Standards Australia has released a draft version of AS11000 intended to merge and replace the suites of contracts related to AS2124:1992 and AS4000:1997. The draft was put together with input from a number of organisations including Austroads, the Australian Procurement and Construction Council, the Australian Institute of Architects, the Civil Contractors Federation of Australia, the Construction Industry Engineering Services Group and the Society of Construction Law.
The key issues of concern identified were:
- Risk allocation
- Good faith
- Extensions of time
- Payment provisions
- Impact of security of payment legislation
- Dispute resolution
AS11000 focuses on these areas and contains significant, and sometimes controversial, changes to the earlier contracts. The proposed changes are intended to provide a broadly balanced risk allocation and will affect all parties to a contract. We set out below the key changes proposed in AS11000 and the implications for principals and contractors.
Unless otherwise noted, all clauses outlined below refer to clauses in AS11000.
Obligation to act in good faith
- AS11000 imposes a new express obligation on the principal and contractor to act in good faith towards each other (clause 2.1). It provides that the parties agree ‘to act reasonably in a spirit of mutual trust and cooperation, and generally in good faith towards the other’. Some courts have implied an obligation of good faith into contracts but this position is not universally accepted in Australia. There is no definition of good faith in AS11000:2015. Legal commentators, in particular, are questioning whether an express and unqualified duty of this nature will add uncertainty and scope for dispute in the context of a lump sum contract with an agreed risk allocation.
Early warning procedure
- A party is required to give immediate written notice to the superintendent and the other party when the party becomes aware of an event or circumstance which may impact upon time, cost, scope or quality under the contract (clause 2.2).
- The right to give a prescribed notice of claim and invoke the dispute resolution provisions are subject to a party’s compliance with the procedure in clauses 2.2 to 2.5. Although the failure to give a prescribed notice is not a bar to making a claim (except in relation to final payment), failure to comply with the early warning procedure may be. This may have the unintended side effect of making issues more contentious and requiring more resources and attention at an earlier stage (and possibly before the full effect of the issue is known), rather than allowing the best resolution to be worked through between the parties as the project progresses.
- It is also clear that the superintendent can issue an early warning notice. Under clause 2.2 it is mandatory for the superintendent to direct the parties to a conference if he or she becomes aware of any event or circumstance which may impact on time, cost, scope or quality or become an issue. The use of the word “shall” suggests there is no discretion about this. Therefore the superintendent must require a conference, whether the contractor intends to make a claim or not, if the superintendent believes there could be cost or time implications. It is to be hoped that this mandatory requirement to direct a conference, and the obligations and time limits which follow that, do not replace the normal project communications between the parties about issues of potential concern.
- According to a statement issued by Standards Australia, the objective of the early warning procedure is to encourage prompt resolution of issues by the parties and the superintendent. This provision has the potential to create an administrative burden on parties with a disproportionate practical benefit. Contractors now need to give notice under this clause to protect their position in many circumstances which may have no real impact on the time or cost of the works. The obligation to follow the procedure in clause 2.2 runs in tandem with the other notice obligations contained in the contract – such as in relation to variations and extensions of time – so the contractor will still have to get on with giving notices and preparing an extension of time claim whilst the early warning procedure is being undertaken. This might mean, in turn, the contractor has to give notice of intention to issue a notice of dispute before the superintendent has made an assessment of the entitlement to an extension of time.
- A contractor entering into the AS11000 contract must now, if required by the principal, use the proposed AS11002:2015 subcontract conditions for contracts with subcontractors (clause 12.3).
- The subcontract terms cannot contain amendments or additions “except those necessary to reflect the Contract between the Principal and the Contractor”. Failure to comply with this requirement is a substantial breach of contract and therefore a ground for giving notice to show cause and ultimately, termination. The words “except those necessary to reflect the Contract between the Principal and the Contractor” are uncertain. Does this mean the subcontract can only be amended to be strictly back to back, or is it permissible to allow, say, longer payment terms to a subcontractor than are applicable under the head contract to give the head contractor a buffer in the event of late payment? Given that the consequences of non-compliance are so onerous, there is a high degree of uncertainty in this provision. We would also expect there will be some resistance from head contractors to having their contractual relationships with the subcontractors constrained in this way and this clause will be a disincentive for contractors to use the new standard.
- The proposed contract introduces the concept of “prospective variations”. If the contractor considers a direction by the superintendent constitutes a variation, the contractor shall promptly and, in any event, not later than 5 business days after receipt of such direction, notify the superintendent in writing the contractor considers the direction constitutes a variation (clause 39.3).
- If the superintendent does not believe the direction constitutes a variation, then the early warning procedure set out in subclauses 2.2 to 2.5 applies.
- In relation to pricing variations, rates and prices generally are to include allowance for overheads and profit unless otherwise stated, and there is a specific right to recover delay costs for delays caused by a variation if not already priced as part of the variation under subclause 39.2.
Role of the Superintendent
- There are substantial proposed changes to the principal’s obligations in relation to the role of the superintendent. These represent a move away from AS4000 closer to the AS2124 regime. Presumably they are also intended to discourage the widespread practice of amending AS4000 to remove any obligation on the principal to ensure the superintendent acts fairly or impartially. Whether the amendments will achieve this outcome remains to be seen but the amendments do not go as far as many contracts generated by principals that we see regularly.
- AS11000 requires that the principal must ensure the superintendent acts honestly and within a reasonable time (as opposed to “reasonably and in good faith” in AS4000. Where the superintendent has to verify, assess, price, measure or value work, quantities or time, or otherwise to act reasonably, the superintendent must act impartially (clause 23.1(c)). As such, there is no general requirement on the principal to ensure the superintendent acts reasonably or fairly but the requirement to act reasonably has been added throughout the contract in relation to specific obligations (for example, in relation to the right to direct additional information to be provided in support of an extension of time claim).
- In AS11000 the superintendent otherwise acts as an agent for the principal (clause 23.2).
Programming, delays and extensions of time
- The programming provisions (now in clause 35), have been strengthened, with an option to agree more detailed requirements in Annexure Part E. AS11000 refers to a program as an “activity-based critical path program in a time-linked bar (or Gantt) chart form” (clause 35.5).
- There is now an express power for the superintendent to accelerate the works.
- The acronym EOT has gone (as has WUC for Work under the Contract). The definitions of qualifying cause of delay and compensable cause of delay have also been removed; the causes are now described in the extension of time clause as in AS2124. There is a new cause of delay “act of prevention” which covers default, act or omission of the superintendent and the principal or its consultants, agents or other contractors.
- The notice regime has changed somewhat; upon becoming aware of anything which will probably cause delay to the work under the contract, a party has to promptly and, in any event, within 5 business days, give the superintendent and the other party written notice of that cause and the estimated delay. The contractor has to state in the notice whether the contractor anticipates it will be claiming an extension of time for the cause of delay (clause 37.2). Note that service of documents by email is now allowed (clause 10).
- The contractor is entitled to an extension of time if the contractor gives the superintendent, within 20 business days after the delay occurs, a written claim for an extension of time and:
a) If the delay occurred on or before the date for practical completion the event was beyond the reasonable control of the contractor (including but not limited to inclement weather and industrial conditions);
b) If the delay occurred before the date of practical completion, it was due to a variation (other than for the convenience of the contractor) directed by the superintendent or an act of prevention (clause 37.3 – 37.4)).
It is unclear why this distinction between delays “before” and delays “on or before” is made and how it might play out in practice. Presumably this reflects that fact the variations have to be directed “before” the date of practical completion. However, if a variation was ordered on the date of practical completion it could amount to an act of prevention.
Clause 37 does not state the notice requirements in the clause operate as a time bar. In the absence of express wording to this effect, a court is unlikely to rule that non-compliance with clause 37.2 or 37.3 means that a party loses its entitlement to claim, unless the principal can show that the delay could have been avoided or mitigated if proper notice was given.
- Extensions of time are now measured only in working days (clause 37). AS4000 measures extensions of time in calendar days not working days.
- There is a new approach to sharing risk of concurrent delays; the contractor is entitled to an extension of time, but not delay damages, where there are “overlapping delays” (clause 37.6). AS4000 required the superintendent to apportion delays.
Security of payment legislation
- AS11000 is drafted so as to more closely align with the requirements of the security of payment legislation throughout Australia, for example:
a) A progress or final certificate is a payment statement or a payment schedule for security of payment purposes (clause 40.1(a)(ii));
b) The progress claim or final payment claim submitted pursuant to the contract is stated to be a payment claim for security of payment purposes (clause 40.1(a)(i));
c) The superintendent has the power to receive payment claims and issue progress certificates on behalf of the principal to comply with the security of payment legislation (clause 40.1(b)). Unlike AS 4000 which had a dual certificate regime (clause 37.2), under AS11000 the superintendent now only issues one certificate for the amount payable to a party.
- Clause 45 of AS11000 substantially expands the dispute resolution procedures and gives two alternatives:
a) Alternative 1 allows the parties to resolve disputes by a conference followed by arbitration (clause 45.7- 45.9);
b) Alternative 2 allows the parties to resolve disputes by a conference followed by expert determination and possibly litigation (clause 45.10-45.13).
- The parties may also elect to resolve disputes by alternative methods. However, if alternatives are elected, the dispute resolution procedures contained in the AS11001 – 2015 are to be applied (clause 45.15). AS11001 is a proposed separate standard on dispute resolution and management in contracts; this is also in the course of preparation.
These are the key changes. It is regrettable that the opportunity was not taken to update the language of the contract. It has been nearly 20 years since the last review. The use of expressions such as “hereby”, “thereby”, “thereupon” and “thereafter” give a contract expected to be around for the next 20 years an outdated feel from the outset. Even the word “shall” is now avoided by many drafters who prefer the more certain alternatives of “may” and “must”.
The opportunity for public comment ended on 27 March 2015. The work of the drafting committee has, so far, been conducted rapidly in light of the size of the task. On past form we can expect the final document relatively quickly.
We will provide a further update once the final version has been released.
In the meantime please do not hesitate to contact Jeanie Elliott on (08) 8110 8006 if you have any questions.