A subcontractor is several weeks behind programme. The head contractor's project director wants to bring in a replacement and deduct the additional cost from the subcontractor's next payment. The subcontractor points to late access and revised drawings. Its extension of time claim remains unassessed, and its latest payment claim is with the commercial team.
Before committing to a replacement, the head contractor needs to establish how much of the delay is the subcontractor's responsibility and whether the circumstances justify termination. Recovering the additional completion cost requires a further assessment, including whether any amount can properly be deducted from payment.
These are decisions commercial managers encounter during delivery, often while the project is pressing for immediate action. The agreement provides the starting point, read alongside the common law and applicable legislation. On Australian projects, differences between states and territories can affect the answer. Recognising the legal issues early gives the team time to investigate and obtain advice before it commits to a course of action.
Establishing the agreement
The documents in the project folder may not give a straightforward account of what the parties agreed. Work can start while a formal subcontract is still being prepared, with a quotation, purchase order and email instruction already creating obligations. Establishing whether a contract has formed, and which terms it contains, requires consideration of the parties' words and conduct.
An expectation that a formal document will follow does not, by itself, establish whether the parties intended to be bound immediately or only after signature. Nor does starting work necessarily mean that every term in a proposed subcontract has been accepted. An instruction for a limited package of enabling works might create an agreement for that package while leaving the main subcontract unresolved. Its scope, price limit and incorporated terms need to be understood before further instructions are issued.
The contract review before signing should resolve which documents and qualifications form part of the bargain. The agreed set must then reach the delivery team, with amendments and subsequent changes recorded. A qualification submitted with a tender cannot safely be relied upon merely because someone can still find it in the folder.
Once a contractual document is signed, a party will ordinarily be bound by its terms even if the signatory has not read them, subject to recognised exceptions. Familiarity with a standard form is therefore a reason to look carefully for amendments, rather than assume the wording is unchanged.
Reading the contract as a whole
For the delayed subcontract, an extension of time clause may appear to provide an answer until it is read with a separate notice provision or an amendment limiting the events that qualify. Completion particulars elsewhere in the agreement may also affect the assessment. Advice based on one clause, or on the wording used on an earlier project, can miss the obligation the parties actually undertook.
The High Court explained the objective approach to interpretation in Mount Bruce Mining v Wright Prospecting [2015] HCA 37. The contract's text, context and purpose inform what a reasonable businessperson would understand its terms to mean. One party's private intention does not determine the meaning of the written agreement.
Reading the provisions together helps establish how the agreement works, but does not permit the team to replace inconvenient wording with something it considers more sensible. In XJS World v Central West Civil [2025] NSWCA 133, the parties had left the contractual completion-date entry blank. The NSW Court of Appeal declined to use wording elsewhere about completing the civil works within three months to fill that deliberate omission. A stated liquidated damages rate did not supply the missing date. Where the completion-date entry is blank, the team should check the agreement and obtain advice before treating the latest programme as the contractual date.
The programme and progress records remain important evidence of the work and its delays. Their contractual significance depends on the agreement. The team needs to distinguish a departure from a planned sequence from a failure to meet a contractual completion obligation, taking account of any adjustment to which the subcontractor is entitled.
Legislation and the agreed terms
Some questions cannot be settled by reading the contract alone. Standard form contracts involving small businesses may be subject to the unfair contract terms regime. Under the current small-business provisions, at least one party must have fewer than 100 employees or annual turnover below $10 million. There is no upfront price limit, but the contract's date and any renewal or variation need to be checked to establish which rules apply.
Under the statutory test, an unfair term creates a significant imbalance, is not reasonably necessary to protect the advantaged party's legitimate interests and would cause detriment if applied or relied upon. Transparency and the contract as a whole also matter.
A unilateral right to change the work or terminate the agreement warrants examination, although being one-sided does not, on its own, establish that a term is unlawful. A business should examine its subcontract conditions before issuing them and when deciding whether to rely on them during delivery.
The Australian Consumer Law's prohibition on misleading or deceptive conduct also applies to commercial dealings between businesses. Tender statements about available resources, capability or delivery dates need a proper basis, and a qualification elsewhere in the tender may not correct a misleading overall impression. Representations about future performance require reasonable grounds when they are made.
During delivery, security of payment legislation can create rights and deadlines that the parties cannot remove by agreement. For the subcontractor's outstanding claim, the delay investigation must proceed alongside any response or payment required by the applicable legislation. Managing payment claims includes dealing with that statutory process even while the contractual position remains disputed.
In A J Portelli Medical v Black Sheep Building [2026] NSWCA 99, the recipient of two payment claims had neither paid them in full nor served payment schedules. The NSW Court of Appeal upheld recovery of the unpaid amounts under the statutory scheme. The claimant did not first have to prove that the claimed work had actually been performed to enforce the liability arising from the unanswered claims. That decision concerned the operation of the NSW legislation; the parties' ultimate contractual entitlements remained a separate question.
Notices and time bars
The subcontractor's extension of time claim may raise a separate question about notification. Reliable contract administration arrangements help the team identify events requiring notice and act before the deadline. Where a notice is late, the assessment must establish what consequence the contract attaches to that failure.
Some clauses expressly make timely notice a condition of entitlement or release the other party from liability for non-compliance. Others impose a procedural obligation with different consequences. The existence of a deadline alone does not establish that the underlying entitlement has been extinguished. The wording must be read in context and applied to the facts.
The correspondence may also reveal conduct affecting reliance on the time bar. An assurance that notification was unnecessary, followed by reliance on that assurance, may have legal consequences. A history of accepting late notices warrants examination, but does not, by itself, establish a general waiver of future deadlines. Those exchanges should be preserved so that their effect can be considered with the notice provision.
