5 Key Clauses to Look Out for in Construction Contracts

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Table of Contents

• Recent Changes to the Application of Unfair Contract Terms
• 1. Indemnities
• 2. Consequential Loss and Uncapped Liability
• 3. Liquidated Damages
• 4. Time Bar Clauses
• 5. Warranties
• Key Takeaways
• Frequently Asked Questions

If you have received a construction contract from a client, it can be difficult to understand what each clause means for you and your business. Some clauses that affect your legal responsibilities will be clearly labelled, whereas others might be hard to spot. It is normal to feel overwhelmed when reviewing contracts from clients. Nonetheless, you should ensure you are aware of these important clauses to minimise legal issues down the line. This article will outline five key clauses and how you can identify some of the critical issues that may be within your construction contracts.

Recent Changes to the Application of Unfair Contract Terms

Unfair Contract Terms (UCT) are provisions in standard form consumer contracts that create a significant imbalance between the parties’ rights and obligations, are not reasonably necessary to protect the legitimate interests of the business, and would cause detriment to a party if relied upon. The Australian Consumer Law (ACL) prohibits the use of UCTs in standard form consumer and small business contracts. Common examples of potential UCTs include terms that:

• allow one party to unilaterally vary the contract;
• allow one party to terminate without cause;
• limit one party’s liability or obligation to compensate; or 
• prevent one party from pursuing legal remedies. 

If a term is found to be unfair, it is void and not binding on the consumer or small business. 

Substantial new changes to the UCT regime have been in effect since 9 November 2023 for unfair terms in standard form contracts made or renewed after that date. Businesses that use unfair indemnity clauses could now face fines of up to $50 million, in addition to having the terms void.

Furthermore, a small business is now defined as one employing fewer than 100 people or having an annual turnover of less than $10 million in the previous fiscal year. 

1. Indemnities

An indemnity is an obligation for one party to compensate the other for:

• damages;
• losses;
• expenses; or
• costs caused by a specific event.  

When you breach an indemnity, the other party can then claim compensation. If you receive a construction contract, you might find many indemnities that go beyond accepted industry standards.

This indemnity is extensive and will force you to compensate the other party for any breach of the contract, no matter how trivial the breach.

When reviewing an indemnity, it is crucial to ensure that: 

• you only indemnify the other contracting party and not unintended third parties;
• the indemnity is linked to your negligent acts or omissions, providing an element of control over the events that may trigger the obligation; and
• you restrict the indemnities to direct losses, excluding consequential or indirect losses, which can be difficult to foresee and quantify. 

While some indemnities are acceptable, such as those for death, personal injury, or breaches of intellectual property, any overly broad or disproportionate indemnities should be addressed with the other party to negotiate more reasonable terms.

Example

For example, if you are a consultant engaged to provide advisory sustainability services, you should carefully review any broad work health and safety (WHS) indemnities. If the clause requires you to indemnify the principal for losses incurred from WHS incidents, this may be a point to raise during contract negotiations. Since your role as a sustainability consultant is primarily advisory in nature, blanket coverage of all site indemnities is not within your direct control and would be quite onerous. The indemnity could be narrowed to only apply to losses arising from your negligent acts or omissions related to the sustainability advisory services you are providing.

Therefore, if you see an indemnity that you do not believe is acceptable, you should raise this with the other party and request them to change it.

Assessing Unfair Indemnity Terms

For an indemnity term to be deemed unfair under the new UCT laws, it must: 

• cause a significant imbalance in the parties’ rights and obligations under the contract;
• not be reasonably necessary to protect the legitimate interests of the advantaged party; and 
• cause detriment if applied or relied upon. 

The ACL provides examples of terms that may be unfair, including those limiting one party’s liability for agents or limiting rights to sue another party. The new penalty regime means businesses must carefully review their standard indemnity clauses and contract terms to ensure compliance and avoid potential multi-million dollar fines.

2. Consequential Loss and Uncapped Liability

Consequential loss is a loss experienced by a party that is indirect and does not naturally flow from an event or breach.

Identifying which clauses affect your legal responsibilities regarding consequential losses can be difficult. There may be provisions that mention consequential loss, or there may be no mention of it at all. Therefore, you should make sure that, under the contract, you are not legally responsible for consequential loss and other losses of:

• revenue;
• profit;
• use;
• financial opportunity; and
• economic loss.  

