A contractor is not required to complete extra work and cannot expect payment for completing extra work that has not been specified in the original contract, without either a new contract, a variation of the existing contract, or an order made under a term in the contract that permits variation of the work.
A variation is an alteration to the scope of works in a construction contract. It could be an addition, substitution, or omission from the original scope of works. A variation should always be within the scope of works originally required. It should not be of such different character or quality as to be totally different to the works originally contemplated. If that is the case, then the contractor could argue that it is not a variation, but extra work.
Almost all construction projects, whether small or large, will have variations. The three critical aspects of a variation are:
What can be varied,
The process of claiming a variation, and
Valuing the variation.
What can be varied?
The first step in identifying a variation to the scope of works is identifying the scope of works itself. The scope of works and services is defined by the contract, commonly by reference to documents such as plans and specifications or a project brief. If works or services are part of the scope of works, then they are not a variation.
A common dispute that arises in relation to variations is whether a variation is, in fact, a variation. These arguments are common where the scope of works is not clear. It is, therefore, important to define with as much precision as possible, exactly what the scope of works includes. Failing to do so could mean that work can be implied to be included within the scope of works if incidentally required.
For example, if a plan shows that the contractor is to install a door and the specifications do not specifically refer to any hinges on those doors, supplying the hinges are part of the scope of works as it is necessary for the completion of that work and likely to be the contractor’s responsibility.
The variation process
Most written construction contracts will specify a process for instructing or claiming a variation. This is because at common law, the principal does not have an automatic right to instruct variations. So, unless the contract empowers the principal to instruct variations, the contractor can refuse to perform the variation and insist on performing the original scope of works.
For example, in Ettridge v The Vermin Board of the District of Murat Bay [1928] SASR 124, a contractor was engaged by the principal to construct a fence along a railway line. During construction, the principal instructed the contractor to deviate from the original line. The contractor refused to accept the deviation and abandoned work claiming that the contract did not give the principal a power to vary the contract. The Court held that as the principal did not have the power to instruct variations, it had repudiated the contract by insisting on the deviation. Accordingly, the contractor was entitled to terminate.
Most written contracts allow the principal to instruct variations and the contractor to claim for variations. In respect of the former, the process will normally involve an instruction from the principal, which can be written or verbal, to vary the works. Depending on the construction contract, this power could be very wide and can represent a significant risk for the contractor.
For instance, the contractor could be required to undertake extra works even though it may not have the necessary resources, or the work may be uneconomic. Furthermore, instructions issued at a later stage in the project may entail extensive redesign and rework which can also force the contractor to remain on site for significantly longer than envisaged. Accordingly, contractors would be well-advised to seek advice on the extent of this power before entering the contract.
In respect of a contractor’s claim for variations, depending on the contract, it may provide specific instances when a variation is claimable. Under NZS 3910 for example, it provides that a variation is claimable where there is a significant discrepancy, late instructions, nominated subcontractor defaults, incorrect information supplied by principal, early occupancy by principal and etc.
In our experience, it is common for disputes to arise because the correct process prescribed by the contract in relation to variation is not followed. A common issue encountered by contractors is non-payment for variation works requested pursuant to verbal instructions from the principal. This issue is especially prevalent in residential building projects.
Typically, this scenario involves a verbal agreement between the principal and contractor for works to be varied. However, once the variations have been completed, the principal attempts to avoid payment by denying that it had instructed the contractor to undertake those variations. If the variation clause requires the variation to be recorded in writing, and the contractor fails to document this, the contractor takes on the risk of not getting paid for the variation as there would be no clear evidence of an agreement for the contractor to perform them.
This could lead to a costly and time-consuming dispute to establish the variation.
While it may seem unfair, the contractor is not entitled to payment if it cannot prove that the variation was instructed. This situation can be avoided by insisting that all variations, large or small, be documented before undertaking the variation in question or refusing to carry it out unless it is formally instructed in writing.
Valuing the variation
The written construction contracts will usually have clauses setting out how a variation is valued.
The variation could be valued by agreement and if so, such agreement should be documented to prevent disputes in the future.
