect of adjudicator’s decision] of Part IV D provides that …the decision of an adjudicator constitutes a liquid document or in the case where it orders the payment of an amount of money, a liquidated amount as contemplated in rule 32(1) of the High Court rules... This provision goes further than the HGCRA and the Scheme providing mechanisms to recover unpaid amounts by effectively enabling the claimant to institute either provisional sentence proceedings65 or summary judgement proceedings66 on the adjudicator’s decision itself as a liquid document evidencing a liquidated amount due, owing and payable.

In addition to the immediate opportunity to institute provisional sentence proceedings afforded by section 2 of regulation 26 X [Effect of adjudicator’s decision] of Part IV D the High Court of South Africa has by both summary judgment proceedings and motion proceedings67 for specific performance68 enforced adjudicator’s decisions. There is a clear willingness exhibited through both Basil Read (Pty) Ltd v Regent Devco (Pty) Ltd 69 and Freeman, August Wilhelm N.O, Mathebula N.O, Trihani Sitos N.O vs Eskom Holdings Limited 70 by the High Court of South Africa to take a robust approach to enforcement of adjudicator’s decisions by application of entrenched South African civil proceedings.

5. Conclusion

A form of statutory adjudication has already found a seat in South African legislation through Part F [Companies Tribunal adjudication procedures] of the Companies Act71 which provides opportunity to parties (as opposed to a statutory obligation72) to refer disputes arising under or in connection with the application of Companies Act to a public authority known as the Companies Tribunal for resolution. The Companies Tribunal is specifically prescribed when adjudicating referred disputes to …conduct its adjudication proceedings contemplated in this Act expeditiously in accordance with the principles of natural justice...73 and may conduct those proceedings informally...74.

Statutory adjudication is, consequent on the enactment of Part F [Companies Tribunal adjudication procedures] of the Companies Act75, no longer entirely foreign to South African jurisprudence, both the South African government and construction industry have recognised the proven effectiveness of such systems internationally and the South African courts have exhibited a definite willingness to enforce an adjudicator’s decision. Therefore, there is every compelling reason for the CIDB’s draft regulations to now immediately be given the force of law by the Minister of Public Works.

65 Provisional sentence proceedings in the High Court of South Africa are regulated under rule 8 [Provisional Sentence] of the

Uniform Rules of Court. 66 Summary judgment proceedings in the High Court of South Africa are regulated under rule 32 [Summary Judgment] of the

Uniform Rules of Court. 67 Motion proceedings in the High Court of South Africa are regulated under rule 6 [Applications] of the Uniform Rules of

Court. 68 Refer to Farmers’ Co-op Society (Reg) v Berry 1912 AD 343. 69 Refer note 62 above. 70 Refer to note 51 above. 71

The Companies Act No.71 of 2008 , has completely overhauled the South African company law legislative framework. 72 Section 181 [Right to participate in hearing] of the Companies Act No.71 of 2008. 73 Refer to note 69 above at Section 180 [Adjudication hearings before Tribunal] (1) (a). 74 Refer to note 69 above at Section 180 [Adjudication hearings before Tribunal] (1) (b). 75 Refer to note 69 above.

The legislative framework proposed will (once implemented) solidify a desperately needed …speedy mechanism for settling disputes in construction contracts on a provisional interim basis and requiring the decision of the adjudicators to be enforced pending the final determination of disputes by arbitration, litigation or agreement...76 into South African jurisprudence and construction practice significantly enhancing …delivery, performance and value for money, profitability and the industry’s long term survival in an increasingly global arena...77.

References

Bvumbwe C, Thwala D.W., (2011).An exploratory study of dispute resolution methods in the South African construction industry, IPEDR Vol. 21, IACSIT Press, Singapore.

Che Munaaim M.E., (2010). Key features of an effective adjudication regime, King’s College London and University of Malaysia.

Coggins, J., Fenwick Elliott. R. Bell, M. (2010).Towards harmonisation of construction Industry payment legislation: a consideration of the success afforded by the East and West coast models in Australia – plus addendum. Australasian Journal of Construction Economics and Building, Vol. 10 (3).

Cole, T.R.H. (2003). Final Report of the Royal Commission into the Building and Construction Industry. Australia: Commonwealth of Australia.

Coulson R (Sir), Construction Adjudication. (2007) (1st ed). Oxford: Oxford University Press.

