In our latest ‘In Practice’ series Building and Construction we discuss with one of the firm’s clients, Manitowoc Cranes, how to set and manage customer expectations in order to avoid warranty claims.

The continued growth of the building and construction industry in Australia has fuelled a proportional increase in disputes and litigation. Some of the disputes dealing with defective works have been highlighted by the media in recent months, particularly in NSW, but some other important issues that don’t attract as much coverage involve project delays and warranty claims. In this blog, we outline how you can minimise risks associated with project delays and warranty claims.

What does the contract say?

The first step in identifying and managing risk associated with delays or potential warranty claims is understanding your contract and being familiar with your obligations. Many disputes in the construction industry could be avoided if parties were more aware of their contractual obligations and effectively communicated potential delays or claims to the other party.

A well drafted construction contract should clearly identify:

• what should happen if a party suspects that there will be a delay in the project (e.g. it was not able to complete part of the works by a due date);
• the relevant procedure for notifying a party of a delay or suspected delay;
• the requirement to make an extension of time request; 
• any consequences associated with that delay;
• what items are covered and excluded by the warranty;
• what the remedy is for a breach of a warranty; and
• the length of the warranty period.

Extension of Time Requests

An often-underutilised tool that forms part of most construction contracts is the ability to issue an extension of time (EOT) request. If there is a delay on the “critical path” a party may be required to issue an EOT request to seeking to extend certain milestones or even the practical completion date. An EOT request should be made in accordance with the requirements set out in the relevant construction contract. These requirements will often vary between contracts, but will:

• set out the reasons and the cause of the delay;
• require some substantiation or proof of the cause of the delay;
• need to set out the impact on the critical path or practical completion date; and,
• need to be “served” in accordance with the contract. 

If the requirement to issue an EOT isn’t strictly complied with, the delaying party may find that they are unable to seek an extension to complete their works. Consequently, they may also be liable to pay liquidated damages to the other party by reason of their delay and failure to seek an EOT, and they may even be exposed to a general damages claim or a claim for consequential losses of the other party.   

What are Liquidated Damages?

In broad terms liquidated damages are fixed damages or a pre-estimate of damages associated with the costs of a project being delayed. If there is a delay and an EOT was not issued or not approved, the delaying party may be required to financially compensate the non-defaulting. 

Liquidated damages in construction contracts can be advantageous in that they can:

• allow the parties to have clarity the real costs of a delay and consequences of the same;
• encourage all parties to comply with their obligations regarding timing;
• allow parties to determine the price of their exposure before even starting a project; and,
• provide a limit on a party’s liability for damages.

However, we have seen many instances of there being an “informal arrangement” or “understandings” regarding extensions without a formal EOT being issued or approved, and at the end of the project liquidated damages would still be claimed.

Care should be taken when considering or agreeing to liquidated damages given the potential financial exposure created and the parties should be mindful of the risk that a general claim for damages may be restricted by the wording of a liquidated damages clause.

Key Lessons to Minimise Warranty Claims

In general terms a warranty is an assurance or promise provided by one party to another. Warranties are often expressly set out in a contract but can also be implied or come from legislation. If a warranty is breached, then one party may have a claim for damages against the party that provided and breached the warranty.

The enforcement of warranties can be uncertain, but a well drafted warranty clause is the first step in minimising warranty claims. The warranty should be clearly written and should set out with sufficient detail what is included and excluded by the warranty, when the warranty may be waived and how a breach of warranty should be remedied.

Often each party will have a very different view on how a warranty clause should be interpreted and the scope of the warranty. This discrepancy is often a key source of dispute between parties. In our experience, some key steps to minimise the risk of a warranty claim includes:

• setting clear expectations around rights and responsibilities of all parties associated with a contract and warranties;
• ensuring that both parties have a common understand of the scope of a warranty and that those discussions take place earlier on in the contract negotiations; and
• being open and transparent with warranty claims or and flag any concerns with goods/services provided as early as possible.

To view more of our ‘In Practice’ series:

Episode 1: Understanding the Contract: More Bargaining Power for Subcontractors

Episode 2: Security of Payment Act: Understanding the Fundamentals

Episode 3: Western Sydney Development with Dr Chyi Lin Lee

Episode 4: Changes to the Home Building Act: Building Defects

Episode 5: Part 1 – The Future of Greater Western Sydney

Episode 5: Part 2 – The Future of Greater Western Sydney

Episode 6: Manitowoc Crane Group – Part 1

If you have any issues regarding project delays or warranty claims, contact our Building and Construction team on +61 2 9895 9210 today.