By far and away, the decision by Mascot Tower owners on May 25 to commence legal proceedings against the building’s developer was unsurprising.
Residents evacuated after cracks were discovered in the building’s primary support structure last June are yet to return. Media reports put the repair bill including interest at $53.5 million.
Mascot is not the only case of high profile legal action across Australia’s building sector.
With well-publicised issues surrounding building quality along with massive levels of investment in public infrastructure, disputes regarding cladding/building safety in multi-storey apartments and cost blowouts/delays on transport projects have generated headlines in recent years.
Since many issues are resolved through mediation and negotiation, the overall number of disputes which occur each year is unknown. When disputes do occur, costs involved vary according to issues such as the size of the project and the nature of the dispute.
Nevertheless, interesting questions surround why building disputes occur and how these can be avoided.
For answers, Sourceable spoke with Emanuel Confos, partner and construction and projects lawyer at international law firm Norton Rose Fulbright, and Helen Kowal, Partner Property, Planning & Projects, Strata at Sydney based commercial and family law firm Swaab.
Confos says disputes can have a significant commercial impact for all involved.
“Disputes involve a lot of business cost,” he says.
“And then there is also the hidden costs to a person’s business when there is a dispute. That is the cost of employees having to spend a large amount of time gathering documents and being available to lawyers which interrupts their general business.
“Developers and owners and builders are not in the business of litigation. They are in the business of doing what they do. This (a legal dispute) is a huge drain on their business.”
According to Confos, most construction disputes centre around, late completion of work, payment for variations or defective work.
Asked what upstream factors lead to disputes, Confos says this is difficult to say for certain but lists several possible issues.
First, the busy nature of the building sector in recent times has constrained resource availability and led to challenges in securing the most suitably qualified tradespeople and subcontractors.
Busy periods such as those of recent years can also lead to the emergence of new developers whose main interest is to turn a quick profit. Leaving behind a quality product, Confos says, is often less of a priority for these people.
In strata, meanwhile, there can be a mismatch in expectations between quality and price. Particularly in multi-residential construction, Confos says there are different pricing points yet often similar expectations surrounding quality and finish..
Finally, competitive pressures among builders can lead to tighter timeframes and downward pressure on prices and margins.
Kowal, meanwhile, offers a slightly different viewpoint.
Fundamentally, she says many disputes result from a breakdown in communication between the parties involved. This can lead to different expectations among partieson matters such as the scope of works involved.
On a related note, Kowal says there can be problems where contracts are unclear. This can occur, for example, where parties either fail to sign a written contract at all or sign a standard contract without either properly understanding what these entail or clearly defining the scope of works.
As well, Kowal says other challenges can lead to further disputes. Variation claims can be problematic where they result from matters which should have been anticipated at the start of the contract. Also problematic is underquoting and bidding for work at prices which do not allow for adequate margins.
To avoid disputes, Kowal says several strategies are needed.
First, it is important ensure up-front that parties understand both their contractual obligations and the costs involved in fulfilling these.
This, Kowal says is important. As a lawyer, much work on which she is engaged comes at the back end of projects. Much of her effort involves trying to redirect focus toward the front end of the work and having parties understand their commitments before signing.
Next, effective project supervision enables problems to be identified and quickly resolved. This could take place through either client side project managers or third parties who are engaged for the purposes of verification.
As well, effective communication is needed throughout the project between builders and designers such as architects and engineers. Potentially, this can involve early contractor involvement to ensure that buildability concerns are addressed during design. Once the design is complete, it can also entail architects and engineers being involved throughout the project.
At a broader level, meanwhile, Kowal says lifting industry standards and practices through implementing recommendations of the Shergold Weir report will also be critical.
Apart from the financial expenses, Kowal says involvement in disputes can have reputational costs for firms. Contractors/subcontractors who become known for frequent involvement in litigation could face greater difficulty in securing new work. For project owners and head contractors, meanwhile, a reputation for litigation involvement could lead to difficulty in securing the services of the best contractors/subcontractors for their project.
Confos recommends several steps to avoid disputes.
Prior to making and awarding contracts, each side should conduct financial due diligence to ensure that their counterparty has the capability to deliver on their commitments. As well, contractors and subcontractors who are chosen should have the necessary capability and expertise for the specific project in question.
When making contracts, it is important to spend time on the details and to obtain legal advice to ensure that the agreement accurately reflects the intention of each party.
During delivery, supervision is essential. This includes ensuring the engineers sign off on relevant stages of construction. The cost of making this happen needs to be reflected in the price of the contract.
Confos says this is important. In recent times, he says there has been a lowering of supervision on construction projects.
Finally, Confos says lawyers should be engaged before the contract is signed.
“There is no point getting in lawyers after you have signed the contract, which is something we see a lot,” he said.
“You need to get them early, negotiate the contract, make sure it reflects what it was (in the deal) and what you are after.
“Then you shouldn’t need to see them again until the end when you need to wrap it all up.”