During contract negotiation, it is common for builders, owners and subcontractors to under-estimate the value of legal advice from a construction lawyer. By the time a dispute arises under a construction contract, it is too late to try to re-negotiate or re-construe the terms of the construction contract.
Once the construction contract is signed, you are stuck with your bargain – the good parts, and the bad.
Saving money on legal advice during a building contract negotiation can be a false economy.
A contractual interpretation dispute
In Jabbcorp (NSW) v Strathfield Golf Club  NSWSC 1317, the Supreme Court was required to determine questions about whether the builder was entitled to variations and a refund of liquidated damages.
The question before the Court was whether certain works were excluded from the original scope of works. This required analysis of the definition of “Excluded Works” in the construction contract and these words: “the construction boundary of the Site”
In that case, the procurement of the builder was an 11 month process run by a project manager (architect). The builder submitted a tender which it revised 3 times and involved tender feedback and much negotiation. The successful tender was incorporated as a contract document.
The builder relied upon a narrow interpretation of the words “construction boundary” to say that (unsurprisingly) the boundary was much smaller than what was contended by the owner. The builder’s construction of the words “construction boundary” relied heavily upon negotiations that were not included in the construction contract.
The starting point for contractual interpretation is that each clause of a contract needs to be read in the context of the contract as a whole. Unfortunately for the builder, the Principal’s Project Requirements and other parts of the construction contract outlined what comprised the “Site” and gave detail about the scope of works. This gave context to the words the “construction boundary“. This was fatal to the builder’s argument.
The builder was stuck with its bargain that was recorded in the contract.
It appears from the negotiations that the builder believed that it had excluded certain works, but the contract did not reflect that intention.
How can I manage risk better?
Risk management in construction is a continuous and fluid process for those in the construction industry. An over-simplified approach to that process (for the purpose of this article) is below. The process relies upon identifying the risk. Risk can be in many forms. A major part of risk (as seen in the Jabbcorp case) arises from what is recorded in the construction contract.
The risk management process fails, if you do not identify the risk.
The lion-share of construction risk is able to be identified during the negotiation phase. Once identified, the risk can be treated (or managed) during negotiation of your construction contracts by:
- avoiding the risk (i.e. re-designing or re-sequencing works);
- transferring the risk to another person (i.e. to design consultants);
- mitigating against the risk (i.e. to take steps to minimise the impact the risk will have); and
- accept the risk (i.e. accept the risk and price it accordingly).
How to reduce construction risk?
There are many ways to reduce your exposure to construction risk. The role of a construction lawyer in managing risk in construction contracts does not end once the construction contract has been negotiated.
These solutions focus on builders and the construction contract.
- Stage 1: Negotiating a contract or preparing a tender – Prepare a “departures table” which identify which parts of the proposed form of construction contract which need amendment to reflect your risk appetite.
- Stage 2: About to sign a new construction contract that has already been negotiated – Identify any risk in the construction contract that represents a “deal-breaker” and attempt to negotiate that risk.
- Stage 3: Recently entered into a construction contract – Understand your risk by carefully reviewing the construction contract and identify where you have major risk exposure and attempt to mitigate or avoid that risk by effective administration of your construction contract.
Get in touch and read more
In the meantime, read more of our recent articles from our Construction + Projects team:
- Injunctions preventing the use of the Security of Payment Act
- What is a construction contract?
- 5 ways to maximise profit as a builder
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