In Victoria, rules applying from 15 April 2026 allow specified notice-based time bars affecting payment, related extensions of time or release of security to be declared unfair where compliance is not reasonably possible or would be unreasonably onerous. Western Australian legislation also provides relief for certain notice-based time bars affecting payment and related extensions of time, although its scope and application differ.
In either jurisdiction, a declaration concerns the particular entitlement in the proceeding; it does not remove the clause for every future event. The relevant legislation must be checked for each project. Giving the required notice on time wherever possible avoids having to argue later that a time bar should not apply.
Delay damages and deductions
Once responsibility for delay and any entitlement to an extension of time have been assessed, the team can establish whether liquidated damages arise. The presence of a daily or weekly rate does not settle that question. The contractual trigger, applicable completion date and any limits or procedural requirements must be checked, along with the right to recover the amount through a deduction.
Delay caused by the principal or head contractor requires particular attention to the extension of time provisions and applicable law. It does not automatically remove the completion date or defeat liquidated damages. The available adjustment mechanism and the parties' compliance with it must be examined alongside the delay evidence. The outstanding extension of time claim therefore needs to be addressed before the head contractor assumes the unadjusted date supports a deduction.
A separate challenge may concern whether the stipulated amount is an unenforceable penalty. In Paciocco v ANZ [2016] HCA 28, which concerned credit card late payment fees, the High Court recognised that the interests protected can extend beyond the damages recoverable for breach. The question is whether the stipulated sum is out of all proportion to those legitimate interests, assessed when the provision was agreed.
An amount exceeding the loss eventually suffered is therefore not automatically a penalty. A construction liquidated damages clause still requires assessment on its own terms and facts. The commercial team should be able to explain the contractual basis for the amount claimed as well as its calculation.
Breach and termination
The decision to terminate requires more than an assessment that the subcontractor is responsible for some delay. Even an established breach does not always justify ending the agreement. At common law, the nature of the term and seriousness of the breach matter, while the contract may provide express termination rights with their own grounds and procedures.
Koompahtoo v Sanpine [2007] HCA 61 concerned serious management and accounting failures under a land development joint venture. The breaches prevented an informed assessment of the venture and deprived Koompahtoo of a substantial part of its contractual benefit. In those circumstances, the High Court upheld the termination.
Conduct may also amount to repudiation where it objectively shows an unwillingness or inability to perform the contract substantially. A genuine disagreement over the meaning of a clause does not automatically meet that test. Repudiation does not end the agreement by itself: the innocent party must decide whether to accept it and terminate or keep the contract on foot.
Where the proposed termination relies on an express contractual procedure, earlier complaints and meeting minutes should not be assumed to satisfy a requirement for a default notice and an opportunity to remedy. The letter in Want v Blackbear [2014] NTCA 3 identified the builder's default, but the majority found that it did not unequivocally communicate an intention to terminate if the default continued. The contract required both, with five days allowed for remedy.
The head contractor needs a clear legal basis for terminating and must follow the process that applies. Withdrawing access or appointing a replacement without a valid right could expose it to a claim, and wrongful termination may itself amount to repudiation. Legal advice should be obtained before the termination decision is implemented, with an accurate chronology and the relevant notices available for review.
Proving a claim for loss
A valid contractual termination does not automatically establish a right to damages for the loss of the remaining bargain. Before seeking additional completion costs, the head contractor must establish the breach and the contractual or legal basis for recovery.
Contractual damages generally aim to put the injured party in the financial position it would have occupied had the contract been performed. The replacement contractor's full price is not necessarily the loss, because the original subcontractor would also have been paid to complete the remaining work.
The calculation must account for the unpaid balance attributable to that work, differences in scope and other relevant savings or costs. It also needs evidence connecting the claimed loss to the breach. Additional work instructed to the replacement contractor cannot simply be charged to the original subcontractor because it appears on the same invoice.
An amount already due under a payment obligation may be recoverable as a debt. The claim for additional completion costs will often require proof of damages. Describing an internal estimate as a debt does not create an obligation to pay it.
Loss may also consist of expenditure that a breach has left wasted. In Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17, expenditure on an airport hangar was incurred in anticipation of a lease that depended on the Council fulfilling its contractual obligations. The High Court upheld an award for wasted expenditure following the Council's breach. Reasonably incurred expenditure wasted by breach can help establish loss, but invoices alone do not settle recoverability. The assessment must connect the expenditure and its waste to the breach, account for benefits retained and consider evidence that the expenditure would not have been recouped even with performance.
Reasonable steps should be taken to reduce avoidable loss. If an urgent completion requirement justified paying a higher price, contemporaneous project records should show the options available and the enquiries supporting that decision. Recovery is also subject to the rules on remoteness, including whether that kind of loss was reasonably within the parties' contemplation when they contracted.
The account must avoid recovering the same loss twice through liquidated damages and another damages calculation. Termination does not automatically erase accrued payment rights or resolve outstanding claims. These matters need to remain visible when the parties reconcile what is due.
For the project director considering a replacement, useful commercial advice starts with the agreed documents and a reliable account of what happened. That allows the team to investigate the delay, assess the contractual options with its legal advisers and compare their cost. The recommendation can then explain whether the proposed action is available and what must happen before it is taken, while the outstanding payment claim continues to be dealt with on time.
This article draws on the Construction Law – Key Principles and Case Law module of the RICS Commercial Management Fundamentals programme, which I developed and deliver for RICS. The views expressed here are my own.
