Downer adds to fallout

The legal fallout from big resources and infrastructure projects continued to mount this week, when Downer terminated its contract on a $1 billion-plus ammonium nitrate plant in the Pilbara.

It joined a strong line-up of construction contractors, including NRW Holdings, Monadelphous Group, Laing O'Rourke and Forge Group, seeking legal redress after being unable to negotiate satisfactory commercial outcomes.

Clayton Utz partner Clive Luck believes the growth in disputes arises largely from a fundamentally changed market, in which weak commodity prices have undermined the economics of major projects.

“Owners have little flexibility or desire anymore to accommodate significant variation and delay claims brought by contractors,” Mr Luck said.

“Conversely, contractors are less flexible in their approach to resolving matters commercially.”

Contractors had previously wanted to maintain relationships in the hope of winning more work, but are now focused on maximising returns from existing projects.

Squire Patton Boggs partner Brendan Reilly has also observed big changes.

“There has been a definite hardening of positions in what is a unique set of circumstances,” Mr Reilly told Business News.

Most of the disputes on big projects relate to large variations in the scope of work.

In Downer’s case, its original contract with head contractor Tecnicas Reunidas was valued at $72 million.

It has already been paid $89 million and is pursuing claims for a further $60 million through arbitration.

Many contractors are going through an adjudication process under the Construction Contracts Act 2014.

“We are seeing increasing reliance on the adjudication process to try and resolve disputes expeditiously,” Mr Reilly said.

However, a favourable adjudication will probably not be the end of the matter.

NRW Holdings, for instance, is one of several contractors embroiled in legal disputes with Samsung C&T over work on the Roy Hill project.

NRW has been awarded about $26 million through adjudication.

“Samsung’s response has been to contest payment through either judicial review of the determination or by resisting enforcement,” NRW said last month.

Laing O’Rourke also used the adjudication process, and was awarded $44 million.

However, the Supreme Court quashed the award after finding that the adjudicator had misapplied the terms of the relevant construction contract.

Minter Ellison partner Kevin Stewart said this enlarged the traditional definition of jurisdictional error.

Laing O’Rourke has appealed against that ruling, which should deliver more clarity on the adjudication process.

Mr Luck anticipates more appeals.

“I think you will also see a lot more appeals against the court judgements, which means these things will take four to five years to settle instead of two to three years,” Mr Luck said.

“You need to be very careful with the contract terms, but people also need to pay much more attention to the scope of work and pricing the work.”

Similarly, Mr Reilly said that, where circumstances allowed, contractors should explore opportunities to allocate more risk to owners and operators before entering new contracts.

Mr Stewart told Business News it was essential companies were particularly diligent as far as contracts were concerned.

“A carefully constructed, equitable contract is the best protection against the damage that might flow from contract disputes,” he said.

In practice, however, this wasn’t always the case, Mr Stewart said.

“It is not unusual for even some experienced contractors to begin work whilst the terms of a contract are still being negotiated, or they rely on their ‘off-the-shelf’ precedents, which were perfectly suitable for last year’s job on a mining site but not this year’s job on a gas well,” Mr Stewart said.

“Some will also accept a principal’s insistence on inequitable or unsuitable contract terms for the sake of the relationship or the sake of winning the job.

“That may be a valid commercial gamble, but hardly best practice.”