Avoiding the ambush: Does your construction contract include a proper dispute resolution clause?

A recent decision by the Supreme Court of Victoria has highlighted the importance of ensuring that all ‘construction contracts’ have a proper dispute resolution clause to protect against claims under the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act).

In a recent dispute between a government Department and a contractor,[1] the Supreme Court of Victoria found that the dispute resolution procedure in the then current Victorian Government Core Conditions (which allow a contractor to resolve disputes by way of referral to arbitration) constitutes a ‘method of resolving disputes’ under the legislation.[2]

The three key takeaways from this case are:

1. If there is any possibility that the subject matter of a contract includes ‘construction work’ or ‘related services’ (see below), it should have a proper method for resolving disputes so that disputed variations can be resolved outside the SOP Act regime. If it is not clear whether the work or services are covered by the legislation, this should be confirmed before entering the contract.

2. The Court’s confirmation turned on the specific words of the clause which in this case gave a party the ability to mandate the method of binding dispute resolution (litigation or arbitration) which is to apply. The Court has not confirmed that other methods of dispute resolution, such as expert determination, will be effective.

3. The Core Conditions[3] are likely to constitute a compliant method for resolving dispute and should not be amended without first obtaining legal input.

What is the SOP Act?

The SOP Act promotes cash-flow to contractors and consultants by entitling contractors and consultants to claim and be paid interim progress payments throughout the project, and has streamlined processes for pursuit and enforcement (such as adjudication) that restrict an owner’s ability to raise defences. It is not possible to contract out of the legislation.

Experience suggests that these fast track processes favour contractors who control use of the SOP Act and are often better prepared than principals.

What does the SOP Act cover?

The SOP Act covers a broad range of construction contracts, and also covers activities that would not normally be considered ‘construction’, including:

• maintenance of buildings;

• installing lighting and air-conditioning;

• security and communications systems; and

• cleaning that is related to other construction work.

It also covers ‘related services’ to construction work, such as consultants, quantity surveyors, architects, engineers and project managers.[4]

What else can the SOP Act be used for?

A common type of dispute in a construction project is whether works constitute variations and, if so, any extra amount that the contractor is entitled to be paid.

The SOP Act can be used by contractors to obtain (interim) payment for disputed variations even though a proper legal interpretation of the contract does not support such an entitlement. That those arguments are preserved for a final contract dispute is little comfort for principals who know well that once money flows this influences future conduct and leverage for satisfactory resolution.

The SOP Act also restricts the amount of disputed variations that can be claimed by a contractor, and it should be noted that there are significantly more restrictions if the contract includes a ‘method for resolving disputes’.

If a construction contract does have a proper method for resolving disputes:

• where the price is less that $150,000, there is no limit on the amount of disputed variations that can be claimed;

• where the price is over $150,000, a contractor is limited to claiming no more than 10% of the price (i.e. up to $15,000); and

• where the price is over $5 million, a contractor cannot claim any disputed variations at all (i.e. NIL).

However, if a construction contract does not have a proper method for resolving disputes, there is no limit on the amount of disputed variations that can be claimed.

It follows from the above that contracts to which the SOP Act might apply should always contain a method for resolving disputes. If disputed variations can be excluded from the SOP Act regime, it leaves those claims to be pursued under other contractual dispute processes such as arbitration – typically a more level playing field.