This exclusion of legal responsibility is particularly important if you agree to provide indemnities that favour the other party. Otherwise, you will be responsible for all losses, and your insurer will not cover those types of losses.

As a contractor, ensure you put a cap on liability. A limitation of liability clause establishes a maximum monetary amount or “liability cap” for which a party can be held responsible. This clause is essential because it provides certainty regarding potential financial consequences. Therefore, you can quantify and manage your risks effectively. When determining the liability cap, you should consider factors such as the contract’s value, scope and associated risks. Also, ensure that you avoid any unusual exclusions to the cap that can put you at financial risk.

3. Liquidated Damages

When negotiating completion dates, be careful about how the other party might charge for liquidated damages. Liquidated damages are compensation you might have to pay if you do not complete construction on time.

Liquidated damages usually represent pre-estimates of the loss they will likely incur if you do not complete the work on time. They are not meant to penalise you for finishing work late.

The rate of liquidated damages in a contract should be reasonable. To avoid any legal responsibility to pay liquidated damages, your construction contract should include:

• favourable extension of time provisions;
• a practical date of completion that gives you sufficient time to complete the work; and
• procedures that allow you to extend the period for practical completion without penalty.

You can also protect yourself by ensuring that you:

• cap the amount that you must pay for liquidated damages; and
• make it clear that the other party can only claim liquidated damages if there is a delay in the project.

4. Time Bar Clauses

A time bar clause limits the time within which you can enforce certain contractual rights.

Construction contracts will often contain wording such as:

Unless the Contractor complies with this clause #, it will have no claim against the Principal.

The Contractor must notify the Principal of a delay within 5 days of when it ought to have been aware of the delay, failing which it will have no claim.”

Contractor must not bring a claim unless it provides notice within 5 days of becoming aware, or ought reasonably to have become aware, of a claim.

Additionally, you may not be able to negotiate out of these clauses. Be sure to understand your time obligations when claiming:

• extensions of time;
• variations;
• latent conditions; or
• triggering a dispute resolution procedure.

Time bars are tough to overcome in a dispute. Be aware of how the wording might affect you in advance.

Assessing Unfair Time Bars

For a time bar to be deemed unfair under the new UCT laws, it must: 

• cause a significant imbalance in the parties’ rights and obligations under the contract;
• not be reasonably necessary to protect the legitimate interests of the advantaged party; and 
• cause detriment if applied or relied upon.

Further, In Western Australia, recent amendments to the Building and Construction Industry (Security of Payment) Act 2021 (WA SOP Act), effective from 1 August 2022, introduced specific rules for notice-based time bars in the construction industry. This regulation impacts all construction contracts in WA, addressing provisions that may be deemed ‘unfair’ under conditions where compliance is not reasonably possible or is unreasonably burdensome. 

Under the WA SOP Act, a contractual term can be declared ‘unfair’ if compliance with the relevant provision of the contract:

• is not reasonably possible; or
• would be unreasonably onerous in the particular circumstances.

Adjudicators, courts, or designated experts can assess these provisions, and if found unfair, the specific time bar is voided for that case but might still apply under different circumstances within the same or related contracts. 

The evaluation considers several factors, including:

• the timing of awareness and notification;
• the relative power of the contracting parties; and 
• required compliance levels. 

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5. Warranties

The wording is important in construction contracts. Where you see the words “you warrant and agree that you will ensure the works are fit for their intended purpose” it has a different meaning to “you agree that you will ensure the works are fit for their intended purpose.”

In the first example, the contractor is asked to provide a warranty. Generally, if you breach a warranty (like in the first example), you will automatically have to pay compensation. In contrast, breaching a term under a contract may not always result in you paying damages.

Ensure that you are aware of what you are warranting to the other party. If the warranty states that goods are ‘fit for their intended purpose’, understand the intended purpose of the goods.

Key Takeaways

Parties will often include clauses that they know you will challenge. Additionally, some clauses may be UTCs, which will be unenforceable. For example, if a term limits the right of one party to sue the other, the clause may be unenforceable. Overall, the five clauses in your construction contract you should be aware of include:

• indemnities;
• liquidated damages;
• consequential loss;
• time bars; and
• warranties.

If you have any questions about the clauses within construction contracts, our experienced experienced construction lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions