Construction

29 Apr 2010

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What's in a Name?

As the old saying goes, 'the devil is in the detail'. And never has this been more true than when drafting construction documents and undertaking construction work. The smallest error can have a significant impact. For example, a contractual party may have trouble enforcing its contractual rights if they have been incorrectly named and a dwelling may not receive Code of Compliance if a product has been substituted. So what are the common types of 'misnomer' and risks to be aware of when products are substituted without the agreement of all parties?

A common mistake which can have significant ramifications is when a party is named incorrectly. This can be a simple omission such as calling the company A Construction Limited, when its correct name is A Construction Development Limited. While on the face of it, this doesn't appear to be a significant error, it may well have flow on effects. For example, if a principal is incorrectly named in a contract, the associated documentation such as construction bonds and insurance certificates will often also name the principal incorrectly (as they rely on the contract name). 

All parties to the contract may accept that a mistake such as the one above was nothing more than a typographical error, but the position may well be different in the eyes of an insurance company receiving a claim under the contract or a bank when a bond is called. Technically the named beneficiary in these documents is not the principal, but some other entity. As such an insurance company or bank may choose to dispute the principal's entitlement to make such a claim or call - after all they are not the named beneficiary, nor are they a party to the contract. You may think this can be easily cleared up with a simple letter from the parties explaining the situation, however when a relationship has ended or something has gone wrong (which is often when a bond is called) then getting this type of assistance from a contractor may not be so easy. 

If the bank or insurance company are not forthcoming, a beneficiary will have to commence proceedings against the surety/insurance company for the release of the money. Such proceedings will inevitably mean the beneficiary will incur irrecoverable costs and the process will take time. This is the case even where it was the contractor who executed the documents containing the incorrect name. Should you be forced down this road the Courts will usually look at the intention of the parties when they entered into the contract - who has been acting as the principal and who was the intended beneficiary - and make an award that reflects this position. 

So while a beneficiary may get there in the end, there is a much cheaper, effective and efficient step available to avoid ending up in this situation. And that is to check, check and check again! Obtain copies of all documents that list you as the beneficiary and check all the parties have been correctly identified. This small effort in the beginning, when goodwill is at its strongest, can avoid a protracted and costly argument in the end.

A similar approach should be taken by a contractor when they are reviewing building plans or specifications and specific materials are listed. On occasion, the specified materials may not be those preferred by the contractor and they may want to substitute the materials. The reasoning behind the substitution may be sound, but this may not be enough. Certain materials may have been specified for a defined reason or to address a specific requirement of the Code of Compliance. 

Too often in the middle of a project, substitutions get made without anyone stopping to consider the ramifications. In particular, are these items specified on the building consent ? And if so, will the Council accept a substitution or was there a reason that the original material was specified? The seemingly innocuous substitution can then bring its own set of problems if the materials are rejected. The contractor may well have to return and replace everything at its own cost.

Equally important, an unauthorised product substitution can let a designer off the hook for design liability. Should the substituted materials fail and the substitution was made without the designers approval, then it will be very difficult to tie the defect and losses to the designer. 

In addition, if a material that has been specified is not fit for purpose a contractor cannot hide behind the argument that it was specified by someone else. If a contractor knows the material isn't for its purpose then they need to raise this and ensure that the specified materials are amended - failure to do this could lead to a contractor being liable for subsequent damage which arises.

As with the misnomer, the issue of substituting products can be easily rectified. If a contractor receives plans that specify a material they want to substitute then they should raise this with the designer and have them sign off the substitution. A little effort in the beginning will ensure liability remains with the appropriate parties and everyone is clear about what is required.

This article is not legal advice.  If you have a specific query please contact Charlotte Fox or Craig Wheatley.

Published: Build April/May 2010

Author

Charlotte Fox

Senior Associate - Property & Infrastructure

DDI: +64 3 365 0971

Mobile: +64 21 242 1602

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