28 September, 2015
WHAT YOU NEED TO KNOW
- One of the key regulatory approvals that may be required for a major construction project is Commonwealth environmental approval under the Environment Protection and Biodiversity Conservation Act 1999 (Cth).
- Where such approval has not been granted before a principal enters into construction contracts for the project, there is a risk of some uncertainty for both parties.
- A principal should ensure it fully understands the risks of entering into construction contracts before EPBC Act approval is granted. In negotiating contracts it should carefully consider appropriate mechanisms for managing the contractual allocation of risk. The level of risk accepted by the principal will ultimately have a bearing on the contract price.
Recent trends in major construction projects
Often in major construction projects, the principal will obtain certain key regulatory approvals before entering into construction contracts. One of the lead regulatory approvals that may be required is Commonwealth environmental approval under the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act).
Where such key regulatory approvals have been granted before a construction contract is entered into, the principal and contractor are in a good position to understand the ongoing requirements and risks associated with those approvals. The parties are able to tailor the contractual terms and the technical scope and performance requirements to appropriately allocate contractual responsibility and liability for compliance with the conditions of the granted approvals.
Realistically, however, this may not always be possible. There have been some recent examples of construction contracts for major projects being entered into before the key Commonwealth environmental approval is granted under the EPBC Act.
While this may be unavoidable for various reasons, it is not ideal for either party. It means that the construction contract can only deal with the EPBC Act approval and associated risks in general terms. That is because the parties cannot know for certain whether the approval will be granted, when it will be granted and what conditions may be attached to the granted approval. This approach can give rise to some uncertainty and risk for both parties.
To avoid ending up in that position, the principal can ensure the project is referred early and approval is granted under the EPBC Act before the principal enters into construction contracts. However, where that is not possible, there are ways the risks can be managed contractually to minimise the principal's exposure.
When is approval required under the EPBC Act?
The EPBC Act is the Commonwealth Government's core environmental legislation. It provides a legal framework to protect and manage certain "matters of national environmental significance". Not all major projects will require approval under the EPBC Act.
An action that could have a significant impact on a matter protected by the EPBC Act must be referred to the Commonwealth Minister for the Environment to determine whether the action is a "controlled action" requiring environmental impact assessment (EIA) and approval under the EPBC Act.
Where a construction project is determined to be a "controlled action", following EIA the Minister will determine whether to grant approval and what conditions are attached to the approval.
To allow time for the referral and EIA processes to be completed and for the approval to be granted, the referral will often need to be submitted at an early stage of the project timeline, before construction contracts are awarded. For that reason, commonly the principal will lodge the referral as the proponent of the project under the EPBC Act and will be responsible for undertaking the EIA.
Who is responsible under the EPBC Act for complying with the approval?
The person who holds the granted EPBC Act approval has primary responsibility for compliance with the approval conditions.
Often a principal will agree under contract that its contractor can rely on the principal's EPBC Act approval to undertake construction of all or part of the approved project. The EPBC Act allows this, expressly stating that an approval authorises the taking of the action by a person who is authorised, permitted or requested by the holder of the approval, or by another person with the consent or agreement of the holder of the approval, to take the action. However, this is subject to the condition automatically imposed on all EPBC Act approvals that the principal must take reasonable steps to en-sure that the contractor relying on the approval:
- is informed of any condition attached to the approval that restricts or regulates the way in which that part of the action may be taken; and
- complies with any such condition.
A contractor will only be able to rely on the principal's EPBC Act approval to the extent that the contractor's proposed activities are within the scope of the action that has been assessed and approved under the EPBC Act.
Where a principal authorises its contractor to undertake all or part of the project approved under the EPBC Act approval, the principal is not released from complying with the conditions of its EPBC Act approval and is therefore exposed to risks of statutory liability if its contractor breaches conditions of the approval.
What are the potential consequences of a breach of the EPBC Act?
Breach of the EPBC Act by contractor
Where approval is required under the EPBC Act, it is an offence to carry out any part of the action before the approval is granted. Offences under the EPBC Act attract significant civil penalties of (from 31 July 2015) up to $9 million for a body corporate, and up to $900,000 for individuals. Such offences may also attract significant criminal penalties.
A contractor may seek to carry out early certain works or preparatory works in the period before the EPBC Act approval for the broader construction project is granted, in an attempt to contract the project timeline. However, there is a risk that early works or preparatory works could be considered part of the broader construction action that has been referred for approval under the EPBC Act. In those circumstances, there is a risk that the contractor may breach the EPBC Act if it proceeds to carry out those works before the EPBC Act approval is granted (or determined to be "not a controlled action").
Once an approval has been granted, if the contractor fails to comply with a condition of the EPBC Act approval governing its activities the contractor will breach the EPBC Act. Such a breach would be an offence under the EPBC Act attracting significant penalties.
