Read time: 13 minutes
Professional services provided by architects to clients will normally include preparation of documents that, as contract documents, define a legal relationship between the parties. It is therefore important for contract documents to be prepared and executed correctly.
- Introduction
- Order of precedence
- Amending contract documents
- Amending standard-form contracts
- Contract schedules
- Liquidated damages
- Incorporating government policy
Introduction
A building contract comprises a set of documents (generally referred to as the 'contract documents') that form a binding agreement between owner and contractor and define the agreed terms and conditions under which a project will be completed.
In addition to the documents that are used for tendering purposes, a number of other documents must be included to form the contract documents. The contract documents should accurately reflect the extent or scope of work to be undertaken and the cost agreed for the works.
An architect providing a traditional service in respect of the procurement of a building is required to administer the contract between contractor and owner.
This task can be made difficult if there are disputes as to what does or does not form part of the contract. Questions may be raised as to which other documents form part of the contract or whether there are also oral or implied terms.
When the selection of the contractor and finalising of the contract terms is either by tender or negotiation, questions may arise as to whether information supplied to tenderers, or offers and counter-offers made in the course of negotiations, are part of the contract.
The contract documents should include the documents used for tendering along with any addenda or records of negotiation. The drawings and specifications should be altered to reflect the amended scope or extent of work, labelled 'For construction' and issued.
Clear, traceable records should be kept of all such changes and changes clouded or highlighted.
The tender documents should be maintained as a record set for possible future reference. Note: the tender documents do not always form part of the contract.
Special care should be taken to ensure that the contract agreement selected for the project will comply with any relevant legislation in the state or territory, eg domestic-building legislation is applicable in most states and there may be other legislative requirements relevant to the particular location of the works.
It is essential for the applicable information in the contract appendix or schedules to be provided in the tender documents and this should be accurately transferred to the contract documents. Some information – such as the actual agreed contract sum, name and address of the contractor, applicable rates or margins – will be obtained from the tender process or from subsequent negotiations between the parties after the close of tenders. The date of the contract will normally be the date when the last party executes the documents. The parties may jointly agree to some other date at which the contract comes into effect but if this is the case it must be confirmed by both parties in writing prior to the execution of the documents.
The architect should be fully aware of the particular requirements of the form of contract agreement selected for any project.
In the preparation of the contract documents it is important to ensure the information is correct and consistent between the contract, the drawings, the schedules and the specification and, where necessary, the bills of quantities.
Order of precedence
The order of precedence of the contract documents should be stated in the contract documents as this will be used to resolve discrepancies and inconsistencies in and between the documents.
Where the conditions of contract include an order of precedence, the contract documents should follow the same order if possible. The following order of precedence for the contract documents is generally consistent with most standard-form building contracts:
- Special conditions shown in the schedule to the contract (including any owner occupier special conditions).
- The conditions set out in the contract/general conditions. This document is generally referred to as 'the contract' and will contain a number of clauses describing the roles and responsibilities of the parties and other matters relating to the construction of the works. The contract may consist of a number of standard clauses, or include a set of special conditions or a combination of both to reflect the requirements of the parties for a particular project. Some standard forms of contract require a separate document known as the 'Instrument of Agreement', which will be unique for any particular project and will be executed by the parties to signify their agreement to the standard form of contract.
- The specification for the works. This will describe the standards and quality of labour and materials required to complete the works.
- The drawings for the works. The drawings describe by way of plans, elevations, sections and details, the scope and extent of the works. The drawings would normally form a part of the documents used to obtain tenders for the works but the tender drawings may not be the same as the contract drawings due to any agreed amendments to the scope of the works made after the close of tenders but prior to the execution of the contract. The contract set of drawings must reflect the actual scope of work as agreed between the parties at the time of the execution of the contract.
- Any other documents in the order shown in the schedule of the contract.
Amending contract documents
Amendments and revisions made to any one of the contract documents after completion of the post-tender negotiations must be reflected in all other documents to ensure the complete set accurately reflects the actual scope of works agreed between the parties. This is best achieved by amendments to the tender documents rather than simply attaching a list of agreed revisions. This means amending the drawings, revising the relevant sections of the specification and altering the bills of quantities. The extra time taken to do this before the contract is signed will ensure there is no confusion about the scope of work and the contractor will have a clear and coordinated set of documents to complete the building works.
Amending standard-form contracts
Architects are warned against amending standard-form building contracts. If it is necessary to do so, a legal practitioner should make the amendments, and all parties be in agreement.
Amending any standard building contract is a task which should not be undertaken without knowledge of contract administration, legal knowledge and document drafting skill. Should your client be caused loss by an amendment made by you, it is possible that they will look to you for recompense. It is also possible that, unless you are a legal practitioner, the drafting of significant amendments to a contract to which you are not a party (such as a building contract) contravenes your state's Legal Practitioners Act.
