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Decoding design and construct contracts: Defects (Part 6)

17 April 2023

8 min read

#Construction, Infrastructure & Projects

Published by:

Andrea Wilson

Decoding design and construct contracts: Defects (Part 6)

In this sixth article breaking down the popular AS4902 standard form design and construct contract, we discuss the contractual issues surrounding defects that may arise in construction projects.

Our previous instalments covered what a contract sum is, types of security under a contract, role of superintendents, concept of ‘time’ in a contract and how contracts are varied.

What is a defect?

The standard unamended AS4902 provides that the term “defects” is defined in clause 35 and includes omissions. However, clause 35 refers to the defects liability period without specifying what constitutes an actual defect under the contract.

The only clarification of what a defect may be is provided under clause 29.3 of the unamended AS4902, where “defective work” covers the requirement for the Superintendent to notify the Contractor of any work done (including material provided) by the Contractor that does not comply with the Contract. This tends to support the general view that a defect is any aspect of the work not done as per the requirements of the Contract.

The latest version of the AS4902 (as from 24 January 2023) uses the term “defect” as a defined term, but still does not provide an express definition other than that it includes omissions.

The parties to the Contract may decide to define the term “defect” to avoid any ambiguity. This can be helpful where the works are intricate or have a very specific purpose where even a minor defect or omission can be a major problem for the use of the works.

What happens when a defect is identified?

Clause 29.3 of the unamended AS4902 states that if the Superintendent becomes aware of any work done (including material provided) by the Contractor does not comply with the Contract, they are required to notify the Contractor as soon as practicable. This drafting means that what documents form part of the Contract and what obligations the Contractor has under the Contract in relation to the works (e.g. workmanship, quality and design obligations) is important.

The Contractor is required to rectify the defective works at their own cost – there is no provision for the Contractor to be compensated for completing any of the rectification works. Instead, in practice, if the Contractor is directed to rectify works which the Contractor considers complies with the Contract, they often then try to claim the cost as a variation, and/or issue a notice of dispute under clause 42.1.

If that work is not rectified, clause 42.1 states that the Superintendent may direct the Contractor to do any one or more of the following (including times for commencement and completion):

  • remove the material from site
  • demolish the work
  • redesign, reconstruct, replace or correct the work
  • not deliver it to the site.

If the Contractor fails to comply with that direction, before the Principal can have that work rectified by others:

  • the Superintendent must have first given the Contractor written notice advising of the Principal’s intention to have the subject work rectified by others
  • eight days must have passed since giving the Contractor that notice, during which the Contractor has still failed to rectify the work.

If that process is followed and the subject work is not rectified within that eight-day period, the Principal may have the work rectified, and the Superintendent shall certify the cost incurred as moneys due from the Contractor to the Principal.

However, the Principal may elect that it will accept the subject work. In this case, rather than giving a direction to the Contractor to rectify the subject work, the Superintendent (pursuant to the unamended clause 29.4) may instead direct the Contractor that the Principal will accept the subject work as a deemed variation.

We note that the responsibility for defect rectification work, and the costs of completing those works, can lead to disputes – especially if the defect was outside of the Contractor’s control and the parties have different opinions on the quality of finishes or the level of risk they assumed under the Contract. As we discussed above, that type of dispute often culminates in the Contractor performing the rectification works, but claiming the cost of doing so as a variation, which is then rejected by the Superintendent.

Defects Liability Period

As defects don’t often become apparent the moment work is completed, most construction contracts, including the unamended AS4902, contain a “defects liability” clause. This is found at clause 35 in the unamended AS4902.

As mentioned above, clause 35 does not contain a definition of a defect. However, what it does provide for is a period of time (called the Defects Liability Period, or DLP) to be nominated by the parties at Item 32 of Annexure Part A to the Contract. This period commences at 4pm on the date of practical completion.

During the DLP, the Superintendent is able to direct the Contractor to rectify any defects that arise. The DLP is usually nominated as 12 months, but is negotiable between the parties. For instance, contracts for earthworks or roads often have a three month DLP.

Importantly, the DLP for the subject work can be extended by the Superintendent if a direction to rectify the defect is given, including a date for completion of its rectification. However, the extended DLP cannot exceed the time provided for in Item 32 of Annexure Part A. Practically, this can operate as per the below example:

  • the Contract requires the Contractor to install floor tiling with a specific slip rating, but during the DLP it becomes apparent that the tiles installed have the incorrect slip rating and present a slip hazard
  • to make the tiles comply with the Contract, it is determined that a coating may be applied to the tiles. However, the Principal is unfamiliar with the success rates of such coatings after install
  • the Superintendent directs the Contractor, during the DLP, to rectify the tiles by applying the coating. To address uncertainty as to the success of the coating, the Superintendent also directs that the DLP for the tiles will extend for a further 12 months from the date the rectification work is completed (but the DLP for the remainder of the works will still end 12 months from the date of practical completion)
  • the Contractor rectifies the tiling by applying the coating within the time directed by the Superintendent
  • if the coating on the tiles fails in the next 12 months, the Superintendent can still direct the Contractor to rectify it in accordance with clause 29.3.

In the above scenario, if the coating of the installed tiles resulted in a product that was of a lesser quality than that specified under the Contract, the Principal would be electing to accept the defective work to a degree, and it could be expected that the Superintendent would give a direction about this under clause 29.4, giving rise to a deemed variation (in this instance, likely to be a negative variation).

However, in that example, it would be good practice, prior to making such an election, for the Principal to seek an indemnity from the Contractor for any loss it incurs as a result of the inferior finish to the tiles.

If the Contractor does not comply with a direction made under clause 35, the Principal may have the rectification works carried out by others, with that cost to be certified by the Superintendent as moneys due and payable to the Principal. Contractors should be wary of this even in the DLP where there are usually limited claims remaining to be made where a set off claim can be applied. This is because the Principal will likely still hold security on behalf of the Contractor, therefore, still providing it with a pot of money (a bank guarantee, or something similar) to claim back from. See our second instalment on security and bank guarantees here.

Regardless, it is important for a Principal to follow the contractual regime and let the Superintendent direct the Contractor to complete the works first. If the Principal does not follow this step, they may only be able to recover what it would have cost the Contractor to do the works, not what it actually ends up spending.

In some instances, the parties can agree on reducing the security to the value of the works rectified in the DLP, and now the subject of the extended DLP. Using the tiling example above, if the Contractor and Principal agree the value of the tiling coating works is at most $10,000, but the Principal holds a security of $100,000, the parties may choose to enter into a side deed to reduce the security down to $10,000, with the remainder being provided back at the end of the original DLP. This means the Contractor can still have the majority of its security properly returned, but the Principal is still protected for the appropriate portion of the works. We have assisted parties previously with these types of agreements.

The above is only a high level look at the Contract and the basic issues that arise in relation to defects. If you require assistance with handling defects during any part of your project, please get in touch with a member of our team below.

The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Andrea Wilson

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