13 April, 2019
The short-lived suspension of Laing O’Rourke Australia Pty Ltd’s QBCC licence between 8 and 13 March 2019 will have caused significant concern amongst counterparties to Laing O'Rourke contracts in Queensland regarding the potential impacts on project delivery and payment resulting from the licence suspension. Fortunately. those impacts should be manageable due to the short duration of Laing O'Rourke's licence suspension. A prolonged suspension would, however, cause major headaches for both Principals and subcontractors compelling them to consider a range of legal options to minimise losses resulting from the suspension.
This article looks at the potential impact of licence suspension upon counterparties (both upstream principals and downstream subcontractors, consultants and suppliers) and their respective legal and commercial positions as a consequence of the disruption caused by that suspension.
This article will take three minutes to read.
Immediate consequences of loss of licence
Laing O’Rourke held, and has now regained, the highest possible QBCC licence, ‘Builder – Open’ with a Maximum Turnover in Category 7 (>$240M), entitling it to work on all classes of buildings and to prepare plans and specifications for use on work to be performed by it.
Queensland has the most comprehensive system of contractor licensing in Australia. Outside Queensland, contractor licencing is primarily focussed on residential construction and specialist trades (e.g. electrical and plumbing). In contrast, the licencing system under the Queensland Building and Construction Commission Act 1991 (QBCC Act) requires contractors to obtain specific licences by reference to the type and value of work performed, with penalties imposed for performance of work outside the authorised licence class.
The consequences of suspension of a QBCC licence are severe, requiring the cessation of construction work on all sites on pain of penalty (and in the case of an individual, potential imprisonment) and the potential risk of QBCC’s refusal to lift the suspension if there is evidence of unlicensed contracting. This prohibition on unlicensed contracting will apply even where individual subcontractors hold relevant licences for their respective trades, due to the inability of the affected contractor to carry out supervision and co-ordination of that work as head contractor.
The problem extends beyond the inability to perform work on site and includes a prohibition on the suspended licence holder from holding itself out as a contractor able to perform work. This would appear to prevent the suspended contractor from submitting tenders, negotiating and entering into upstream contracts, performing design work or letting subcontracts. Sections 54 and 67(4) of the QBCC Act require all contractors to display their QBCC licence number in advertising and marketing material and to state their licence number in each written contract. A suspended contractor is unable to comply with either of these obligations and is liable to a fine for breach. The suspension of a licence will also impact the ability of the suspended contractor to enforce the payment provisions of any contract, since the QBCC Act restricts the amount a suspended contractor is entitled to be paid (where work has been carried out during a suspension), and expressly excludes an entitlement to be paid any profit.
For Principals, the loss or suspension of the contractor’s licence means a complete halt to progress of work on and off site and an indeterminate delay to program and ultimate Practical Completion of the project until a new licence is granted or a new licence holder appointed. This may have severe financial consequences in terms of delayed income generation (e.g. inability to complete on downstream sales contracts, delayed commencement to leases of commercial and retail property or use of economic infrastructure such as toll roads) and may cause breach of developer financial covenants. The head contract will provide for liquidated damages for delay backed by unconditional undertakings and potentially Parent Company Guarantees, however any prolonged suspension is likely to result in liquidated damages liabilities in excess of the security held by the Principal and lead the Principal to consider its termination rights.
Subcontractors, consultants and suppliers will also be unable to perform work for the suspended head contractor, leading to significant cashflow implications with idle labour and plant (much of it hired) and no progress payments.
Rights of Principals in the licence jurisdiction
Principals will look to their contractual rights against the affected contractor, including for breach of express representations that the contractor has the ability and capacity to carry out the work under the contract and that it will do so in accordance with legislative requirements. Many contracts will include a specific representation that the contractor maintains, or will obtain, all necessary permits and approvals to perform the work. As stated above, for Queensland contracts the relevant QBCC licence must be expressly stated in the construction contract. Some contracts will specifically identify the loss of a key permit or approval as a substantial breach of contract, entitling the Principal to terminate.