If not done by agreement, the parties should be aware of the valuation procedure in the contract. Typically, the contract will include a schedule of rates that will apply to most variations. Contractors should therefore check how variations are valued and whether those prices are feasible before entering the contract. Failing to do so could mean that the contractor is obligated to carry out a variation at a loss.
Conclusion
In the next article, we will discuss potential avenues available to contractors outside of the contract where the variation process has not been complied with. They include quantum meruit, estoppel and the doctrine of free acceptance.
Variations are an inevitable component of many construction contracts, and to ensure a fair outcome for all parties involved, the scope of work in the contract needs to be comprehensive. Our lawyers at Norling Law can review your scope of works and variations, and can assist with dispute resolution, as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation-brent/.
There are a variety of barriers to settlement throughout the mediation process. These include communication barriers, unrealistic expectations, emotional barriers, cultural barriers, intraparty conflict and fear of losing face.
This article discusses caucusing as an effective way of overcoming barriers and challenges of mediation.
Mediation caucusing
Mediation caucusing is the use of separate meetings between the mediator and the parties individually during a joint mediation session. Caucuses can be conducted at various stages of a mediation and sometimes in combination with joint sessions. Mediators often use caucus sessions to discuss the conflict and advance the negotiation.
David A Hoffman noted in his book on shuttle diplomacy that caucusing is widely used because it can overcome a variety of tactical and strategic barriers that would be difficult in joint sessions such as (to name a few):
communication barriers
emotional barriers
information barriers
cultural barriers
strategic barriers
unrealistic expectations
obstacles to generating options
need for negotiation coaching
need for process management
internal conflicts
fear of losing face
Communication barriers
In mediations with particularly high-conflict behaviour, the parties may communicate aggressively and may find it difficult to remain in the joint session. A skilled mediator will reframe the statements made by each party and may decide to meet separately with the parties to manage any barriers to communication between them.
Emotional barriers
Mediations often cause intense emotions, especially when the conflict is highly personal, or one party believes that the other party is not bargaining in good faith.
Hormonal changes occur when people are under stress. Adrenaline production rises, and people experience a fight or flight reaction. Caucusing provides parties with a space to recover from any confronting behaviour. Caucuses also create a space for safe venting of intense emotion without negatively affecting the atmosphere of the joint session.
Information barriers
The mediator is sometimes given critical information unknown to the other side on a confidential basis in a caucus session.
The parties are often reluctant to share such information because if it is shared in advance of trial, the other party will have time to prepare a response to lessen the impact of the damaging evidence. However, a mediator is obliged to obtain express permission to share information imparted confidentially in a private session. A skilled mediator will understand and adhere to professional obligations and will not compromise confidentiality or impartiality.
Cultural barriers
Mediators need to identify and manage any perceived power imbalances. Racial, cultural, class, and other differences may lead some people to perceive themselves to be less powerful so they prefer private caucuses in a mediation. This is especially the case if a party’s identity is a central element in the mediation and the aggrieved party perceives (accurately or inaccurately) a lack of respect from the other party because of that identity.
For example, a group of students at Columbia University in 1996 went on a hunger strike and requested the university to create an ethnic studies department. The anger and mistrust on both sides made joint meetings problematic so caucus sessions were particularly useful.
Strategic barriers
Most parties are reluctant to share their true bottom line out of fear that this will be exploited by the opposing party. Caucus sessions may help mediators determine a zone of possible agreement.
The mediator may ask each party separately what they believe the other side might be willing to offer to settle the case. The two answers may assist the parties to come to a range within which the parties are comfortable they can settle.
The mediator may also ask a range a party might be willing to bargain in. Such “range bargaining” communicates a willingness to be flexible and begin defining the parameters of a zone of possible agreement.
Unrealistic expectations
Parties often have overly optimistic assessments of their best alternative to a negotiated agreement (BATNA). A skilled mediator can assess a party’s BATNA by exploring what will happen in Court if the dispute is not settled. Overconfidence is one of the many cognitive miscalibrations to which the human mind is prone; others include self-serving bias and status quo bias, which likewise can skew a party’s assessment of his or her BATNA.
A skilled mediator will be able to test the inferences that have led each party to their conclusions about their BATNAs. In joint sessions, parties usually exaggerate their likelihood of success and minimise the other party’s likelihood of winning.
Lawyers commonly seek mediation when they believe the other side, or even their own clients, have an overly optimistic view of the case because the mediator can persuade each side to be more realistic.
Obstacles to generating options
The parties may fear that sharing something in a joint session could reveal their openness to solutions that they wish to keep private.
Mediators may encourage brainstorming first in caucus sessions and then in joint session to gain the trust of the parties and reduce the risk that an idea advanced in the mediation could be viewed as biased.
Need for negotiation coaching
Mediators commonly engage in negotiation coaching because disparities in negotiating skill and mediation experience can create an unlevel playing field.
Negotiation coaching may encourage parties to explore each side’s interests instead of focusing solely on positions, help parties generate options, and decide offers and counteroffers.
Coaching is impossible in joint sessions because it could give the appearance of partiality, and because the parties are rarely truthful about their bargaining strategies.
Need for process management
Caucus sessions may be required if there is a party displaying disruptive behaviour. Joint sessions may be harder to manage in some circumstances.
If a party, or party’s lawyer, cannot pick up on social cues and is unable to control the impulse to talk throughout the mediation, a skilled mediator may decide to separate the parties to create some time and structure to the mediation.
Internal conflicts
Parties often need internal mediation within their own team. A party, and his or her lawyer, may have differing ideas about the best negotiation strategy. There may also be an uneasy alliance or a difference in dynamics within a group.
Parties can be transparent about internal disagreements in caucus sessions and then achieve unity in joint sessions. Separate meetings may also be needed to determine whether there is a potential conflict of interest.
Fear of losing face
In commercial disputes, some executives or employees may have similar interests with respect to outside constituencies (shareholders, suppliers, and customers) and with internal constituencies (company’s officers, employees and board of directors). They may be motivated to avoid letting them believe that they gave up or left money on the table.
An effective mediator can help maximise everyone’s interests. Often, the most successful way to assist the parties to reach a resolution and save face in a negotiation is for the final proposal to come from the mediator.
In a “mediator’s proposal” procedure, the parties are less likely to dismiss a proposal and the mediator can discuss the proposal confidentially with the parties. Even when a mediator’s proposal is not accepted by a party, these separate conversations can often lead the way to resolution.
Conclusion
Mediation caucusing adds value to mediation by overcoming various tactical and strategic barriers and impediments to settlement. Although the no-caucus model may be appropriate for certain types of mediation (and preferred by some mediators), often parties prefer the efficiency that can be achieved with caucusing. Numerous variations and hybrid mediation formats may also be useful.
How can you find out more?
At Norling Law, we are passionate about solving commercial disputes and legal issues. We offer professional, independent, and impartial mediation services to users in a dispute.
Norling Law supports mediation as an efficient way of solving legal issues. Especially if the parties to the dispute want a negotiated outcome that remains private and confidential and that puts a prompt end to the costs of having the dispute ongoing.
As mediators and representatives, we assist the users to a mediation achieve their priorities throughout the mediation process and enable them to make informed decisions regarding the resolution of the disputes they are involved in.
Our mediator, Wendy Alexander, regularly assists with the facilitation of settlements through mediation.
At Norling Law, we receive a large number of commercial disputes. Commercial disputes can be extremely stressful and can often be suitable for mediation. The parties may have been negotiating directly to reach a solution that would meet the interests of both parties. However, the parties often find it difficult to reach agreement.
Using mediation is an option that could potentially resolve commercial problems quickly and efficiently. Mediation is a low-cost option to consider before deciding on whether to litigate. Traditional mediation is usually a more expensive process as it involves the users meeting physically and there are resulting costs involved with travel and booking a neutral meeting room (or rooms). Sometimes traditional mediation might not be available at all for urgent matters.
Wendy can effectively assist users of mediation with her extensive experience as a commercial mediator. Wendy can help parties decide whether the parties’ objectives would be best served using joint sessions, caucusing, or a combination of these approaches. Wendy completed training at Program on Negotiation at Harvard Law School, USA and the Arbitrators and Mediators Institute of New Zealand (AMINZ). Wendy is also an Associate Member of AMINZ. This training complements the skills she already has in negotiation and dispute resolution.
