General Nature of Disputes

The nature of construction projects, and the disputes which arise out of them are contractual in nature. In its simplest form, one party, a Contractor, supplies work and materials to achieve a particular outcome for a paying client, the Principal, the terms of which are agreed in a contract.

Types of Disputes

Typical disputes involve:

• Incomplete or defective works, and materials;
• Fundamental flaws in design;
• Variations of contract, leading to breach;
• Unpaid progress payments; or
• Delay

Thus, disputes typically encompass time, materials, payment, and quality of work.

Changes or Variations of Contract

Contractors are at the mercy of market conditions, including raw material availability and prices, government regulations, unions, and many other overlapping factors which can affect the performance of the contract.

Contractors are also at the mercy of the contract which they have agreed to.

It is certainly common in construction projects that variation provisions are baked into contracts. Parties can then make relevant adjustments to, for example the price of raw materials, which would also affect the completion price. In this type of scenario, the adjustment would not trigger a variation of contract. Rather, parties are simply operating within the confines of a well constructed contract. This is an ideal scenario.

The express terms and conditions, and in some cases, implied terms within the contract, determine to what extent the parties can manoeuvre within the confines of the contract.

Within the course of a construction project, there are often considerations regarding whether the scope of work under the contract should be reduced, expanded or varied, or in some cases, stopped altogether. Broadly, this concept is called variation.

Types of Variation

In the event the contract terms do not provide for sufficient manoeuverability for the parties a variation will be required. Well constructed contracts have several cascading clauses which enable parties to conduct semi-formal style negotiations to agree on contractual variations. Typical variations occur from:

• Changes to costs of raw materials;
• Inability or delay in obtaining raw materials;
• Contractual documents being inflexible or often very inconsistent;
• Changes within the governing laws;
• Changes in client specifications;

In best case scenarios the parties anticipate likely events which would result in a variation and incorporate this into a contract.

Parties wishing to vary the contract without first complying with the parameters of the contract may potentially fall into breach or repudiation of contract.

Payment for Existing Works

Often construction contracts are drafted in a manner to include progress payments, which typically involve a series of instalments paid to the Contractor during the life of the project for the price of work undertaken and partially completed.

Disputes often arise where a Contractor has partially completed the project, but the contract does not account for a progress payment. The parties are left in a situation where it is unclear as to what part of the project entitles the Contractor to claim for a progress payment.

In the event of non-provision of the progress payments within the contract a Contractor may seek payment for work completed on quantum meruit basis or, payment for work completed.

On the other hand, the Principal may have made a series of progress payments in good faith but is yet to see advances in the project in line with agreed contractual expectations.

Both situations can lead to disputes, which can often stall the project and cause further delay.

Delay

Often it is the case a delayed project may not be protected under the contract and leave the Contractor liable for damages due to breach. Damages are often highly complicated in construction projects.

To avoid the complexities of calculations on quantum, a liquidated damages clause is sometimes agreed. In such circumstances there will be a mutually agreed daily rate for damages, or similar depending, on the size of the project.

Practical Completion

A construction project would typically stipulate the date by which the final works must be practically completed. This date is generally understood to be the day when the majority or substantial amount of work has been completed, save for defects.

The completion of works date typically triggers a defects liability period which may last, for example, for a period of 12 months where specific defects which are covered in the contract must be remedied by the Contractor.

Often, there will be defects, which are not completed, or outside the scope of the definition of the defect liability provisions, which would again cause the parties to fall into dispute.

Breach, Repudiation, Election

Often, these terms are incorrectly conflated together.

Breach of contract scenarios typically involve not performing an obligation under the contract, defectively performing an obligation, or not performing an obligation on time. Where there is a breach of contract, a party would typically have a right to terminate the contract and sue for damages.

Anticipatory breach is defined as a party that no longer intends or is willing to be bound by the contract to such an extent by their words or conduct, that they would fall into breach. Anticipatory breach gives rise to the concept of repudiation of contract, where, in a sense they are no longer ready and willing to perform the contract, and if it is seriously deficient enough, the non-repudiating party may elect to terminate the contract.

Election thus, is a choice from the non-repudiating party to terminate the contract for an anticipatory breach, or repudiation.

Where a party elects to terminate the contract, they may not go back and request the non-performing party to continue the contract as the contract itself is voided or terminated.

Damages

The general principle in contract law regarding damages is to restore an aggrieved party to the position which would they have been had the wrongful act not occurred, or the cost of completion in accordance with the contract.

A general feature of damages is the concept of finality. Damages represent a final determination of the entire loss suffered, and it is generally considered that the aggrieved party may not then seek further damages regarding the same breach. Damages for breach are usually assessed from the date of breach.

In the case of defective works, damages would include the cost of rectification.

Duty to Mitigate Loss When Claiming Damages for Breach

Where a party has suffered loss or is likely to suffer a potential loss due to breach they have a duty to mitigate such loss. This is particularly so when a party suing for damages could’ve mitigated some loss, and did not. The party in breach may then set off this amount against damages awarded against them. A claim of damages may be also set off against a claim for any money owing.

The essential substance of this rule is that it requires a party to limit or minimise the loss for those damages that are intended to be claimed.

Within construction projects the duty to mitigate covers such reasonable steps to uncover any defective work, prevent such deterioration of the uncovered defective work, or carry out any rectification work, where upon discovery, a failure to act might increase costs.

The costs of any rectification work, including any additional damage suffered is typically recovered as damages from the wrongful acting party, as damages flowing from the original wrongful act.

As a somewhat complex example, in the event a Principal instructs a Contractor to conduct an illicit, or illegal act, or perhaps an act outside the confines of the contract, the Contractor may have a duty to mitigate loss and accept a reputation of contract. If the Contractor had undertaken the work, the failure to not repudiate the contract may amount to a failure to mitigate loss.

Consequential Loss

As discussed above, damages flow from the breach, and in some cases where there are additional impacts on lost revenue, profit, or even capital loss, these may also be claimed as a consequence of the initial breach.

Evidence in Disputes

Evidence in construction disputes can be complex and require typically the instruction of expert witnesses in a given field to determine the liability and quantum of damages.

Agreements to Arbitrate

Parties should always check and be certain of the applicable law for the contract in which it will be governed under. Also, it is critical to have an appropriate arbitration clause, which encompasses the means to remedy a potential breach. This is particularly within cross-border projects where, in some cases the domestic state laws may not apply, or may not have the far reaching powers that international laws do.

Key Takeaways

Contracts should ideally have flexibility for both parties, which would encompass the concept of delay.

Contracts needs to be flexible enough regarding pricing and delay so the parties can operate within it not having to re-draft clauses which would further delay the contract.

Parties may seek to elect to terminate the contract from a non-willing party, giving rise to sue for damages.

If you have any questions or concerns about this insight, please contact us at info@letranlaw.com