A commission of enquiry is looking into construction insolvency in NSW. The inquiry aims to determine the cause of insolvencies in the building industry and of sub-contractors not being paid.
Whenever there is a downturn in new start activity, insolvency and building industry layoffs tick up. History has shown this to be a given because the money pipeline dries up.
Construction downturns also lead to more onerous market and contracting cultures. As margins shrink, there is a tendency for canny developers to screw down prices, screw down margins and use the contract as a blunt instrument, all of which is perfectly permissible in the cut throat free market.
My firm recently acted for a contractor who had signed a contract that prohibited time extensions for events such as force majeure, inclement weather and flooding. All of this conspired to make it virtually impossible for the contractor to claim time extensions. The contract was inherently prohibitive and had all the characteristics of what is often parochially referred to as a “take it or leave it” contract.
A flood occurred that caused a three-month delay but little largess was afforded for the contractors’ predicament when it came to granting time extensions and the builder haemorrhaged.
This type of scenario is common and oppressive, with such one-sided contracts a major cause of insolvency. Bar the introduction of a Fair Contracts Act, they will continue to be so.
Contracts should be inherently fair. Unforeseen risks should be shared by both contracting parties. There is a need for a Fair Contracts Act that articulates the ground for the sharing of risk. Factors such as force majeure, inclement weather, third party induced delays or industrial action that results in down time in circumstances where neither party has caused any IR disquiet should all be captured in such legislation. Such legislation should impede a party’s ability to visit upon another the costs of third party actions or acts of God as the risks are too onerous, too conducive to insolvency and too perilous for those who are desperate for work but lack bargaining leverage. Work shortages should not be construed as grounds for commercial exploitation.
The concept of commercial fairness should underpin contractual cultural ethos. Having just returned from Japan, I can vouch for the fact that Japan is a “desert” for lawyers. Why? because the cultural ethos is about a fair go and not in the lip service sense. Conflict is to be avoided at all costs in Japanese society and there is loss of face if matters have to be resolved by third parties such as lawyers. The notion of entering into contracts that are heavily weighted in favour of one party is somewhat anathema in Japan as the blunt instrument approach seen in the west tends to damage commercial relationships.
Sadly, short of statutory intervention to impose the concept of “fair go contracts” the practice of oppressive contracting will continue and this will aid and abet insolvency in the building industry.