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Managing construction risks in Asia-Pacific
Australia
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Managing construction risks in Asia-Pacific: Australia

Australia is a highly advanced mixed economy, but investors – often drawn to the country's economic stability and resilience – should be aware of certain clauses that typically appear in construction contracts.

Australia is a highly advanced mixed economy, with investors particularly drawn to its economic stability and resilience.

As of 2021, Australia has the world's 12th-largest GDP.5 The construction industry is a key driving force in Australia's recovery from the COVID-19 pandemic, with various major projects underway, or close to completion, across Australia. Australia is a common law jurisdiction, which finds its roots in English law. Australia is also a federation with six states and two major territories, overseen by a federal government. Both the common law and legislation at the federal and state level will be relevant to investors in the construction space.

20%

Any company in which an individual not ordinarily resident in Australia holds at least a 20% interest is included in the broad definition of a “foreign person”

 

Are there any restrictions on foreign investment?

Australia's current foreign investment review framework took effect on January 1, 2021. This framework is set out by the Foreign Acquisitions and Takeovers Act 1975 (Cth) and the Foreign Acquisitions Fees Impositions Act 2015 (Cth), and the regulations associated with those pieces of legislation.

Under this foreign investment review framework, a "foreign person" planning to make investments in Australia, which meet certain criteria, must notify the Australian Treasurer. The Treasurer may then grant or deny approval for the investment. In deciding whether to approve the proposed investment, the Treasurer is advised by the Foreign Investment Review Board (FIRB). FIRB, and the Treasurer, make these decisions on a case-by-case basis.

"Foreign person" is defined broadly to include individuals not ordinarily resident in Australia.6 It also includes any companies in which an individual not ordinarily resident in Australia holds at least a 20 percent interest, or a company in which two foreign persons hold an aggregate interest of at least 40 percent.

Depending on the nature of the proposed investment, a lower interest percentage threshold may apply. Some relevant examples are:7

  • Interests in land: As a general rule, any acquisition of an interest in commercial land, residential land, mining tenements or national security land will require FIRB approval
  • National security business interests: Generally, a threshold of at least 10 percent applies where a foreign person proposes to acquire a direct interest in a national security business. This includes investments relating to telecommunications, electricity, ports or water networks8

Where Australia has a bilateral investment treaty or free trade agreement in place with another country, foreign investors from that country may benefit from certain substantive investment protections.

The main forms of dispute resolution for construction disputes in Australia are adjudication, mediation, arbitration and litigation

 

Is your contract enforceable under Australian law?

Australian law follows the classic English law test for contract formation (offer/acceptance, consideration, etc). All contracts, including construction contracts, must meet these requirements to be enforceable.

Standard-form contracts are often, though not always, used for construction projects in Australia. Australian Standards is the primary non-government standards development body in Australia. Its forms are the most common type of standard form used, though other forms such as FIDIC and GC21 are also used, particularly for large projects.

A key principle of Australian contract law is the freedom to contract, whereby parties may strike whatever bargain they choose. However, the common law and statute provide for certain limitations to the freedom to contract. Rules around penalties or liquidated damage clauses, and limitations and exclusions of liability clauses, may be particularly relevant to construction contracts:

a. Penalty or liquidated damages clauses

Construction contracts often include liquidated damages clauses. These clauses define the damages that a contractor must pay to the principal if they fail to complete the works within the timeline specified in the contract. Liquidated damages clauses are often included in construction contracts because they provide certainty to both parties.

To be valid, the liquidated damages must be a genuine pre-estimate of the principal's likely losses.9 If not, a court might construe the liquidated damages to be a penalty, which will not be enforceable.10

When construing a liquidated damages clause, a court will look at the substance of the clause over form: Even if the contract explicitly states that the amount in the clause is not a penalty, a court might still identify it as a penalty.11

b. Exclusion and limitation of liability clauses

Construction contracts also commonly include exclusion or limitation of liability clauses. These clauses reduce (either partly or wholly) parties' legal responsibility for certain breaches of their contract. For example, parties often exclude consequential losses.

In general, the freedom to contract allows parties to limit their liabilities as they see fit. Australian courts will generally enforce exclusion or limitation of liability clauses using a strict interpretation of the relevant clause.12

However, there are certain limits to contracting parties' ability to limit their liability. At common law, parties are not permitted to agree to a blanket exclusion of liability for any breach of a party's obligations.13 Courts will also refuse to enforce clauses that exempt a party from the consequences of fraudulent conduct.14

In addition, parties cannot limit or exclude their liability for breach of certain provisions of the Australian Consumer Law. For any transaction that is "in trade or commerce" (which includes construction contracts), these provisions will include at a minimum: misleading or deceptive conduct; unfair practices; and unconscionable conduct.

c. Conditional payment clauses

Conditional payment clauses (also known as "pay when paid" clauses) are generally not enforceable in Australia. Each state and territory has enacted security of payment legislation invalidating conditional payment clauses.15 Contractors' rights under this legislation are discussed in the following section.

January 1, 2021

Australia’s current foreign investment review framework took effect on January 1, 2021

 

How does a contractor secure adequate cash flow in Australia?

Each Australian state and territory has enacted a statutory regime (known as security of payment regimes) regulating the submission and payment of regular progress claims for construction projects. The regimes are broadly similar, but there are differences.

The security of payment regimes establish a right for contractors to progress payments, and bespoke adjudication processes when these progress payments are disputed. The security of payment regimes also provide contractors with a right to suspend work where a progress payment is due but unpaid, or where security for payment has not been provided.

 

When does a right to terminate arise from a breach of contract under Australian law?

Most construction contracts include termination clauses, permitting a party to terminate a contract in certain situations. These situations might include the breach of particular obligations.

However, there are a number of limits to termination clauses:

  • Notice requirements: Termination clauses tend to have specific notice requirements before termination. Australian courts do not always enforce notice requirements strictly. But in large construction projects, where the consequences of termination are serious, courts are more likely to require strict compliance with notice requirements
  • Good faith: Australian courts may read in an implied requirement of good faith such that a party seeking to exercise a contractual right to terminate a contract must do so reasonably.16 A court will not do so where the clause provides for an unqualified right to terminate17
  • Unconscionable termination: Where a party terminates in circumstances that make the termination unconscionable, the counterparty may be able to seek relief against termination18

Termination for breach may also be possible even where a contract does not expressly include a right to terminate.

For example, a party may terminate a contract where the counterparty renounces the performance of its obligations. This is known as repudiation. Repudiation can occur where a party is unable, or unwilling, to perform its obligations. Sometimes a party expressly renounces its obligations, but a party's conduct alone might also amount to repudiation.19

A party may also in some circumstances terminate for breach of certain obligations:

  • Breach of condition: A party may terminate for breach of a "condition." A condition is a term that is fundamental to the parties' agreement, without which they would not have entered into the contract. The contract might specify that an obligation is a condition, or a court might determine that it is a condition by looking at the parties' intentions20
  • Serious breach of an intermediate term: A party can also terminate in some circumstances for a serious breach of an intermediate term (that is, an obligation other than a condition). To permit termination, the breach must deprive the terminating party of "substantially the whole benefit which it was intended that [it] should obtain from the contract."21

 

When might the parties' obligations be amended, or performance be excused due to unforeseen circumstances?

Parties can agree to a contractual mechanism to deal with unforeseen circumstances affecting the performance of their obligations. In some circumstances, the common law will also permit parties to amend or avoid the performance of their obligations, even when the contract does not expressly permit them to do so.

Force majeure clauses, for instance, might relieve a party from liability arising from its inability to fulfill its contractual obligation in certain circumstances beyond its control. Australian courts will interpret these clauses narrowly by reference to the express words used, rather than undertaking any broader determination of the parties' intention.22 Some examples of force majeure events commonly provided for in construction contracts include wars, pandemics, riots, floods, hurricanes and earthquakes.

Where a force majeure clause does not cover unforeseen circumstances, or where a contract does not include a force majeure clause, parties may also be able to rely on the common law doctrine of frustration to excuse the performance of their contractual obligations.23

To rely on frustration, a party must show that a "frustrating event," which was not caused by either party, has significantly changed the nature of the party's contractual obligations, making it unjust to enforce those obligations. Whether an event constitutes a frustrating event will depend on the facts of the case. The event must bring about a "radical" change: The fact that the event has made performance more expensive or onerous is not enough. Only exceptional circumstances will constitute a frustrating event.

 

How can disputes under construction contracts be resolved?

In many construction contracts, the parties agree to specific mechanisms for the resolution of disputes. This might be in the form of one dispute resolution mechanism, or multiple mechanisms (for example, one specifically for security of payment disputes, and another for general contractual disputes).

The main forms of dispute resolution for construction disputes in Australia are adjudication, mediation, arbitration and litigation:

  • Adjudication: As discussed above, each Australian state and territory has implemented a statutory security of payments scheme. These schemes permit parties to bring their disputes before specialized disputes boards. Adjudication is a useful way for parties to rapidly secure cash flow. However, disputes boards can only hear disputes relating to interim progress payments—they cannot adjudicate on broader contractual disputes
  • Mediation: Mediation is frequently provided for in construction contracts in Australia. In some instances, a court may also exercise its case management functions to direct parties to make genuine attempts at negotiations or mediation before proceeding to court. Mediation entails a meeting between the disputing parties, facilitated by an impartial mediator, whose role is to facilitate negotiations. Mediations are confidential and voluntary
  • Arbitration: Construction contracts also frequently contain arbitration clauses, whereby the parties agree to the resolution of their dispute before an arbitral tribunal. Parties often choose arbitration because it is private and generally confidential, and can be quicker than going to court. From a practical perspective, international arbitration is the only real choice available to parties resolving international disputes. The International Arbitration Act 1974 (Cth) governs international commercial arbitrations in Australia. Part II sets out Australia's implementation of the New York Convention. Part III provides that the Model Law has the force of law in Australia. Domestic arbitration is regulated at the state and territory level. Model Commercial Arbitration Acts have been adopted in each state and territory that are consistent with the Model Law. The Australian Centre for International Commercial Arbitration has adopted modern arbitration rules consistent with international best practice
  • Litigation: Despite Australia not having specialist construction courts, the Australian courts have significant experience in resolving construction disputes. Certain jurisdictions, such as New South Wales and Victoria, also have specialist lists that deal with construction disputes

 

1 World Bank, https://data.worldbank.org/indicator/SP.POP.TOTL?locations=AU.
2 World Bank, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=AU.
3 World Bank, http://wdi.worldbank.org/table/4.2, numbers established in 2019.
4 CAustralian Industry and Skills Committee, 'Construction' (2021) available at: https://nationalindustryinsights.aisc.net.au/industries/construction.
5 International Monetary Fund, 'IMF Datamapper: GDP, Current Prices' (2021) available at: https://www.imf.org/external/datamapper/[email protected]/OEMDC/ADVEC/WEOWORLD/APQ.
6 Foreign Acquisitions and Takeovers Act 1975 (Cth), section 4 ('foreign person').
7 For further detail, see Foreign Investment Review Board, 'Guidance Notes' (2021) available at: https://firb.gov.au/guidance-notes.
8 For further detail, see Foreign Investment Review Board, 'Guidance Note 8: National Security' (9 July 2021) available at: https://firb.gov.au/sites/firb.gov.au/files/guidancenotes/GN08_NationalSecurity.pdf.
9 O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 45 ALR 632, 636–7 (Gibbs CJ), citing Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, 86 (Lord Dunedin).
10 See Paciocco v ANZ Banking Group Limited [20216] HCA 28 (27 July 2016).
11 Bridge v Campbell Discount Co Ltd [1962] AC 600, 624 (Lord Radcliffe).
12 See, for example, Insight Vacations Pty Ltd v Young (2011) 243 CLR 149. See also Chubb Insurance Company of Australia Limited v Robinson [2016] FCAFC 17, 83, 98, 101.
13 MacRobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975) 133 CLR 125.
14 Petera Pty Ltd v EAJ Pty Ltd (1985) 7 FCR 375, 377-8
15 See, for example, Building and Construction Industry Security of Payment Act 2002 (Vic) section 13.
16 See, for example, Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234.
17 See, for example, DR Design (NSW) Pty Ltd v Grand City International Development Pty Ltd [2017] NSWSC 1778, [21]-[27].
18 See Australian Consumer Law, section 20; ispONE Pty Ltd v Telstra Corporation Ltd [2013] FCA 823, [18]-[20]. In New South Wales, a court might also find that a termination clause is unjust and declare the contract void or vary the contract pursuant to the Contracts Review Act 1980 (NSW).
19 Universal Cargo Carriers Corp v Citati [1957] 2 QB 401, 446, 449 (Devlin J); Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245, 263–4 (Mason J).
20 Tramway Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR NSW 632, 641 (Jordan CH).
21 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, 69-70 (Diplock LJ).
22 Coastal (Bermuda) Petroleum Ltd v. VTT Vulcan Petroleum SA (The Marine Star (No 2) [1996] 2 Lloyd's Rep 383, 385 (Saville LJ).
23 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 69, 729 (Lord Radcliffe).

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The author would like to thank Michael McArdle for his contributions to this chapter.

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