5 Top Pitfalls and Traps of Construction Disputes

Written by: Paul Rojas Published: May 10, 2021

When entering into a construction project, parties often feel assured that the terms of their construction contract will provide protection against conflicts. In reality, if parties fail to understand and abide by the prescriptive terms of their construction contract, disputes over payment, key phases of a project, and even the appropriate dispute resolution process can arise.

This article identifies key considerations that you should have regard to when progressing towards the close of a construction project, to minimise the risks of a construction dispute and to mitigate against losses.

1.Understand the Terms of your Contract

Often parties take steps in relation to a construction project without having regard to the terms of the contract governing the project. It is critical that you understand the terms of your construction contract so that you do not waive your entitlements under the agreement or breach the applicable law.

Parties should properly understand their obligations under the contract during each construction phase as there are typically multiple elements and obligations that apply during each construction phase. For example, most construction contracts contain a defects liability period, in which a contractor is legally required to return to a construction site and rectify any defects during the relevant period. Where a contract does not provide for a defects liability period, a statutory defects liability of 12 months applies from the date of practical completion.

If an owner (or principal) seeks to have defects rectified by a contractor during this period, they, or their superintendent, are usually required to give notice about a defect in a particular way and provide a deadline for the contractor to comply with the notice. If the defect is not rectified within a particular timeframe, construction contracts usually contain terms permitting an owner (or principal) to arrange for an alternative party to rectify the defective work, if certain procedural steps are taken.

A construction contract can also include terms permitting the parties to undertake testing of construction work during the defects liability period to ensure that any defects are identified and rectified during the relevant period. Once the defects liability period ends, a contractor is able to claim for the release of their retention amount or security, if any. Where a party is uncertain of their obligations under a contract, they may unintentionally waive their entitlements or abrogate their responsibilities under the construction contract.

Bose v Muggeridge Constructions Pty Ltd [2018]

In the case of Bose v Muggeridge Constructions Pty Ltd [2018] QDC 75, the parties had agreed that Muggeridge Constructions Pty Ltd (Muggeridge) would provide bank guarantees in lieu of retention monies under the contract. Muggeridge proceeded to take out two bank guarantees in an attempt to fulfill its obligations under the contract. However, the guarantees expired prior to the end of the relevant defect’s liability period.

When Bose sought to make a claim on the relevant bank guarantees in relation to defects, that had become apparent during the defects liability period, the bank guarantees had expired or were close to expiring. Bose applied to the District Court of Brisbane seeking declaratory relief from the court on 20 April 2018, requiring Muggeridge to provide a bank guarantee to cover the remaining period of the defects liability period, which expired on 13 June 2018. Bose was successful in its application, and costs were awarded in its favour. Had Bose properly understood the terms of the contract it could have demanded that Muggeridge provide the appropriate guarantee at the start of the project, and mitigated the time and expenses associated with applying to the court for declaratory relief during the defects liability period.

2. Follow the Procedural Requirements of the Contract

Construction disputes often arise where the strict form of notices and procedural requirements of the construction contract have not been followed. It is essential that you familiarise yourself with what is procedurally required under your contract and adhere to those requirements to protect your rights under the contract. For example, if a builder seeks an Extension of Time under a construction contract, the contract may require the superintendent to provide written approval of the Extension of Time within a period of, say 28 days, for the Extension of Time to be given effect. Without this written approval, the builder cannot rely on the Extension of Time and may be liable for liquidated damages if it does not reach practical completion in time.

3. Maintain Records of Communications

If any dispute arises between the parties, keeping detailed records of all communications between the parties may be the difference between successfully defending your claim and having no leg to stand on. We recommend that you establish good record-keeping practices at the beginning of any construction project no matter your role and put key communications in writing.

If, for example, a construction contract requires builders to provide written variations to an owner or principal for approval before they can claim the variation, if the builder does not maintain a record of the written variation, it may be difficult to establish that they followed the necessary processes under the contract later down the track and they may be excluded from claiming a variation.

4. Early Dispute Resolution

Early Dispute Resolution can help parties reach a resolution quickly and cost-effectively. Construction contracts usually require that parties notify one another of any disputes within a specific time period that relate to the contract, and can sometimes mandate that the parties seek to resolve a dispute through alternative dispute resolution processes, such as attending a conference or mediation.

Even if your contract does not include early dispute resolution mechanisms, we recommend that parties consider this option before embarking on a more formal form of dispute resolution, such as litigation in a court setting.

For residential construction contracts, for example, parties should be aware that the QBCC has an informal dispute resolution process that can be utilised to reach low-cost, relatively quick resolutions in relation to construction disputes. If the QBCC Early Dispute Resolution process does not result in a satisfactory outcome, there may be a range of other options available to parties. You should seek legal advice from an expert building and construction lawyer on what options may be open to you.

5. The Appropriate Dispute Resolution Forum

Parties should give heed to dispute resolution requirements under a construction contract. Contracts can include clauses that require technical disputes to be referred to expert panels, mandate an informal dispute resolution process before a matter is taken to court, or, require disputes to be referred to arbitration. If a claim is started in the wrong forum, parties may have to bear the costs of their mistake.

Cheshire Contractors Pty Ltd v Civil Mining Construction Pty Ltd

In the recent case of Cheshire Contractors Pty Ltd v Civil Mining Construction Pty Ltd [2021] QSC 75, a dispute arose between Cheshire Contractors Pty Ltd (Cheshire) and Civil Mining Construction Pty Ltd (CMC) in connection with the works that Cheshire had performed for CMC. Cheshire filed a claim against CMC in the Cairns Supreme Court, seeking money owing in the sum of $1,393,616.80 plus GST, interest thereon, and the return of bank guarantee. The construction contract between the parties, however, included an arbitration clause requiring disputes to be referred to arbitration.

Therefore, instead of filing a defence, CMC brought an application seeking to permanently stay the court proceeding and to refer the parties to arbitration. His Honour Henry J found that the dispute fell within the ambit of the construction contract and ordered that the parties be referred to arbitration, permanently staying the court proceeding and ordering costs to follow the event. As a result of failing to properly consider the dispute resolution terms of the construction contract and commencing a claim in the wrong dispute resolution forum, Cheshire will have to front the costs for its mistake.

We hope the above considerations have provided a useful insight into managing the pitfalls and traps of construction disputes.

Rostron Carlyle Rojas Lawyers have an expert team of building and construction lawyers. If you have a question or you’d like more information on the contents of this article, contact us today on (07) 3009 8444 or email us at [email protected].