Wendy often receives feedback from the mediation parties that they felt relaxed and in safe hands with the management of the dispute and that Wendy truly understood where they were coming from.
If Wendy’s expertise can be of assistance, the first step is to send us the details of the situation here.
It is common practice in the construction industry for clients to ask a contractor to provide a quote or estimate on a project.
What is a quote?
A quote is an offer to carry out the work for an exact price. Once a quote is accepted, the contractor is unable to charge more than the agreed price, subject to variations, cost fluctuations and provisional sums.
The benefits of a quote are that both parties are aware of the costs from the outset and can budget for the project accordingly. However, this can be a high risk path for the contractor if they fail to adequately price any element of the project as they are contractually required to bear any losses from their mispricing. The high-profile losses by Fletcher Construction on the International Convention Centre is an example of this.
What is an estimate?
Unlike a quote, an estimate is a best guess of how much a project might cost. It is a contractor’s best guess of what the labour, materials and margin is going to be from start to finish. An estimate does not carry with it a legal obligation to carry out the work at a fixed price and does not provide a cap for the total cost. While a contractor is not legally bound to its estimate, it owes a duty of care to the principal when providing the estimate.
An experienced contractor is likely to price a project on this basis if they consider the project too risky to provide a fixed price. This would be more common particularly in the current market. The uncertainties could include their ability to obtain materials, the site conditions, and the scope of works itself.
Estimates in court
A common dispute that arises is where the principal claims that it was provided a quote as opposed to an estimate.
In Jefferson v Straw Homes Limited [2017] NZHC 1766, the contractor and principal entered a residential building contract. In that case, the agreement was specified to be for “managed labour only” and the contract price was not stated. The principal had limited funds available to it which were sourced mostly from borrowings. This was made known to the contractor before work commenced and it was communicated that this was the limit.
Two written estimates were provided both containing words stating that it was a “price estimate” for $646,060.63. This was subsequently inserted into the contract as the “contract price”, at the principal’s request. As the project progressed, the principal enquired as to the cost to complete the project. The contractor informed him that there was approximately $100,000 of work still required over and above the estimate. After that, the relationship between the parties deteriorated and the principal stopped paying the contractor’s invoices.
At Court, the principal relied on the “contract price” in the agreement. However, the Court considered that the interpretation of the phrase “contract price” must be determined according to what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean, and the facts and circumstances known and likely to be operating on the parties’ minds at the time.
In considering the facts of the case, the Court held that a reasonably and properly informed third party would have considered the words “contract price” in this instance to mean an estimate as per the written estimate provided at the same time, as:
The contractor indicated that it was not prepared to commit to a fixed price at the time;
The plans were still fluid when the contract was entered into;
The estimate gave imprecise figures for a number of items;
The estimate was based on plans with a smaller floor area and a large plan was being considered at the same time;
A third party would understand that the parties had agreed on a managed labour contract with the hope that the project could be completed for less with labour input from the principal;
The principal’s behaviour was consistent with there being no fixed price; and
The contractor continued to invoice the principal when the “contract price” had been exceeded, and the principal paid those invoices.
Having found that it was an estimate, the Court proceeded to consider whether the contractor owed the principal a duty of care in providing its estimate and whether that duty was breached.
On this issue, the Court held that in circumstances where the contractor was made aware of the principal’s financial situation and wished to limit the amount they wished to spend, this gave rise to a duty on the contractor, in contract and in tort, to ensure that accurate cost estimates were given before work commenced. This would have enabled the principal to make decisions to ensure that it remained within its financial limit.
In any event, the Court considered that while there was a breach, the principal did not suffer a loss. The Court held that it was wrong to consider the additional expenditure they were forced to incur as a loss when some of the additional expenditure was not caused by the contractor. Furthermore, the principal received a larger asset.
Conclusion
For contractors, the takeaways are to always be clear whether you are providing an estimate or a quote. Frequently, we encounter contractors providing estimates headed up with the word “quote” when it had no intention to provide a quote.
