August 28, 2023
Australia’s construction industry climate continues to reflect the adverse impacts of persistent material and labour shortages, resulting in significant delays and cost overruns. According to Australian Constructors Association’s Jon Davies, the Australian construction industry is facing a total cost to complete current projects of $224 billion.[1]
Amid the ongoing delays within the construction industry, it is pertinent to be aware of the various contractual avenues available for principals to mitigate the financial impacts of such delays. Over the next three weeks, this article series will provide an overview of common principal claims, including:
- The right to set off, when recourse to security held under the contract is available and the legislative requirements to consider under the Queensland Building and Construction Commission Act 1991 (Qld) (QBCC Act) (Part 1);
- Claims for liquidated damages, specifically what liquidated damages are, when entitlement arises and key considerations to ensure the validity of this entitlement (Part 2); and
- The right to take works out of the contractor’s hands, the operation of these clauses and the potential implications (Part 3).
Right to Set-Off
The right to set off allows the principal to deduct amounts owed to the contractor. The purpose of set off clauses is to provide a mechanism for principals to recover debts owed by the contractor or to compensate for loss incurred (e.g., delays to completion).
Depending on the contract, principals may be able to set off amounts owed for defective work, delay caused by the contractor and liquidated damages.
For example, clause 37.2 of the AS4902 standard form design and construct contract allows a principal to set off amounts owed by the contractor to the principal from payment claims. That said, the principal may only set off amounts that have been certified by the superintendent pursuant to the relevant provisions of the contract.
Recourse to Security
Generally, construction contracts will require the contractor to provide security (commonly in the form of a bank guarantee) to provide the principal with protection if the contractor fails to fulfil its contractual obligations.
Where an amount owed by the contractor has remained unpaid, the principal’s right to have recourse on security arises after the principal has given notice of its intention to have recourse and the specified timeframe under the contract has lapsed.
Legislative Requirements
In Queensland, the QBCC Act governs the principal’s right to set off or use security to obtain an amount owed under the contract.
Section 67J provides that the principal must give written notice to the contractor within 28 days of the principal becoming aware, or ought reasonably to have become aware, of its right to have recourse to the amount owed.
Notably, the amount owed is limited to a debt due from the contractor to the principal because of circumstances associated with the contractor’s performance of the contract (e.g., failure to achieve practical completion).
Further, principals must comply with this timeframe to ensure that any notice of intention to have recourse to amounts owed issued to the contractor is valid.
Read more about the processes and requirements relating to the QBCC Act and security under a contract in Lamont Project and Construction Lawyers article series “Bank Guarantees As Security” here.
Lamont Project & Construction Lawyers
The Lamont Project & Construction Lawyers team has extensive knowledge regarding the principal’s right to set off under various standard form and bespoke contracts and the circumstances giving rise to such a right. Further, our team has experience and a comprehensive understanding of the intricate risks related to set off clauses. With this knowledge and expertise, Lamont Project & Construction Lawyers can provide the required support and advise on major projects with respect to whether the principal has a right to set off amounts under the contract.
If you would like to discuss any matters raised in this article as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.
The content of this article is for information purposes only and it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Quinn Hironaka
Email: [email protected] or [email protected]
Phone: (07) 3248 8500
Address: Suite 1, Level 1, 349 Coronation Drive, Milton Qld 4064
Postal Address: PO Box 1133, Milton Qld 4064
[1] Michael Bleby, ‘Point of no return: Builders alarmed over $220b delays’, Australian Financial Review (7 August 2023), https://www.afr.com/property/commercial/point-of-no-return-builders-alarmed-over-220b-delays-20230719-p5dpoq.