Principals will also look to their entitlement to impose liquidated damages, however this power arises only once the Date for Practical Completion has passed and is often capped (e.g. at 10% of the Contract Sum). Some, but not all, contracts will include a specific entitlement for the Principal to terminate when the liquidated damages cap is reached without Practical Completion having been achieved. The application of liquidated damages and the right to terminate at some relatively distant future date will likely be cold comfort to a Principal faced with uncertainty as to whether its head contractor will regain its suspended licence necessary for it to recommence work.
A Principal looking for a rapid resolution to this uncertainty will wish to consider whether loss of a critical licence constitutes repudiation of the head contractor (as an arguably self-inflicted inability to perform the work under the contract), entitling the Principal to accept the repudiation and terminate the contract. Alternatively it could be characterised as a complete failure of consideration. Whilst termination is a ‘nuclear option’ and comes with the risk of a counter-allegation of repudiatory conduct by the terminating Principal, well advised Principals will seek to keep their powder dry by reservation of rights. A Principal in discussion with a head contractor whose licence has been suspended must be careful to avoid affirmation of the contract and consequent loss of the ability to terminate, as affirmation will restrict the Principal to a claim for damages (potentially limited to its liquidated damages entitlement).
Joint venture partners may also wish to consider whether they bear any risk in contracting with an unlicensed contractor and should review their insolvency and default related rights.
Principals outside the licence jurisdiction
Projects outside Queensland should not be directly affected by the licence suspension, except to the extent that the cashflow and liability implications of the suspension have a knock on effect on the affected contractor's solvency generally.
To the extent that licence suspension is a symptom of underlying solvency issues, these may become evident in an overall decline in progress due to non-payment of subcontractors and suppliers.
The Principal’s site representatives and contract administrators should be attuned to signs of subcontractor and supplier disaffection arising from non-payment and scrutinise contractor statements submitted with each progress claim regarding payments made to subcontractors. Additional care should be taken when valuing work performed and assessing the cost to complete to minimise the risk of over-certification. Contract administrators should also ensure that the contractor has provided security for the correct amount (reflecting any adjustments to the Contract Sum) and that contractor insurances are current.
Downstream counterparties
The range of subcontracts and supply contracts renders it more difficult to generalise regarding the content of those contracts. It is also likely that many subcontracts and supply agreements will have been let on the basis of contractor standard form documents, which will inevitably favour the suspended contractor by limiting instances of contractor breach and subcontractor/supplier remedies.
It is likely that the subcontracts will include provision for extension of time and delay costs, particularly where due to a breach of contract or act or omission of the head contractor. The failure of the head contractor to make the contracted work and work site available to its subcontractors will generally be a clear event of delay for which the head contractor is liable to the subcontractor for both an extension of time and delay costs. This is particularly problematic for the head contractor, which will have no corresponding entitlement to an upstream extension of time and delay costs from the Principal, potentially compelling the head contractor to incur substantial acceleration and expediting costs to subcontractors and suppliers to bring the project back on program. Subcontractors must, however, be alert to the notification obligations under their respective subcontracts to ensure that non compliance does not bar an otherwise valid claim.
It is important to provide reliable evidence of delay costs incurred as a result of the head contractor licence suspension. It is advisable to create a specific cost code for recording of these losses, which will include unproductive down time for labour pending mitigation by reassignment to other projects, time related preliminaries such as plant hire, storage costs and insurances and loss of contribution to head office overheads
What you should do now
Counterparties should demand that the affected contractor clearly articulate its plan to regain the suspended licence, how long it anticipates this will take and its proposals to mitigate and compensate consequent losses. The counterparty should also expressly reserve its rights pending consideration of its legal and commercial position and a clear eyed assessment regarding whether the licence will be restored as promised.
The assessment of legal entitlements should include consideration of the potential remedies set out above, ranging from claims for liquidated damages (if a Principal) and extension of time and delay costs (if a Subcontractor), through to termination based on substantial breach or termination at common law based on repudiation.
For further information, please contact:
Alex Hartmann, Partner, Baker & McKenzie
alex.hartmann@bakermckenzie.com