Additionally, contractors owe a duty of care to the principal in preparing its estimate. Practically, this means that a contractor may be required to do more than review plans and designs when preparing the estimate by visiting the site or engaging a quantity surveyor to ascertain the materials required.
Likewise, for the principal, if you are not sure whether you have received an estimate or quote, seek clarification from the contractor. Inform the principal of your financial situation and what you can afford before entering a construction contract, and regularly update the contractor on your financial situation as your project progresses.
The impacts of COVID-19 to local and global supply chains have resulted in unprecedented pressure on the construction industry as a result of price increases on some building materials. In some cases, this made projects unaffordable for principals and contractors alike, with elevated risk of budget blowouts. As such, care should be used in the current market when assessing when to issue a quote or an estimate for a particular job.
Contact us if you are considering embarking on a construction project and are weighing up proceeding with a fixed price quote or an estimate. Our lawyers at Norling Law can review your options and discuss the pros and cons as they relate to your specific situation as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation
Many mediators believe that the most serious challenge facing commercial mediation is poor public and professional awareness of the mediation process. This is a major obstacle to the potential users of mediation attempting to resolve commercial disputes using the mediation process.
Financial and time constraints are also commonly identified as other challenges in dispute resolution.
This article explores who uses mediation and the benefits of mediation.
Users of mediation
The users are the most important people in mediation, and everything revolves around them. Mediation helps the users to resolve disputes. The mediator’s aim is to empower the users and their representatives’ aim is to advocate for them.
The greatest demand for commercial mediation comes from the building/construction, insurance and property disputes, as well as contract disputes in general.
Benefits of mediation
The parties involved in commercial disputes often choose mediation because of its benefits compared to litigation, including:
low costs;
speed and efficiency;
certainty and control of outcome;
confidentiality;
flexibility;
preservation of relationships;
ability to get advice about alternatives, risks, and consequences.
Mediation is also generally much cheaper than other third-party alternatives.
The users to mediation may have different priorities depending on the specific area. At Norling Law, we can assist users achieve their priorities throughout the mediation process. We can assist users both as mediators and representatives.
Many parties are happy with using mediation as a dispute resolution process because of its benefits (outlined above). Accordingly, mediation should be included as an advised option for resolving disputes more regularly. All lawyers have a positive obligation under r 13.4 of the Conduct and Client Care Rules to keep the client advised of alternatives to litigation that are reasonably available to enable the client to make informed decisions regarding the resolution of the dispute.
How can you find out more?
At Norling Law, we are passionate about solving commercial disputes and legal issues.
Norling Law offers professional, independent, and impartial mediation services to users in a dispute. Norling Law supports mediation as an efficient way of solving legal issues. Especially if the parties to the dispute want a negotiated outcome that remains private and confidential and that puts a prompt end to the costs of having the dispute ongoing.
As mediators and representatives, we assist the users to a mediation achieve their priorities throughout the mediation process and enable them to make informed decisions regarding the resolution of the disputes they are involved in.
Our mediator, Wendy Alexander, regularly assists with the facilitation of settlements through mediation.
At Norling Law, we receive a large number of commercial disputes. Commercial disputes can be extremely stressful and can often be suitable for mediation. The parties may have been negotiating directly to reach a solution that would meet the interests of both parties. However, the parties often find it difficult to reach agreement.
Using mediation is an option that could potentially resolve commercial problems quickly and efficiently. Mediation is a low-cost option to consider before deciding on whether to litigate. Traditional mediation is usually a more expensive process as it involves the users meeting physically and there are resulting costs involved with travel and booking a neutral meeting room (or rooms). Sometimes traditional mediation might not be available at all for urgent matters.
Wendy can effectively assist users of mediation with her extensive experience as a commercial mediator. Wendy completed training at Program on Negotiation at Harvard Law School, USA and the Arbitrators and Mediators Institute of New Zealand (AMINZ). Wendy is also an Associate Member of AMINZ. This training complements the skills she already has in negotiation and dispute resolution.
If Wendy’s expertise can be of assistance, the first step is to send us the details of the situation here.
So, you or your client have been served with a statutory demand.
What does it mean? What are the consequences? What must you do and by when? These are all questions that need to be answered within a short timeframe.
Issuance of a statutory demand is the first step in the process to commence liquidation proceedings against a company. This is not the only available path to commence liquidation proceedings against a company, however, this is the most used one.
As such, if a statutory demand has been served on a company, it should not be ignored as there could be serious consequences if it is not addressed.
Usually, a statutory demand can be set aside if there is a substantial dispute as to whether the debt is owing, or there appears to be a counterclaim or a setoff. The methods of setting aside a statutory demand are discussed in our previous article.
Unlike a usual statutory demand, the Supreme Court in Laywood v Holmes Construction Wellington Ltd [2009] NZSC 44 held that in certain circumstances, a statutory demand for a debt under the Construction Contracts Act 2022 (the CCA) might not be able to be set aside even if a company has a substantial dispute, counterclaim, or setoff. This is due to the “pay now, argue later” regime under the CCA.
This has recently been affirmed by the Court of Appeal in Demasol Ltd v South Pacific Industrial Ltd [2022] NZCA 480.
Background to Demasol Ltd v South Pacific Industrial Ltd
South Pacific Industrial Ltd (SPI) was the head contractor for demolition works. Demasol Ltd (Demasol) specialised in asbestos removal and was the subcontractor to demolish a large bin tank containing asbestos.
Demasol served two payment claims which contained charges for additional works due to variations to the contract. SPI did not dispute the payment claims by issuing payment schedules as required by the CCA, nor did it pay the amounts sought in the payment claims. Consequently, Demasol served a statutory demand on SPI.
SPI applied to set aside the statutory demand. The High Court set aside the statutory demand under s 290(4)(a) of the Companies Act 1993 because it was reasonably arguable that the second payment claim was not valid due to the charged variations being disputed. Demasol appealed to the Court of Appeal.
Payment claims under the CCA
The Court of Appeal noted that the objective of the CCA is to secure timely cashflow to contractors and subcontractors in the construction industry. The CCA does not shut the payer out from disputing the amount claimed but it requires the payer to pay first and argue later.
If a payer does not respond to a payment claim by serving a payment schedule under s 21 of the CCA, then the contractor is entitled to recover the amount as a debt due under s 23.
If a payer had issued a payment schedule and the dispute has not been resolved, then there may be a substantial dispute and s 290(4)(a) of the Companies Act 1993 may be invoked to set aside a statutory demand.
Whether the statutory demand should be set aside
Demasol made its payment claims under the CCA and complied with the statutory requirements under s 20.
SPI then became liable to pay the claimed amounts under s 22 as it failed to provide a payment schedule or pay the amounts claimed within 20 working days.
All the issues SPI belatedly disputed should have been covered in a payment schedule (which SPI failed to do). As a result, Demasol became entitled to recover the debt from SPI under s 23.
The Court of Appeal held that the payment claims served by Demasol on SPI were valid payment claims under the CCA. There was no substantial dispute as to whether SPI was liable to pay the amounts claimed. Accordingly, Demasol was entitled to enforce its statutory demand.
Therefore, the Court of Appeal held that the High Court erred in setting aside the statutory demand under s 290(4)(a) of the Companies Act 1993 as doing so would be contrary to the CCA and undermine its purposes. SPI was not shut out from the CCA’s adjudication processes or other proceedings. It simply had to pay now and argue later.
Outcome
SPI’s application to set aside the statutory demand was dismissed but the time for complying with the statutory demand was extended.
Our view
This recent Court of Appeal case reinforces the “pay now, argue later” regime under the CCA. It is a good reminder to all in the construction industry to respond promptly to payment claims pursuant to the process prescribed in the CCA.
The timeframes in the CCA are strict and failing to comply has irreversible consequences and can result in the payment claim being enforced in the Courts as a debt which will likely result in increased costs for the payer. It might be too late to dispute the debt once the contractor takes enforcement steps in reliance on s 23(2)(a) of the CCA.
Conclusion
If you have been served with a payment claim under the CCA or a statutory demand, or require legal assistance, we invite you to contact our specialists for a no obligation discussion. Our lawyers at Norling Law can assist you as part of our no obligation legal consultation.
To book a free 30-minute consultation, please click the button below:
