Parties to a construction contract
Construction law is a specialised area of law which comprises an amalgamation of contract and tort law within a statutory and regulatory framework. It covers a wide range of legal issues with its own jurisprudence and terminology.
A construction contract is a cornerstone of any construction project. Like any other contract, a contract is enforceable if, there is an offer to perform an act in exchange for something, the offer is accepted, and there is an intention to form a binding relationship. The construction contract governs the contractual rights and duties of the parties to the construction project.
The main parties to a construction contract are frequently known as the principal and contractor. The principal being the party for whom the contract is being undertaken (the Principal) and the contractor the party completing the contracted works (the Contractor). Depending on the size and complexity of the project, other professional advisors such as architects, engineers, surveyors, quantity surveyors and project managers may also be involved. These professional advisors will often be governed by their own professional bodies and terms of engagement.
It is important to understand the role of each party and any overlapping contractual obligations contained in a construction contract. This is discussed below.
Principal
In the construction industry, the Principal (also known as the employer or client), is the party for whom the project is being undertaken. In most cases, the Principal supplies information to the Contractor to review and price the project. In some instances, the Contractor may provide design services and construct the building as well.
The three main obligations owed by the Principal to the Contractor are:
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- To pay the Contractor;
- Not to hinder the Contractor from completing its work; and
- To do anything necessary for the Contractor to complete its work.
A breach of the first obligation is normally considered to be an essential breach that would entitle the Contractor to terminate the contract or in some circumstances, suspend work. Accordingly, the Principal should ensure that it does not fall foul of this obligation.
It is imperative for the Contractor to understand and verify the identity of the Principal before entering into the contract. The Principal could either be a natural person, a company or a trust and it is important to properly understand the different legal requirements for contracting with each entity.
This issue of identifying the Principal is crucial in the residential construction industry where it is common for the property in question to be held in trust. For example, if a trust is involved, the law requires unanimous consent from all trustees to enter into a contract. If not, there could be issues with enforcing the contract against the trustees.
To avoid any difficulties with enforcement, we recommend naming all trustees of a trust as the Principals to the contract and requiring each trustee to execute the contract. This will provide the Contractor with the best chance of enforcing the contract against the trust in the event of non-payment.
Contractor
The Contractor constructs the project in accordance with the information provided by the Principal. In contrast to the Principal, the Contractor provides that Principal with a range of warranties. Typical warranties that are implied in a construction contract are:
- All building work will be done properly, competently and according to the plans and specifications in the approved consent;
- All materials used will be suitable and, unless otherwise stated in the contract, new;
- The building work will be consistent with the Building Act 2004 and the Building Code;
- The building work will be carried out with reasonable care and skill, and completed within the time specified or a reasonable time if no time is stated;
- The home will be suitable for occupation at the end of the work; and
- If the contract states any particular outcome and the Principal relies on the skill and judgment of the Contractor to achieve it, the building work and the materials will be fit for purpose and be of a nature and quality suitable to achieve that outcome.
These warranties apply automatically to all contracts for building work on a residential house, whether written or oral. In addition, there are other legal obligations imposed by the Building Act 2004, the Consumer Guarantees Act 1993, and other duties of care under general law.
Generally, when entering a construction contract, the parties agree to do all that is necessary to be done on their part for carrying out of the project, though there may be no express words to that effect.
Professional advisors
In complex projects, professional advisors will also be appointed to administer different elements of the contract requiring specialist advice, such as design, quantity surveying and engineering (the Professional Advisors). The Professional Advisors are normally appointed by the Principal and are responsible for tasks allocated under the contract.
The Professional Advisors are Principal’s agents. It means that they must act in the best interests of the Principal and are authorised to legally bind the Principal. However, the Professional Advisors can also carry out a quasi-judicial role. This distinction is regularly misunderstood.
For example, an engineer may issue a payment claim and/or a payment schedule as a Principal’s agent. However, when an engineer assesses the value of the Contractor’s payment claims, it must do so impartially. Given the dual role of some Professional Advisors, it can be difficult to act in an impartial manner and in good faith. In this example, an engineer must also act in an impartial manner when making decisions such as approving and valuing variations, confirming unforeseen physical conditions, granting extensions of time, and resolving disputes between the parties.
It is common for engineers to act in “subjective fairness” rather than the objective standard required under law. In Brown & Doherty v Whangarei District Council, the Court held that:
I commenced this section of the judgment by emphasising that no criticism is intended of the personal subjective honesty of either Mr Beck of Mr Brennan. Both struck me as competent Engineers honest and reasonable men, who sought to discharge their duties under this contract in a proper and fair manner. But as the cases I have quoted emphasise, it is not a matter of subjective fairness. Rather it is a matter of looking at the whole situation objectively from the point of view of a reasonable contractor and asking whether what occurred appears to be fair and whether, in carrying out his duties, the Engineer appeared to act with independence and impartiality. To borrow words from the judgment of Woodhouse and Cooke JJ in the Canterbury Pipe Lines case I have reached the conclusion that “both as to a matter of fact and degree” it cannot be said objectively that Mr Beck’s conduct in this case was fair and impartial in the sense that is required by law.
If an engineer does not act impartially in making a quasi-judicial decision under the contract, that will be a breach of contract by the Principal as the engineer is the agent of the Principal. The Principal can therefore be liable in damages for such a breach.
The Principal must therefore be careful when communicating with a Professional Advisor, especially if it concerns a dispute. Prudently, Professional Advisors should also obtain legal advice in respect of their conduct to ensure that they do not commit a breach of contract and/or their professional obligations.
Summary
In summary, we have identified that the obligations owed by the Principal, Contractor, and Professional Advisors are extensive. There are overlapping contractual obligations that must be considered carefully.
Essentially for the Contractor, these obligations can significantly affect the Contractor’s ability to be paid for its work and the enforceability of the construction contract. This will be discussed in further detail in future articles.
Professional Advisors also need to be mindful of their dual capacities so as not to prejudice the Principal in respect of their decisions.
Contact us if you have a question about a construction contract that you are a party to, or if you are considering entering a contract. Our lawyers at Norling Law can also review your contract and discuss potential fishhooks that are in the contract as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation
Brown & Doherty v Whangarei District Council CP 3/86, Smellie J, Auckland, 13 February 1987.
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
Anna practices in the area of commercial litigation and has appeared as Counsel in the District Court, High Court and the Court of Appeal, having successes in all Courts. Anna has a special interest in corporate, insolvency and relationship property law.
Wendy has over 20 years’ experience in civil litigation in New Zealand with a main focus on construction, insolvency and debt recovery and security enforcement.