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.
The construction sector in Asia-Pacific is set for considerable growth, although that comes with challenges. In any largescale construction project, myriad risks exist to cause disruptions and delays, but there are best practices for mitigating these risks and resolving disputes.
The International construction industry, sensitive though it is to global economic cycles, has proven itself remarkably resilient in the face of the pandemic. In much of the developing world, including countries in the Asia-Pacific region, it also holds the key to economic recovery due to its potential for job creation. Coupled with a drive toward sustainability and digital transformation, the sector is set for considerable growth in the next few years. Some market observers suggest that the construction industry in Asia-Pacific might reach US$312.67 billion by 2024.
Governments across Asia-Pacific are looking to infrastructure to help stimulate growth as the region begins to return to some form of normalcy post-COVID-19. Encouraged by this government focus, investors are turning to view Asia-Pacific as a land of opportunity. But with rapid growth comes challenges. Construction projects around the world rely heavily on long supply chains: equipment, material and labor. A disruption to any link in that chain can result in delay and increased costs, and the way parties approach risk allocation and mitigation can have significant financial implications.
As construction projects around the world were interrupted or suspended against the backdrop of the pandemic, project owners, developers and contractors have started to look at their contractual terms more closely. Force majeure is not the only option for obtaining relief, often other—and more appropriate—avenues exist that merit exploring at an early stage. Savvy market participants will proceed with great caution and will take steps to mitigate risk, avoid disputes and ensure the best possible outcome through settlement or arbitration should disputes arise.
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.
In recent years, the construction industry in India has emerged as an attractive destination for foreign investment. To support this heightened interest, the government of India has enacted an attractive foreign direct investment policy.
The construction industry in Indonesia has long been considered the backbone of the country's economic and social development, and regulations are being continuously amended to ease complexity and expedite processes for businesses and foreign investors.
With its strategic location and significant natural resources, Malaysia is an internationally recognized investment-friendly jurisdiction with a significant construction industry. Malaysian law offers procedural safeguards and mechanisms for dispute resolution to facilitate, for example, regular and timely payment under construction contracts.
The Philippines construction industry is expected to grow with the introduction of the "Build, Build, Build" initiative and the amendment of a number of laws that would loosen restrictions on foreign investment.
With a significant and coherent body of case law on construction disputes, Singapore is a hub for resolving many construction disputes across the Asia-Pacific region.
Changes in the construction law and favorable government policy continue to spur Vietnam's construction industry.
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.
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
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.
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:
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
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.
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.
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.
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:
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:
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.
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:
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/NGDPD@WEO/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).
The author would like to thank Michael McArdle for his contributions to this chapter.
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