Vicarious liability of principal
In certain circumstances the principal may be vicariously liable for a breach of the EPBC Act by its contractor.
Under the EPBC Act, both the holder of the approval and a person who is authorised by the holder to take the action may be liable for the breach of a condition attached to the approval. The principal may be liable for a breach by its con-tractor unless it can demonstrate it has taken all reasonable steps to ensure that its contractors comply with the conditions of the EPBC Act approval.
The level of risk of liability of the principal for an action (or inaction) committed by its contractor will depend on the extent to which:
- the contractor is acting on behalf of the principal;
- the contractor is acting under the direction or
- control of the principal; and
- the principal appears to have:
- authorised or allowed the alleged contravention to occur; or
- taken reasonable steps to prevent the alleged contravention.
Personal liability of executives
The EPBC Act imposes personal liability on directors and other executive officers for the actions or inactions of a body corporate. In addition to the body corporate being liable, an executive officer of the body corporate may also be found to have contravened the civil penalty provisions or criminal penalty provisions under the EPBC Act if:
- the executive officer knew that, or was reckless or negligent as to whether, the contravention would occur;
- the executive officer was in a position to influence the conduct of the body corporate in relation to the contravention; and
- the executive officer failed to take all reasonable steps to prevent the contravention.
What are the potential risks for a principal entering into a construction contract before the EPBC Act approval is granted?
The most obvious risks are that:
- the approval is not granted;
- there is a delay in the grant of approval affecting the construction works program;
- the approval is granted subject to conditions which:
- are significantly more onerous than anticipated by the parties;
- require variations to the project design and scope and performance requirements (resulting in an increase in costs and extension to the construction works program); and
- may effectively prohibit the project from proceeding (eg, because the conditions have an unforeseen adverse impact on the feasibility of the project);
- a third party alleges there has been an administrative error in the Minister's decision to grant the approval and seeks an injunction under the EPBC Act to prevent works proceeding pending judicial review (certain individuals and non- government organisations have standing to challenge key decisions of the Minister under the EPBC Act); or
- the contractor proceeds to carry out early works that are part of the referred action, in breach of the EPBC Act.
How can the risks be managed?
In considering how to deal with the risks outlined above in negotiating the contractual terms with the contractor before the EPBC Act approval is granted, the principal needs to be mindful of:
- the potential for contractual uncertainty;
- its statutory obligations as the proponent of a project referred under the EPBC Act (and once granted, the holder of an EPBC Act approval); and
- the potential adverse impact on the contract price if the contractor is required under the contract to bear the risk of delay in the grant of the EPBC Act approval and the risk that onerous conditions affecting construction design and methodology are imposed.
Allocating contractual risk
As a starting point, the contract between principal and contractor will need to make it clear who bears the contractual risk that:
- the grant of the approval is delayed or the approval is not granted — no part of the action can commence until the approval is granted (ie, no early works that are part of the referred action can commence);
- the conditions attached to the approval when granted significantly affect how the project is to be carried out, potentially requiring variations to the detailed scope of work and construction works program; and
- the conditions require preparation and approval of certain management plans for the project before any works can commence.
The principal needs to be aware that transferring the risks entirely to the contractor will have a corresponding impact on the contract price.
To achieve a more balanced allocation of risk, the parties may consider including mechanisms in the contract which might include:
- a right of the principal to change the scope of the project works within a certain timeframe (and within agreed parameters) if required as a result of the EPBC Act approval conditions, without triggering a variation; or
- a pre-agreed variation regime which is triggered only if the principal does not obtain the EPBC Act approval by a certain date.
There may be a range of alternative mechanisms available to the principal to minimise its exposure to risk, depending on the particular circumstances, which will need to be weighed against the impact on the contract price.
Minimising risk of statutory liability
A principal can minimise its risk of statutory liability (and the risk of personal liability of executive officers) for a breach by its contractor of the principal's EPBC Act approval by:
- stating under contract that the contractor:
- is not acting as agent for or under the direction of the principal; and must implement systems to ensure that it complies with approvals (and other laws);
- implementing and reviewing a compliance system that documents the principal's statutory obligations and its compliance with them; and
- taking steps to rectify any non-compliance identified under the compliance system.
Conclusion
Only once an EPBC Act approval is granted will the parties to a construction contract be in a position to fully under-stand the ongoing requirements and risks associated with the approval. In reality, however, parties to major construction contracts have been willing to enter into agreements before obtaining the key Commonwealth environmental approval required under the EPBC Act. Parties adopting this approach should only do so after careful consideration of the resulting risks and uncertainty, and after implementing appropriate mitigation measures. One of the key mitigation measures is to clearly allocate under contract the responsibility for any liabilities arising a result of entering into the contract before the EPBC Act approval is granted.
This article first appeared in the Australian Construction Law Bulletin –Volume 27 No 6.
For further information, please contact:
Claire Woodland, Ashurst
claire.woodland@ashurst.com
