• John Lowry

Killer Contracts - Are you signing up to contract that can kill or badly wound your business?



Killer Contracts - The impact of contract on security of payment

There is a general impression that security of payment legislation is an alternative mechanism for resolving payment disputes through adjudication. A reading of any Australian security of payment legislation will reveal that security of payment legislation is primarily a regulated payment process to ensure that businesses in the construction industry can maintain cash flow on reasonable commercial terms. The legislated process is a formalisation of a long standing customary process, namely a claim for payment for work done, an assessment of the claim, negotiation and agreement, and in the last resort a formal dispute resolution process. Adjudication is intended to be a last-resort when a payment dispute can not be resolved.

Construction payment is about much more than adjudication. Payment is about:

  1. Entitlement, and

  2. Collection

Entitlement is by far the most complex and difficult of the two aspects of payment to manage.

Entitlement in Queensland is established by much more than security of payment laws. It is governed by:

  1. Legislation, including the Building and Construction Industry Payments Act (BCIPA) and the QBCC Act.

  2. Judgements

  3. Contract.

Legislation regulates he payment process, even though it is voluntary, some unconscionable contract provisions including “pay when paid” provisions and other matters such as maximum payment terms and interest on overdue amounts. Otherwise, governments are reluctant to interfere with contractual agreements. Recent changes to consumer legislation will have little real effect for most contractors.

Judgements of the Courts interpret and clarify the legislation. They create the precedent for decisions of future claims. Lawyers analyse these decisions carefully in order to advise their clients about how to manage or vary their contracts to minimise the risks of losing claims.

Contact governs most other aspects of payment, including entitlement to payment for variations, extensions of time, suspension and termination, retention and liquidated damages. Every one of these issues has an impact on a contractors entitlement to payment.

Contracts are carefully crafted to avoid the risk of entitlement to payment from contractors for mismanaged or unforeseen contingencies. Many of these contracts are so well crafted we call them “Killer Contracts”.

Killer Contracts include conditions that, if anything should not go exactly to plan, will destroy or badly damage good and well managed businesses. They include liability for risks that the contractor or subcontractor can not manage or price. They also typically include conditions that prevent contractors from suspending or withdrawing from a contract and from seeking recovery of damage from any other party.

Contract clauses that might cause you to consider a holiday cruise instead of signing up to a disastrous contract are:

Performance obligations - Unpriceable and unmanageable obligations include guaranteeing the accuracy and correctness of design documents provided by others and a guarantee to use the most expensive option in the event of a discrepancy. Guaranteeing “fitness for purpose” of material and designs and specifications of others.

Site conditions and latent conditions - Responsibility for all unknown site conditions and existing services.

The work of prior contractors - Guaranteeing the work of prior contractors / subcontractors.

Access - Responsibility for access to the site and the contractors work on site, over which you have absolutely no control.

Time bars - Unreasonable and effectively impossible time bars are used to cut off your entitlement to variations and extensions of time.

Program - Responsibility for the entire construction program, over which you have absolutely no control. You are not entitled to any payment for delay, disruption or acceleration.

Protection - Responsibility for protecting your work at all times until project completion, whether you are on site or not.

Completion - You have no way to trigger completion of your contract. Completion is often tied to signing off on a “release and waiver” that is used as a tool to negotiate discounts or disputed amounts.

Retentions and guarantees - Retentions and guarantees including retentions on other contracts may be accessed at random to set off claims against you.

Termination and suspension - You may have no rights to suspend or terminate a contract for any reason, including non-performance by your client / contractor. On the other side, you client / head contractor may be entitled to terminate your contract without reason. This tactic is often used in Queensland to avoid a payment claim under the BCIPA.

Overriding your subcontracts - A client / contractor may be able to pay your subcontractors directly and recover the payment from you, even when you are in dispute with the subcontractor.

There are many and varied subtle ways to avoid payment and to prevent your entitlement to proper and reasonable payment.

Other issues

Killer contracts have a broader effect on the construction sector. They inhibit productivity, cooperation and investment. They are damaging to innovation and collaboration; this is particularly relevant at a time when collaborative contracting is fast becoming the path to major productivity gains in the construction sector.

Would you like more information about Killer Contracts? Contact AQSAS here >>

Author: John Lowry lfaiqs, iceca, aiama, reg adjudicator (Qld) - Director of AQS Advisory Services and MIAC-Workflow business workflow integration.


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