Posted by Carl Small - Co-Ordinated Landscapes
on 8 November 2017
There was an interesting article posted on LNA's news portal April 2016 by Nationwide Insurance Brokers and The Fold Legal titled Unfair Contractual Indemnities Legislation. It was discussing the then upcoming but now implemented unfair contract laws, Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015.
The article described how these laws will provide small businesses some protection from unfair contractual terms when negotiating sub-contracts with Principals and Head Contractors as it will be illegal to include unfair terms in contracts with small businesses. The Act includes definitions of a small business and unfair terms. What particularly caught my attention in the article was the section on one-sided indemnity clauses. Around this time we had been seeing a proliferation of indemnities being required in subcontracts, particularly listed developer builder subcontracts.
We had recently signed a subcontract with one of those developer builders, the warranty in that subcontract included some of the indemnities categorised as 'unfair terms' in the article:
Indemnities which transfer liability to the small business for losses or liability regardless of fault;
Indemnities that require the small business to be liable for the other party's negligence;
Unlimited indemnities, eg where there is no financial limitation;
Indemnities for consequential loss, or excessive liquidated damages.
Realising we really had not fully understood what we had signed up to we set about finding out more about it. We were pretty shocked with what we found and thought we would share it with LNA Members.
It seemed to us that some years ago subcontracts typically only had a defects liability period. More recently many subcontracts include a Warranty. The warranty usually requires signing towards the end of a project and is commonly a pre-condition to receiving completion. Originally these warranties tended to be a statement that the works were completed in accordance with the requirements of the subcontract and a promise that the Warrantor would fix, at their cost, any substandard or defective work that became apparent within a specified time frame.
More recently warranty implications and obligations we are seeing are much, much broader. Some of the terms being included and our understanding of their potential implications are:
Execution as a deed / Deed Polls - a deed is a special type of binding promise or commitment and a breach of a deed is actionable for 12 years after the date of the relevant breach. An agreement that is not executed as a deed is actionable for 6 years from the date of the relevant breach.
Commencing on the date for practical completion / for a duration not less than - there is a start date for the warranty but no end date.
The Subcontractor indemnifies the Beneficiaries against all loss, damage, cost, expense - a contractual obligation to make good all losses suffered by the indemnified party on a full out of pocket basis. The indemnity has broader consequences than general, common law liability as all losses are actionable, there is no financial limit. An example could be if a property sale fell through due to late completion of a subcontract, besides any applicable liquidated damages the subcontractor may be liable for extended construction finance costs, the costs of resale and any loss in value of the sale.
The indemnity under this clause shall be reduced proportionally to the extent that the Principal, its agents, employees and contractors contributed to the breach of the subcontract - some warranties do not include proportional reduction clauses such as this, meaning the subcontractor may be fully indemnifying the Principal and other Beneficiaries even though the Principal or others caused or contributed to the breach.
Fit for purpose clauses - seem to be popping up everywhere, not just in warranties. Such warranties are broad and potentially onerous as-is, but if the purpose of the works has not been defined and is left as being "as intended" or the like, the obligations are even more onerous.
Who fixes defects or 'unfit' works - these warranties commonly don't include any rights for the subcontractor to fix their defects. With an all losses indemnity, the beneficiaries can have defects or unfit works fixed by whomever they want but the subcontractor is liable for those costs.
The Beneficiaries may assign the benefits and rights under this Deed Poll - any of the beneficiaries are able assign the warranty to another party or parties of their choosing. You may have a good working relationship with your client and trust they will not take advantage of the warranty but they or one of the other beneficiaries can assign their rights to someone else such as the new owner of a building. Just say the new owners find the pavers you installed, pavers that the building architect selected, slippery. The new owners may be able to determine the pavers are not fit for purpose, get them replaced by the most expensive pavior in town and you may be liable for the whole cost under the warranty.
Maintenance and fair wear and tear -any exclusion for failure to comply with maintenance directions or fair wear and tear seems to be commonly ignored or specifically excluded in contemporary warranties.
Even though the subcontractors Warranty Deed is covering all of the 'Works' it is not uncommon for subcontracts to include a separate Warranty Deed that selected subbies and suppliers of the subcontractor may be required to execute. I expect this is required so the beneficiaries have direct access to those subbies or suppliers if the subcontractor no longer exists or if the subbie or supplier is better capitalised or insured. Even though the subcontractor may not be considered a small business under the Act and have the benefit of its protection, now the Act is in force the subcontractor could well find themselves in a position where they are breaking the law by asking their small subbie or supplier to sign the warranty deed.
In summary, we are suggesting members should be very careful about providing these types of warranties and undertakings and are providing our thoughts and observations on this issue to other LNA Members for their own consideration but we are landscapers and are in no way qualified to provide legal advice so all readers should make their own, careful assessments of these issues.
Carl Small, Co-Ordinated Landscapes