Coulson P (Sir), Construction Adjudication. (2011) (2nd ed). Oxford: Oxford University Press.

Davenport, P. (2010). Security of payment now Australia wide. Australian Construction Law Newsletter. Vol. 131.

Fenn. P. (2002). Why construction contracts go wrong (or an aetiological approach to construction disputes), A paper given at a meeting of the Society of Construction Law in Derbyshire. www.scl.org.uk

Gaitskell, R. (2007). International statutory adjudication: its development and impact.

Construction Management and Economics. Vol. 25, July 25. (p777).

Jackson, R. (2006). The Tower of Babel: What happens when a building contract goes wrong? The 2006 Denning Lecture given in Gray’s Inn. London. Downloadable from www.scl.org.uk.

76 Mr.Justice Dyason in the landmark United Kingdom case of Macob Civil Engineering Limited vs Morris Construction Limited

[1999] BLR 93,TCC at page 97 77 Refer to note 16 above.

Maiketso, N. C., Maritz, M. J., (2009). What are the requirements for the South African construction industry to fully utilise adjudication? London: Royal Institute of Chartered Surveyors. Royal Institute of Chartered Surveyors, 12 Great George Street, London, SWIP 3 AD, United Kingdom, September 2009.

Maritz, M.J. (2007). An Investigation into the Adjudication of Disputes in the South African

Construction Industry. London: Royal Institute of Chartered Surveyors 12 Great George Street, London, SW1P 3AD, United Kingdom.

Uher, T. E., and Brand, M.C. (2007). The evolution of adjudication law in the construction industry in New South Wales. In CIB World Building Congress ‘Construction for Development’, 14 May 2007 - 17 May 2007: In house publishing.

Van der Merwe, C.J. (2009). Is adjudication a better procedure for construction dispute resolution than mediation? Pretoria: University of Pretoria, Faculty of Engineering.

The Enforceability of Termination for Convenience Clauses

Professor Phil Evans1

Abstract

Traditionally the right to terminate a contract has been based on the classification or importance of the term. Specifically, is the term a condition or is it so important that a party would not have entered into the contract unless assured of performance of the term. However termination for convenience clauses (TFC) are being increasing used in a wide range of construction contracts where the principal may wish to terminate a contract in situations which would not give rise to lawful termination at common law. This paper discusses the origin of TFC clauses, the legal issues arising from their use, common law principles relating to termination and suggestions for appropriate wording for TFC clauses based upon a consideration of the relevant principles developed from Australian case law.

Keywords: termination, AS 2124, rights, convenience, good faith

1. Introduction

The right to terminate a contract has been traditionally based on the classification of the term; specifically is the term a condition or a warranty, or is the term so important that a party would not have entered into the contract unless assured of performance of the term. Additionally a contract may provide express details of what may be determined “substantial” breaches which will give rise to the election to terminate as in the Australian Standard General Conditions of Contract, AS 2124-1992. However, we are now frequently seeing an increase in the use of express termination or termination for convenience clauses (TFC) or termination “at will” clauses, which give the Principal or Owner the right to unilaterally terminate a contract. These clauses were originally used in large infrastructure or defence contracts to ensure that government is able to act freely in order to vitiate contractual obligations where it is in the public interest, or where policy may change, even though this may interfere with the normal common law contractual rights of the other party. They are now being used in a range of construction agreements. 1

Current case law appears to be undecided on the legal issues arising from a clause which provides unfettered right to terminate. This paper will discuss the basic legal principles applicable to termination for convenience clauses. The issues to be discussed include the implication of a term of good faith, the effect of capricious or arbitrary behaviour by a party and whether the right to terminate is unfettered. The paper will also discuss issues of

1 Deputy Dean, School of Law, Murdoch University, 90 South Street, Murdoch WA 6150

compensation and the appropriate wording of enforceable termination for convenience clauses with particular reference to construction contracts.

2. The Origin of Termination for Convenience Clauses

Whilst at first sight the use of “without cause “or “termination for convenience clauses” (TFC) appears to be relatively recent, they appear to have their origins at the end of the American Civil War where these clauses were inserted into federal government contracts in order to allow the government to wind down military procurement and pay contractors for work already completed under the contract. 2

In Torncello v United States 3 it was stated in relation to a TFC clause;

“It originated in the reasonable recognition that continuing with wartime contracts after the war was over was clearly against the public interest. Where the circumstances of the contract had changed so dramatically, the government had to have the power to halt the contractors performance and settle.”

Since the end of the Second World War, TFC clauses have also been widely used in American private construction contracts and since 1997 the American Institute of Architects (AIA) standard form contracts have featured a TFC clause.4 Locally these clauses are used in government contracts to allow for termination of projects where there have been policy changes or significant cost overruns but they are increasingly be applied in private sector contracts.

The clauses are also useful by providing a speedy resolution where the relationship between the parties has broken down or there are allegations of poor performance which at the same time may be difficult to prove to the level required for resolution or termination at common law. However there a number of legal issues which may arise with respect to the use of a TFC clause. Before these are considered the right to terminate generally at common law will be discussed.

3. Fundamental principles of construction contract law.

A construction contract is essentially no different to any other commercial contract with the exception of a clause permitting the principal to appoint a “superintendent” to administer the contract and generally the inclusion of a dispute resolution clause. In any dispute arising out of the performance of the contract or the interpretation of its terms, the issues for the court, adjudicator or arbitrator are; to determine the essential elements of formation (offer, acceptance, capacity, intention, legality and consideration) together with the terms of the contract (express and implied), then decide if the obligations of both parties been performed or breached and finally what remedy is available to the innocent party.

The application of this approach can be seen in Pindan Pty Ltd v Uniseal Pty Ltd 5, where McKechnie J set aside an interim award of the arbitrator and remitted the matter back to the

same arbitrator for determination in accordance with his Honour’s directions. Specifically the directions were that the arbitrator should determine the terms and conditions which were incorporated into the contact, establish on the evidence of there was a breach and finally consider if the breach caused a loss to the other party.

This approach at first sight appears straight forward, however as Kirby P observed in Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd 6 courts and lawyers may expect the agreements of business people to be clear and complete but unfortunately, in the market place, agreements (especially when prepared by lay persons) often fall short of what a lawyer might desire. In particular when determining which actions constitute a breach which may give rise to the election by the innocent party to terminate, in order to avoid the consequences of unlawful breach 7 it is important to understand the common law right to terminate.

4. Termination at common law

At common law it is well established that the “innocent” party can only elect to terminate a contract where there has been a breach of a condition or what is described in the Australian General Conditions of Contract as a substantial term8 or generally as a breach of a condition or a term which goes right to the heart of the contract rather than a minor term or warranty. 9 Unfortunately the classification of all terms as either conditions or warranties is a simplistic view of the various terms. The importance may not always be obvious and in some cases it may well be that some terms are capable of both substantial and minor breach. These terms which are generally described as intermediate or innominate, may create issues where a party seeks to terminate a contract for breach of a term which could in fact be minor and which consequently result in wrongful repudiation. 10

Consequently, some terms may be viewed as critical to the operation of the contract such that without assurance of strict performance the parties would probably not have entered into the contract in the first place. For example in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd 11 where Chief Justice Jordan stated;

“The question whether a term in a contract is a condition or a warranty i.e. an essential or a non-essential promise, depends upon the intention of the parties as appearing in or from the contract. The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of strict and substantial performance of the promise, as the case may be and this ought to have been apparent to the promisor.”

At the same time, expressly providing that all terms in the contract are conditions, the breach of which will give rise to termination, will not be enforced. In the Court of Appeal decision in L Schuler AG, Edmund Davies LJ specifically referred to the non lawyer’s practice of referring to all terms as conditions. 12 In a later decision, Lord Diplock stated that whilst

“condition” is used in a variety of senses it does not mean that a breach, however minor, by one party entitles the other party to elect to bring the contract to an end. 13

5. Termination under AS Standard or industry based construction General Conditions of Contract

Standard general conditions of contract (GCOC) typically provide provisions relating to the lawful grounds for the termination of the contract. These are invariably described as “substantial” breaches which whilst not exclusive, provide a right to terminate which may still fall short of a breach which goes to the heart of the contract but would still provide the innocent party with a right to terminate.

