It is a pro forma contract right? how bad can it be?

Simple – pretty bad!!!

We are often accused of criticising pro forma contracts such as the Master Builders pro forma. Such contracts are not necessarily bad contracts at all – if you are the builder!!

As a general rule, contracts are not just intended to record the commercial bargain of the parties (that is, what work will be carried out for what price) they are also intended to try to allocate risk between the parties (that is, who will take on what risk).

Obviously, Master Builders Australia is an association intended to protect its members (which are builders).  So the contracts prepared by the Association are skewed in favour of the builders.  Those contracts certainly do little to protect the interests of any body corporate using them, and in fact place significant and, in our view, unnecessary risks on the body corporate.

Take for example clause 12(a) of the Master Builders Commercial Building Contract (LSC2) which provides for an indemnity by the body corporate as follows (our emphasis added):

(a)  The Owner indemnifies, and will keep indemnified, the Contractor against any claim, loss, expense or liabilityarising out of:
….

      (v) any defect in the design of the Works.

At the least, the obligation to indemnify the builder in respect of any liability arising out of any defect in the design of the works is unreasonable, particularly where the body corporate did not produce the design (or have the design produced by a third party such as an engineer, or architect – and that topic opens up another whole can of worms).

Take the example where:

1.  A wall was designed and built by the builder;

2.  The wall collapsed because the design was insufficient;

3.  A person was seriously injured as a consequence of that collapse;

Notwithstanding the fact the builder had designed the wall the body corporate would need to indemnify the builder under that clause 12(a) in respect of any loss or damage the builder suffered through a claim brought against the builder.

Many/most insurance policies contain an exclusion clause which allows the insurer to refuse cover to any insured person (so here the body corporate) for any liability assumed only by way of agreement.  That is the case with an indemnity, in that the body corporate is taking on liability to the builder only because it agreed to do so in that clause 12(a).  So the body corporate’s insurer does not need to cover the body corporate for any liability the body corporate incurs through the giving of that indemnity.

So lets look at how that works, using the example above:

a.  If someone was seriously injured because the wall collapsed, the person would likely make a claim against both the body
corporate and the builder.

b.  The builder would then require the body corporate to indemnify the builder in regards to the claim by that person, under that
clause 12(a)

c.  The body corporate would presumably claim on its insurance:

i.  The claim by the builder under the indemnity – however the insurer would not be obliged to cover that indemnity because of
the exclusion mentioned above.  On that basis, the body corporate would have to bear from its own pockets the claim made by
the builder under the indemnity; and

ii. The claim by that injured person against the body corporate.  This is where it can get a little trickier. The difficulty is that the
body corporate’s insurer is then subrogated into the shoes of the body corporate to pursue any contractual rights the body
corporate might have against the builder (because the builder negligently designed the wall).

Of course, upon the body corporate’s insurer pursuing those rights against the builder, the builder will counterclaim against the
body corporate under that clause 12(a) for indemnity for any liability the builder has to the body corporate’s insurer (and again
the body corporate would have to bear that liability from its own pockets),

such that the body corporate could be required to bear the entire amount of the claim from its own pockets, simply because the body corporate used that contract containing clause 12(a).

If that was to occur, a special levy would need to be raised and of course lot owners might then be looking to point the blame at the body corporate manager and/or Committee, who then have to consider their own potential personal exposure.

Let’s look at another example.  Firstly, it is important to understand that there is a general rule of law that a party in material breach of a contract cannot terminate the contract because of a breach of contract by the other party, without first removing its own breach.

Therefore, to sign a contract that contains terms that the body corporate cannot comply with, is sheer folly.

Looking again at the Master Builders Commercial Building Contract (LSC2), clause 11(b) requires the body corporate to take out a building and contents insurance policy in the joint names of both the body corporate and the builder until expiration of the defects liability period.

Whilst we are not insurance brokers, so we are not able to say whether or not that is in fact possible or not to do that, we understand from past experience that insurers are very reluctant to issue such policies in “joint names”.

So if the body corporate does sign a contract containing this requirement and the body corporate later seeks to terminate the contract because of the material breach by the builder, the body corporate may be prevented from doing so (and if it tried to terminate the contract, the body corporate could be held liable for damages by the builder).

These are just a couple of issues that are apparent in the Master Builders contract.  And it is not just the Master Builder’s pro formas that are of concern to any body corporate using them, as all of the pro forma contracts require some amendment (some more than others though).

Put simply, a committee should not consider any contract (including any pro forma construction contract) suitable for the body corporate to execute, unless that contract is specifically prepared by or has been reviewed by the body corporate’s solicitors, to ensure that the body corporate’s interests are protected.

If any committee would like advice in respect of any contract, please do not hesitate to contact us as we would be happy to assist.