Should you consider that a standard amendment is necessary to the contracts you administer, have your solicitor draft it. If an amendment is necessary for a particular job, either at your initiation because of particular circumstances or, at the client's request, ask your client to have a solicitor draft it, taking into account the contract as a whole, including any 'standard' amendments.
Either way, standard contracts should only be amended for clear and sufficient reason and after due consideration of all the possible effects of the amendments.
Contract schedules
Most standard-form building contracts include schedules which detail the particular requirements or conditions of contract for a project. The schedules must be completed before tenders are called and will become part of the contract when it is signed.
The Australian Building Industry Contracts (ABIC) contract schedules are integrated into single downloadable contract documents for all state and territory versions. Refer Acumen note ABIC contracts (and navigate to your relevant state or territory page).
Ambiguity in contracts has the potential to lead to misunderstandings at best, and litigation at worst. When completing contract schedules, architects should exercise care and diligence. Contractual provisions might seem peripheral, but they warrant the same attention as those functions closer to the core of architectural practice. The issues are not difficult, but their simplicity belies their importance.
In legal documents, such as contracts, the effects of ambiguous terms can be significant for the parties to the contract. Furthermore, if an architect has had a hand in those ambiguous terms, such as ambiguously filling out the schedules to an ABIC contract, that architect may be sued for professional negligence, the damages for which would extend to the loss suffered by the client as a result of the architect's negligence.
Some ambiguous terms
The meanings of the terms 'N/A' and 'not applicable' were considered by the High Court in Deaves v CML Insurance (1979, 23 ALR 539). Though the matter does not appear to have been directly argued before the court, most of the judges nevertheless felt compelled to address the relationship between the terms, the eventual conclusion of which was that 'N/A' is synonymous with 'not applicable'. However, the fact that the matter had to be discussed by the High Court at all is reason enough to avoid the issue altogether – better to be explicitly clear than slightly ambiguous. Accordingly, if a provision is not to apply, it should be filled out 'not applicable', rather than 'N/A'.
Of greater concern is the use of the term 'nil', which is defined in the Oxford Dictionary as 'nothing' or 'no number or amount'. Clearly, 'nil' is not synonymous with 'not applicable'. Similarly, neither 'not applicable' nor 'nil' are synonymous with 'no'.
This was part of the problem before the court in Deaves, where the answer to a question in an insurance application form had been filled out 'N/A'. The question being answered in this fashion related to whether the property proposed to be insured was already insured with another insurer. The property was, in fact, insured with another insurer. Unfortunately for the owners, the law will usually allow an insurer to avoid paying out on a policy if there has been a material misrepresentation in the application form. In this case, the insurer was trying to do just that – avoid paying out on the policy because (as far as the insurer was concerned) the answer 'N/A' meant that the owner had falsely represented that the property was not insured with another insurer, when in fact it was. Judge Jacobs focussed on the ambiguity:
The statement 'N/A', meaning 'not applicable', is ambiguous. It may mean 'not applicable because there is no other insurance' or it may mean ‘The request is not applicable in the circumstances.' (1979, 23 ALR 539 at 574)
For Judge Jacobs, if the former had been intended, there had been a material misrepresentation and the insurer was not bound to pay out; if the latter had been intended, there was no material misrepresentation and the insurer was bound to pay out. Clearly, if the form had been filled out 'yes' (or 'no' if it had not been insured with another insurer), the whole expensive and protracted legal exercise could have been avoided because the answer would have been clear.
As to the question of what was intended by a particular answer, architects sometimes assume that the answer to this question should lie in asking the architect what was meant at the time. This belief is mistaken. Courts have rules of interpretation, and these rules do not involve the subjective intention of the architect. Rather, courts will draw their own conclusions based on what a dispassionate third-party observer would conclude was meant by a particular term.
Liquidated damages
Liquidated damages are a pre-estimate of the 'loss' a client/owner is likely to suffer if the practical completion of a building project is delayed beyond the date for practical completion (as legitimately extended under the terms of the contract). Liquidated damages are meant to be a genuine estimate of the loss the owner is likely to suffer if practical completion is not achieved when due. If the amount inserted is treated not as compensation but designed to injure the other party, it will likely be challenged and struck out as a penalty. For example, if the client/owner is renting accommodation while their house is being built, the liquidated damages might be equal to the rent they are paying. To complete the schedule item at the time of signing the architect needs to take advice from their client/owner, after explaining that this must reflect reasonable estimates of the client/owner's costs at the time practical completion is anticipated.
It is good practice to document the client’s reasoning and keep this on the project file.
It is not uncommon for contracts to now expressly provide that if liquidated damages are not recoverable because they are found to be a penalty, then general or common law damages will apply.
Court awarded damages (at common law which are designed to put the plaintiff in the position it would have been in but for the breach) and liquidated damages are not necessarily mutually exclusive remedies; depending on the wording of a contract, one or the other, or neither may be an available remedy for the client/owner. Even if liquidated damages are excluded, the parties need to show clear and completely unambiguous words in the contract that they intend to exclude common law damages for delay in completing a project. However, it is unlikely that the owner will agree to forego all rights of recovery if the project is delayed. There is no guarantee that the following suggestions about how to complete a liquidated damages schedule item will exclude the possibility that common law damages will apply. The only way to guarantee that neither liquidated damages nor common law damages will apply is to have a lawyer amend the contract appropriately.
Problems usually arise later when the client/owner at the end of the construction period wants damages to be applicable for late completion after all. Whether damages at common law are also available to a client/owner is a question architects should not try to answer. The architect's role is to administer the contract, and if a client/owner wishes to investigate recovering common law damages for late practical completion, it will be outside the scope of the architect's services in administration of the contract. The architect should recommend that the client/owner gets legal advice about what remedies might be available to them in addition to the contract.
However, uncertainty often arises for administration of the contract itself where, at the time the contract is signed, the parties do not indicate a positive dollar amount for liquidated damages. Where possible have this detailed and both parties agree. If the circumstances change at least a starting position is recorded.
Refer Acumen note Prevention Principle and the implied duty of cooperation.
Completing the schedule item
The liquidated damages schedule item usually calls for a positive dollar amount to be inserted. It is also advisable to ensure that the liquidated damages are either stated as a daily rate or if another rate is chosen, for example a weekly rate, that the amount is readily divisible by seven. With that figure available, the architect can apply the provisions of the contract.
Writing in 'N/A' or 'not applicable' is likely to result in ambiguity about the intention of parties (refer 'some ambiguous terms' section above). While it might have been intended that the liquidated damages provisions of the contract are not applicable, ambiguity may remain because it is not clear whether common law damages are to apply.
Not completing the item at all also creates a serious ambiguity. The ambiguity arises because the blank item means it cannot be determined from the contract what the parties intended. It could mean that liquidated damages are not applicable (as above), that no liquidated damages are payable (and common law damages may be or not be available), or that the parties simply failed to think about or contractually agree on what liquidated damages rate is to be applicable. In this case, if a court is asked to interpret the contract to determine what damages remedy is available, the court may find it has no good basis to work out what the parties really intended. The risk to the client/owner is that a court will be unable to resolve the ambiguity and conclude that there is no entitlement to liquidated damages and the owner/plaintiff will need to prove general damages or loss of use damages apply and then prove the claim made by reference to actual loss. This particular ambiguity can be avoided by completing the item with an appropriate dollar amount.
Caution also needs to be exercised in filling out the item as 'nil' or '$0.00'. This is a very basic way of indicating that the parties did not intend liquidated damages under the contract to be payable. The literal interpretation of inserting 'nil' or '$0.00' is that the contractor is still liable under the contract provisions to pay the client/owner liquidated damages but at the rate of $nil per calendar day (or other period stated) and that can be applied to the contract provisions, but with a '0' result. For that reason, it is sufficient for contract administration purposes to say that liquidated damages will not in effect be paid. However, it does not answer any question of what damages remedy outside the contract (such as common law damages, also known as ‘loss of use’ damages), if any, is available to the client/owner. That still depends on the wording of the particular contract. If the question is raised, the architect should recommend that the client/owner get legal advice about their possible remedies.
Incorporating government policy
Government clients may attempt to incorporate policies into consultant’s documents that are unrelated to design aspects or safety standards. For example, government policy may specify that a certain percentage of Australian materials must be used in construction.
Such conditions thought desirable by government clients should be contained in the conditions of tendering and not in the contract documents, thereby putting the onus on the builder. An architect should not be responsible for checking that specified conditions have been complied with, and for checking that product substitutions are of equivalent standard. Refer Acumen note Substitutions. It is advisable for architects to include a clause to this effect in their conditions of engagement with government clients.
Disclaimer
This content is provided by the Australian Institute of Architects for reference purposes and as general guidance. It does not take into account specific circumstances and should not be relied on in that way. It is not legal, financial, insurance, or other advice and you should seek independent verification or advice before relying on this content in circumstances where loss or damage may result. The Institute endeavours to publish content that is accurate at the time it is published but does not accept responsibility for content that may or has become inaccurate over time. Using this website and content is subject to the Acumen User Licence.