On a Proper Construction Issue 10: Time Bar Disputes are Back Under the New WA SOP Bill

The contractual notice-based time bar has been making cannon fodder out of contractor claims for payment and extensions of time since they have become a common feature of construction contracts.

Often seen by industry participants and observers as being harsh and unfair, a time bar is a clause in a contract which requires a party to exercise a contractual right within a certain time and in a certain way, in order to maintain its entitlements.

The most common form of a time bar in construction contracts makes claims for payment or extensions of time conditional on the contractor, subcontractor or supplier giving a written notice containing mandatory information within a limited timeframe. For example, time bars often apply to delay, variation and latent conditions claims.

The original intent of a time bar clause was to deal with circumstances early on so that preventive and corrective measures could be quickly implemented and events causing a commercial impact could be properly managed. This in turn took care of the long maligned tendency for contractors to bundle their claims for variations, extensions of time and other entitlements into a final payment claim or wait until the very end of project to submit them rather than claiming them as they arose.

In modern times, the use of the time bar has morphed from a cash-flow and risk management tool to a complete defence to contractor claims for payment and extensions of time. It has become commonplace for extremely onerous time bars to be drafted into construction contracts without regard for a party’s ability to actually comply with them.

Often, the notice-based time bar will be imposed by a principal on a head contractor. In order to comply with it, head contractors will often ‘back to back’ the time bar down the contractor chain and often in even more onerous terms than those which have been imposed on it. For example, if a head contractor has to submit a notice of its intention to claim an extension of time for a principal caused delay within 5 days, the head contractor will often require its sub-contractor to submit a similar notice within an even shorter period (say 3 days) to allow the head contractor to assess it and provide its own notice to the principal in compliance with the head contract.

The Court’s approach to these time bars has been to allow them to operate even if they appear unfair, unreasonable or onerous as long as they are clearly expressed. Courts have generally not seen it as their role to modify a contract that has been voluntarily entered into by two commercial parties in an arms’ length transaction.¹

Recent reviews of security of payment legislation, most notably John Murray’s report to the Commonwealth government in late 2017² and by John Fiocco to the WA State Government in late 2018³ have both recommended reformation of the laws to void unfair time bars in construction contracts.

Enter the West Australian State Government’s Building and Construction Industry (Security of Payment) Bill 2020 (WA) (Bill). The Bill attempts to reform industry use of notice-based time bar provisions by empowering referees (being adjudicators, arbitrators, expert determiners and the courts⁴) to declare such a provision “unfair” if compliance with the provision is not reasonably possible or would be unreasonably onerous.⁵

If and when the Bill is enacted, the party who seeks a declaration has the onus of proving that the notice-based time bar is unfair. The matters that the referees can take into account include:⁶

1. When the party required to give notice would reasonably have become aware of the thing that they are required to give notice about;
2. When and how the notice was required;
3. The relative bargaining power of each party;
4. The presumption that the parties have read and understand the construction contract;
5. The rebuttable presumption that the party required to give notice has the commercial and technical competence of a reasonably competent contractor; and
6. If it is being argued that the provision is unreasonably onerous, whether the matters set out in the notice are final and binding.

Interestingly, is not clear from the drafting of the Bill what weight the referee should give to each factor in coming to a decision. If a declaration is made that a notice-based time bar is “unfair” then that declaration will only apply to the proceedings and specific claim in which the declaration is made (noting that any such decision could be reversed in a subsequent proceeding). Where such a declaration is made, the time bar has no effect so any delay in bringing the claim would not be relevant. Otherwise, the time bar will continue to operate and apply to other claims and proceedings as they arise subject to any further declaration being made.

It’s difficult to tell how consistently the legislation will be implemented by referees in practice. Certainly the intent of the Bill is to discourage the use of unfair time bars and it will be interesting to observe success of the Bill in driving industry reform. We expect that principals may be more inclined to negotiate more realistic time-bar provisions rather than risk such provisions being found to be “unfair” – that is, the 24-48 hour time bar clause may be a thing of the past! It will also be important for principals to consider whether the mandatory information to be included in contractual notices can be provided within the timeframe and how difficult this might be to achieve. We have set out below a hypothetical example of a time bar provision that a referee might consider to be overly onerous.

It’s unchartered regulatory territory for the WA Government as this is the first time such a power has been included in security of payment legislation in Australia.

The Bill will apply to construction contracts entered into after it is enacted it (perhaps in Q1 2021). Please contact the writer if you require assistance in reviewing your template construction contracts to determine whether the time bar provisions are at risk of being “unfair” and otherwise to discuss compliance with the new regime.

Hypothetical Example: Unreasonably Onerous Notice Provision

As noted above, a referee may declare a provision “unfair” if compliance with the provision is not reasonably possible or would be unreasonably onerous. Below is a hypothetical example of a time-bar provision which a referee could deem to be unreasonably onerous, having regard to the criteria outlined in the Bill.⁷

Facts:

• A tier 1 firm/company as head contractor contracts with a small subcontractor for the design and construction of a retail outlet.
• The subcontractor’s materials are delayed for a reason not attributable to the subcontractor. This consequently causes a delay and, as a result, the subcontractor requires an extension of time. However, at the time that the subcontractor becomes aware it is not clear how long the materials will be delayed.
• The subcontract provides that:

‘the subcontractor will only be entitled to an extension of time if the subcontractor provides to the contractor a written notice within 2 days of the subcontractor becoming aware of the likely occurrence of a delay event.’

• The notice requirements are onerous and the subcontractor must include details and evidence of:
  • the delaying event affecting the critical path for the works;
  • how many days the extension of time will be required for;
  • a revised project programme demonstrating critical delay;
  • an analysis of the risk of further delays to the project and required contingency plans;
  • an explanation of the steps which the sub-contractor took to prevent or avoid the delay; and
  • supporting valuations for the delay costs incurred.
• Under the subcontract, a hard copy of the notice must be served by post or hand-delivered to the contractor’s offices before 4pm.

Discussion

• The effect of the time-bar provision if upheld would disentitle the subcontractor to an extension of time and would create a liability for liquidated damages.
• In this scenario, it is possible that the subcontractor can discharge the burden of proving the provision is unreasonably onerous, given that:
  • the notice requirements are mandatory and the matters set out in the notice are final and binding;
  • the period for compliance is very short;
  • the relative bargaining power between the companies is unequal;
  • the subcontractor does not have the adequate resources or technical expertise which would permit it to perform the required programming analysis and it was not possible to engage a delay expert in the time available; and
  • the service requirements for the notice are onerous and further restrict the subcontractor’s ability to comply within the required timeframe.

Further, given that the subcontractor did not know, at the time that the notice was required, exactly how long the materials were to be delayed it may also be able to argue that it was not reasonably possible to comply (i.e. on the basis that setting out the period of delay was a mandatory component of the notice).

This article was written by Kate Morrow, Partner, Matthew Cornish, Senior Associate and Lara Scott, Law Graduate.

Update: the Building and Construction Industry (Security of Payment) Act 2021 (WA) (Act) was assented to on 25 June 2021.

The Act will have a staged commencement, with different provisions commencing at varying times.

The details set out in this article remain current and valid under the Act.

¹ See, for example, CMA Assets Pty Ltd v John Holland Pty Ltd [No 6] [2015] WASC 217.
² Murray, John AM. Review of Security of Payment Laws, Building Trust and Harmony. See recommendation 84. December 2017. Available here.
³ Fiocco, John. Final Report to the Minister for Commerce, Security of Payment Reform in the WA Building and Construction Industry. October 2018. Available here.
⁴ Section 16(3), Building and Construction Industry (Security of Payment) Bill 2020 (WA).
⁵ Section 16(2), Building and Construction Industry (Security of Payment) Bill 2020 (WA).
⁶ Section 16(6), Building and Construction Industry (Security of Payment) Bill 2020 (WA).
⁷ Section 16(6), Building and Construction Industry (Security of Payment) Bill 2020 (WA).