In AS 2124-1992, Clause 44.2 refers to default by the Contractor and notes that substantial breaches include;

• Suspension of work in breach of clause 33.1

• Failing to proceed with due expedition (clause 33.1)

• Failing to lodge security (clause 5)

• Failing to use materials or standard workmanship required by the contract Clause 30.1

• Failing to comply with directions of the Superintendent ( clauses 30.3, 23)

• Failing to provide evidence of insurance (clause 23.1)

• Providing n untruthful statutory declaration or documentary evidence in respect of clause 43

Similarly clause 44.7 of AS 2124-1992 lists the substantial breaches under which the Principal may be in default of its obligations. Clause 39 of AS 4000-1997 also stipulates the events which may constitute a substantial breach of the contract. Clause 39.2 refers to substantial breaches by the Contractor while clause 39.7 refers to substantial breaches by the Principal. These provisions essentially mirror those found in As 2124-1992.

PC-1 (1998) 14 lists the breaches which permit the other party to issue notice to the party in default.15 ABIC MW-1 16provides that the failure of a party to meet its substantial obligations permits the other party to commence the termination procedures as set out in Section Q.

6. Case law decisions on the express right to terminate

Current case law appears to be undecided on the legal issues arising from a clause which provides an unfettered right to terminate as illustrated by the following cases.

In Champtaloup v Thomas 17

The purchaser of a property had an express right, in accordance with the terms of the contract, to rescind a contract in the event of the occurrence of proscribed events. In evidence at trial, the purchaser stated that these events had nothing to do with his decision to rescind the contract. The NSW Court of Appeal held that where a party has a contractual right to terminate, even when that right is exercised capriciously, arbitrarily, unreasonably and not bona fide, the right is not restricted or lost. The Court held that the right was validly exercised and refused to limit the rights given by the contract. 18

Renard Constructions (ME) Pty Ltd v Minister for Public Works19

In Renard Constructions, the decision of the NSW Court of Appeal was inconsistent with the decision in Chantaloup. In Renard Constructions, under clause 44.1 of the general conditions of contract (NPWC3) if the contractor breached the contract, the principal could call upon it to show cause as to why the contract should not be terminated. The principal was unhappy with the contractor's performance and required the superintendent to issue a show cause notice. The contractor accordingly responded to the show cause provision. Nevertheless principal proceeded to terminate the contract.

The majority of the court held that the powers conferred on the principal under the clause must be exercised reasonably and consequently by analogy, in good faith. While Renard Constructions is authoritative in the context of express termination clauses, the issues arose from a consideration of the show cause notice, which nevertheless is a feature of all construction contracts.

Gary Rogers Motors (Australia) Pty Ltd v Subaru (Australia) Pty Ltd 20

This decision held that the use of a TFC can be challenged on the basis that it is inconsistent with an implied condition that the parties are to act in good faith. In Gary Rogers Motors (Australia) Pty Ltd v Subaru (Australia) Pty Ltd the agreement between the parties allowed that either party could terminate the agreement by giving the other party notice in writing. Subaru were discontented with the performance of Gary Rogers and issued a notice of termination. The court held that in this case there was an implied term requiring good faith and fair dealing in the relationship. This means that the exercise of a TFC (depending on the exact wording of the clause) could be subject to a challenge on good faith grounds if the election to terminate was exercised either capriciously, arbitrarily or for an improper purpose (thus reflecting the comments in Abu Dhabi National Tanker Co v Product Star Shipping Line (N0 2)21

Kellogg Brown Root Pty Ltd v Australian Aerospace Limited 22

The issue of good faith in the exercise of a power under a termination for convenience clause was considered in the case of Kellogg Brown Root Pty Ltd v Australian Aerospace Ltd. Australian Aerospace were engaged by the Commonwealth to supply 12 helicopters

and Kellogg Brown Root (KBR) was engaged as a subcontractor to provide training services for the project. The agreement contained a dispute resolution process and also a TFC. When a dispute occurred, KBR gave notice commencing the dispute resolution process but Australian Aerospace responded by giving notice to terminate for convenience. KBR then sought an injunction restraining Australian Aerospace from terminating the agreement. KBR alleged that Australian Aerospace’s right to terminate was subject to an implied term of good faith and fair dealing. They submitted that Australian Aerospace had breached this implied term by terminating the contract. KBR further submitted that the behaviour of Australian Aerospace was indicative of an opportunistic attempt to avoid any adverse determination arising for the dispute resolution process. The court noted that in Australian Aerospace giving the notice of termination before the dispute resolution process had been carried out they had acted to pre-empt the process.

Whilst the focus was on the issue of whether the terms of the subcontract permitted the implication of a good faith term under the BP Refinery 23 principles, and whether the implication of the term was as serious question to be tried under the American Cyanamide 24 principles, Hansen J noted that the case for an implied term and its breach was arguable.

Thiess Contractors v Placer (Granny Smith) Pty Ltd 25

This case is definitive with respect to the application of good faith in applying a TFC and whether the right to terminate is unfettered. In 1989 Thiess entered into a schedule of rates mining contract with Placer to undertake open cut mining at Placer’s gold mine at Laverton, Western Australia. In 1991 a number of unforeseen problems arose and as a consequence of variations under the contracts Placers costs per cubic meter of mined material significantly increased. Placer subsequently negotiated with Thiess for a new contract which was based on a risk sharing basis rather than schedule of rates basis. A term of the new agreement was that the parties “work in good faith on all matters relating to the contract.” The new contract provided for a fixed profit to be earned by Thiess based on a agreed percentage on costs. A new contract on this basis was entered into on 13 July 1992.

In March 1995 Placer terminated the contract in reliance on a TFC which entitled it at any time and for any reason it might deem advisable to cancel and terminate the contract. Clause A 6.5.1 stated;

“[Placer] may at its option, at any time and for any reason it may deed advisable, cancel and terminate the Contract, in which event [Thiess] shall be entitled to receive compensation as follows;” 26

Upon termination Thiess would receive compensation for unit price items and demobilization as well as certain other compensation.

Thiess commenced proceeding against Placer alleging that the termination had been unlawful and claiming substantial damages. Placer counterclaimed alleging that in breach of the express obligation of good faith, Thiess had falsely represented the costs of certain plant

costs it would incur in work under the contract. Thiess submitted that prior to entering the new contract Placer represented that it would only rely on the termination clause in the contract if the mine were closed or if the mine was uneconomical to work. On the evidence, the court rejected the submission and noted that Placer had insisted on the termination clause being inserted into the contract even though Thiess wished it to be removed. Further Thiess was well aware of the risks agreeing to the contract with the termination clause and accepted those risks. The trial judge noted that “This clause appears to be clear and unambiguous in providing Placer with an absolute and uncontrolled right to termination.” 27

With respect to the issue of good faith relative to the termination clause, Templeman J made the interesting comment that the good faith provisions were typical of many contained in sections dealing with good faith, but which at the same time, do not define the rights and obligations with any precision. 28 Templeman J further noted that their implementation clearly requires goodwill and cooperation on the part of both parties and that good faith must include these matters and additionally that the obligation of good faith requires the parties to deal honestly with each other.29

Templeman J considered that the good faith obligation applies to general matters relating to carrying out the works, derivation of rates and interpretation wherever they arise in the contract. In summary the obligation off good faith requires the parties to act honestly with each other and to take reasonable steps to cooperate in relation to matters where the contract does not define rights and obligations or provide any mechanism for the resolution of disputes.

However in relation to the interpretation of the contract, Templeman J noted the obligation of good faith was far more difficult to define. Templeman J held that the application of the good faith provision in clause B1.1.5 had not application to the TFC (6.5.1). Thiess had submitted that the obligation of good faith requires the termination clause on to be invoked when Placer had a reasonable reason for determining the contract. Templeman J however noted that the construction of the TFC was clear and unambiguous. It was an express provision which entitled Placer to terminate the contract “….at its option, at any time and for any reason it may deem advisable….” Thiess had relied on the English decision of Abu Dhabi National Tanker Co v Product Star Shipping Line 30 which noted that;

“Where A and B contract with each other to confer a discretion on A, that does not render B subject to A’s uninhibited whim. In my judgment the authorities show that not only must the discretion be exercised honestly and in good faith, but, having regard to the provisions of the contract by which it is conferred, it must not be exercised arbitrarily, capriciously or unreasonably.”

Templeman J noted that whilst “ Placer had a discretion whether or not it would terminate the contract, the termination clause provided it with an absolute and uncontrolled discretion which it was entitled to exercise for any reason it might deem advisable. That is a contractual right which relieved Placer from any obligation to have regard to Thiess’ interest.” 31 In his “Summary of Conclusions”, Templeman J noted (in part) 32; that the termination

clauses gave Placer an unfettered right of termination and in any event, Placer exercised its rights of termination honestly and in good faith.

Subsequently Thiess appealed against the dismissal of its claim and the upholding of the counterclaim. 33 The court dismissed Thiess’ appeal relating to Placers right to apply the TFC. The court noted that Placer had insisted on the termination clause being inserted into the contract even though Thiess wished it to be removed and Thiess was well aware of the risks of agreeing to the contract with the termination clause and accepted those risks.34

7. Express and implied conditions of good faith

It can be seen that the issue of an express right to terminate is inextricably linked to the issue of good faith. However the issue of good faith in the operation of commercial contracts and the interpretation of terms is far from settled. The term is controversial because we do not have a legal definition of what constitutes good faith in commercial agreements. 35 For example in South Sydney District Rugby League Football Club Ltd v News Limited (2000) 177 ALR 611 @ 695, Finlay J. said that Australian law has not yet committed itself unqualified to the proposition that every contract imposes on each party a duty of good faith and fair dealing in contract performance and enforcement.

The issue was considered by the High Court in Royal Botanic Gardens & Domain Trust v South Sydney City Council (2002) 186 ALR 289 @ 301. Kirby J indicated his view that the notion of reasonableness, fairness and good faith appeared to be in conflict with the doctrine of Caveat Emptor inherent in common law conceptions of economic freedom. 36 However there have been a number of cases where courts have determined that there are situations where an obligation of good faith (or fair dealing) will be imported into contractual relationships. These include Amann Aviation v The Commonwealth (1990) 192 ALR 601, Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSW LR 234 Hughes Bros. Pty Ltd v Trustees of the Roman Catholic Church and Archdiocese of Sydney (1993) 31 NSW LR 91 Hughes Aircraft Systems International v Air Services Australia (1997) 146 ALR 1 Alcatel Australia Ltd v Scarcella (1998) 44 NSW LR 349 and as mentioned above Garry Rodgers Motors (Australia) Pty Ltd v Subaru (Australia) Pty Ltd (1999) FCA 903. However, there are a number of other decisions where the courts have declined to imply conditions of good faith in the operation of commercial agreements. These include G S A Group Pty Ltd v Sieve Plc (1993) 30 NSW LR 573, Service Station Association Limited v Berg Bennett & Associates Pty Ltd (1993) 117 ALR 393, Esso Australia Resources Pty Limited v South Pacific Petroleum NL (Receivers and Managers Appointed) (Administrators Appointed) [2005] VSCA 228) and Kendells v Sweeney [2005] QSC 64.

More recent decisions have also not assisted us with the issue. In Vodafone Pacific Limited v Mobile Innovations Limited 37 Justice Giles J declined to hold that commercial contracts generally, and specifically dealing with the right to termination, could not imply a term of good faith. Further, in Solution 1 Pty Limited v Optus Networks Pty Limited 38 whilst the court was willing to imply a term of good faith into a contract, in this case it was excluded because the term which permitted Optus to terminate on 120 days notice at its absolute

discretion was absolute and further there was an entire contract clause which expressly excluded any implied terms.

8. Good faith requirements under AS GCOC

The Australian Standard General Conditions of Contract (GCOC) expressly refer to the application of fair dealing or good faith on the part of the Superintendent. The duality of the role in acting as both agent for the Principal and independent certifier has been considered in a number of cases and will not be considered here suffice to say that there is no legal impediment to the Superintendent acting in both roles. 39

AS 2124-1992 Clause 23 states;

“The Principal shall ensure that... in the exercise of the functions of the Superintendent under the contract, the Superintendent-

(a) Acts honestly and fairly

(b) Acts within the time prescribed under the contract or where no time is prescribed within a reasonable time; and

(c) Arrives at a reasonable measure or value of work, quantities or time”

AS 4000-1997 Clause 20 states;

“The Principal shall ensure that at all times there is a Superintendent, and that the Superintendent fulfils all the aspects of the role and functions reasonably and in good faith.”

The issue of good faith has been considered above and as noted is far from settled. However judicial decisions have made it clear that in the context of certification and approval the contract administrator must make an assessment free for interference and only taking into account whether the work has been done in accordance with the requirements of the contract.

Similarly in the context of what is reasonable behaviour for the purpose of both AS 2124-1992 and AS 4000-1997 what is “reasonable” is a question of fact depending on the particular circumstances. 40

Whilst not in the context of construction contracts, the decisions in Burger King Corp v Hungry Jacks 41and Alcatel Australia Ltd v Scarcella 42provide some assistance in determining the possible elements of good faith. These include an obligation on the parties to cooperate in achieving the contractual objectives; compliance with honest standards of conduct; and compliance with standards of conduct that are reasonable having regard to the interests of the parties.

9. Drafting an express right to terminate clause

In the absence of a High Court decision on the matter and in view of the divergent state court decisions, the law is still unsettled. However the early decision in Renard Construction and the more recent decision in Thiess provide some assistance with respect to construction and infrastructure contracts but it is acknowledged that the case law generally indicates that courts will be reluctant to imply a term of good faith in all commercial contracts. In drafting an operative TFC the following factors will be relevant.

• The obligation off good faith requires the parties to act honestly with each other and to take reasonable steps to cooperate in relation to matters where the contract does not define rights and obligations or provide any mechanism for the resolution of disputes.

• Where the principal has discretion, whether or not to terminate the contract, if the termination clause provides it with an absolute and uncontrolled discretion which it is entitled to exercise for any reason it might deem advisable, that right will be unfettered. Particularly if it has been brought to the contractor’s attention, or was subject to discussion at the time of entering into the contract.

• When drafting a termination clause in a commercial contract, consider including a clause which expressly excludes the application of good faith with respect to the provisions of the TFC.

• In the absence of an express term excluding the application of good faith, where a duty of good faith is implied it will not prevent a party from taking steps which are designed to protect its legitimate interests. 43

• When a party is acting in a manner that is consistent with its contractual rights to promote its legitimate interests, there should be no breach of any implied duty to act in good faith. 44

• In the TFC make provision to ensure that the Contractor is to be compensated for its losses including loss of profit and an overheads contribution on the balance of the work. If this is absent then there is the possibility that that clause may be considered as penal or in some circumstances as unconscionable

10. Termination for Convenience clause example

The following clause is representative of a TFC clause which is considered to provide an unfettered right to terminate at will.

TERMINATION BY THE PRINCIPAL FOR CONVENIENCE

Without prejudice to any of the Principal’s other rights and powers under this contract, the Principal may at any time for any reason within its sole discretion upon 10 Business Days

Notice to the Contractor terminate the Contract. Upon receipt of such notice the Contractor shall remove its Constructional Plant from the Site, shall otherwise cease the performance of its obligations under the Contract and shall endeavor to mitigate any expense or losses that it or the Subcontractor may incur or has incurred in relation to its obligations under the Contract.

If the Principal terminates the Contract under this clause then the Principal shall be liable to pay the Contractor the total of:

(a) For work executed prior to the date of termination, the amount which would have been payable if the Contract had not been terminated and the Contractor had made a progress claim on the date of termination;

(b) Subject to the obligation of the Contractor to mitigate its costs and expenses, the cost of materials reasonably ordered by the Contractor for the Work under the Contract, which the Contractor is liable to accept, but only if the materials become the property of the Principal upon payment;

(c) All retention monies and security; and

(d) The reasonable cost of demolition

up to a maximum amount of the balance of the contract sum (as it is adjusted pursuant to the Contract) unpaid at the date of termination and other amounts payable pursuant to the Contract at the date of termination. The amounts to which the Contractor is entitled under this clause shall be in full satisfaction and compensation of the Contractor in relation to the termination and the Contractor shall have no other entitlement as a consequence of the termination under this Clause or in relation to carrying out the work under the Contract to the date of termination.

There appears to be little in the literature or authorities, relating to the form and content of the compensatory provisions; however it was noted in the English case of Abbey Developments Limited v PP Brickwork Ltd 45

“Termination for convenience clauses frequently provide that the Contractor is to be compensated for its losses including loss of profit and overheads contribution on the balance of the work. If they do not then they risk being treated as leonine and unenforceable as unconscionable.”

11. Conclusion

Traditionally the right to terminate at common law has been dependent on the classification of the term. That is, is it a condition or a warranty? Where a contract is terminated for breach of a minor term or mere warranty then the termination will be unlawful and provide the right of the innocent party to the damages which flow from the breach. A term containing

an express right to terminate for convenience is inextricably linked to the requirement of the parties to undertake obligations in good faith but without clear High Court authority on the issue of good faith, the law remains unsettled. However guidance can be obtained from a number of decisions which have held that where the principal has the discretion, whether or not to terminate the contract, if the termination clause provides it with an absolute and uncontrolled discretion which it is entitled to exercise for any reason it might deem advisable, that right will be unfettered. In the absence of an express term excluding the application of good faith, where a duty of good faith is implied it will not prevent a party from taking steps which are designed to protect its legitimate interests. When a party is acting in a manner that is consistent with its contractual rights to promote its legitimate interests, there should be no breach of any implied duty to act in good faith. Finally the TFC should provide that the Contractor is to be compensated for its losses including loss of profit and an overheads contribution on the balance of the work. If this is absent then there is the possibility that that clause may be considered as penal or in some circumstances as unconscionable

References

1 See Gray, Anthony (2012) Termination for convenience clauses and good faith. Journal of International Commercial Law and Technology, 7 (3). pp. 260-275.

2 See New York Law Journal, Volume 345-No 30, 15 February 2011

3 681 F.2d 756, 764 (Ct.C1.1982)

4 See AIA A201-1997 General Conditions of Contract for Construction, Clauses 14.4

5 [2003] WASC 168

6 (1991) 24 NSW LR1 at 21

7 See Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64

8 See AS 2124-1992 (Clause 44) and AS 4000-1997 (Clause 39)

9 See Bettini v Gye (1876) 1 QBD 183 and Poussard v Spiers and Pond (1876) 1 QBD 410

10 See Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26; L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235.

11 (1938) 38 SR (NSW) 632 @ 641-642

12 See Schuler AG v Wickman Machine Tool Sales Ltd [1972] 1 WLR 840 (The Court of Appeal decision)

13 See ANZ Banking Group Ltd v Beneficial Finance Corp (1982) 44 ALR 241.

14 Property Council of Australia Project Contract (PC-1 1998). PC-1 is produced by the Property Council of Australia and has been designed to represent the interests of the commercial property industry. It does not represent to balance the interests of the owner and the contractor but is premised on the view that those who pay for projects are entitled to allocate the risks.

15 See clause 14.2 (Owner) and clause 14.3 (Contractor)

16 Australian Building Industry Contract, ABIC MW-1 2003, Major Works Contract. The ABIC contracts are jointly published by the Master Builders Association and the Australian Institute of Architects. They are intended for use in architect administered building contracts.

17 [1976] 2 NSWLR 264

18 However in Godfrey Constructions Pty Ltd v Kanangra Park Pty Ltd (1972) 128 CLR 529 the High Court held that similar rights could not be exercised “unconscionably or unreasonably”.

19 (1992) 26 NSWLR 234

20 (1999) FCA 903

21 (1993) Lloyds Rep 397

22 [2007]VSC 200

23 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266

24 American Cyanamide v Ethicon [1975] AC 396

25 (2000) CIV 1970 of 1995 16 April 1999 Templeman J; Lib No; 990187

26 Lib N0; 990187 at page 95

27 Lib N0; 990187 at page 95

28 A helpful discussion on the issues of good faith is the decision of Gummow J in Service Station Association v Berg Bennettt & Associates (1993) 45 FCR 84.

29 Lib N0; 990187 at page 98

30 [1993] 1 Lloyd’s LR 397 at 404

31 Lib N0; 990187 at page 101

32 Lib N0; 990187 at page 246

33 Thiess Contractors Pty Ltd v Placer (Granny Smith)Pty Ltd [2000] WASCA 102

34 Thiess Contractors Pty Ltd v Placer (Granny Smith)Pty Ltd [2000] WASCA 102 at paragraphs 18,19

35 For detailed information on the issue of good faith generally, see “Good Faith in the Performance of Contracts” Peden, E. (2003) LexisNexis

36 See also Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1; Australis Media Holdings v Telstra Corporation (1998) 43 NSWLR 104.

37 [2004] NSWCA 15.

38 [2010] NSWSC 1060.

39 See South Australian Railways Commissioner v Egan (1973) 130 CLR 506; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd (2002) 18 BCL 322.

40 See Note 33

41 (2001) NSWCA 187

42 (1988) 44 NSWLR 349

43 South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611).

44 Thiess Contractors Pty Ltd v Placer (Granny Smith)Pty Ltd [2000] WASCA 102

45 (2003) EWHC 1987

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