Building disputes in Australia frequently originate from unclear or unfair contract clauses rather than from poor workmanship alone. The most common dispute-prone clauses involve scope of work definitions, payment terms, variation procedures, liquidated damages, dispute resolution mechanisms, indemnity provisions, force majeure, and termination rights. By understanding these clauses and drafting them with precision, homeowners, builders, and developers can avoid costly tribunal hearings and legal battles.
In the construction world, it is not the rare or unusual clauses that cause the most trouble. It is the everyday provisions, particularly when they are loosely worded, open to interpretation, or poorly aligned with what actually happens on site. Whether you are a homeowner building your first home, a developer managing a multi-unit project, or a contractor bidding on residential work, knowing which contract clauses tend to spark conflict can save you serious time, money, and stress.
Safe vs. Risky Contract Clauses
The table below compares well-drafted contract clauses with their risky counterparts. A single poorly worded clause can trigger months of legal arguments, so it pays to get these right from the start.
| Clause Type | Safe Clause | Risky Clause |
|---|---|---|
| Scope of Work | Clearly defines tasks with supporting specifications and plans | Vague description with no drawings or acceptance process |
| Variation / Change Orders | Requires written approval before proceeding with changes | Allows verbal or informal variations without cost or time updates |
| Payment Terms | Itemised progress payments tied to milestones | Lump-sum or unclear schedule with no reference to timeline or outputs |
| Liquidated Damages | Reasonable cap aligned to actual loss | Uncapped penalties or arbitrary fees not tied to project value |
| Dispute Resolution | Multi-tiered: negotiation, then mediation, then arbitration | Litigation as first and only resolution method |
| Forum Selection | Agreed upon neutral state jurisdiction | Forum biased toward one party's legal system |
| Indemnity | Limits to direct damages with negligence clearly defined | Broad indemnity for any third-party claims or indirect losses |
| Force Majeure | Specific list of events and notice procedures | Catch-all language without notification or proof requirements |
| Time of the Essence | Tied to milestones with reasonable delays allowed | Applies to every deadline, including minor or administrative tasks |
| Termination | Clear triggers, cure periods, and process steps | Allows one-sided termination without notice or remedy |
Each clause listed above has been at the centre of thousands of disputes between builders, owners, developers, and subcontractors across Australia. Knowing what to watch for is your best protection.
Scope of Work and Variation Clauses
A clear scope of work is the cornerstone of any construction contract. Disputes erupt when it is vague, incomplete, or does not evolve as the project does. The same goes for variation clauses. Changes are part of every build, but without a proper paper trail, they can quickly lead to disagreements.
Why scope clauses cause disputes
- Ambiguity over what is included and what is excluded from the builder's obligations
- Disputes over extra charges or who authorised a variation
- Misalignment between the written scope and attached drawings or technical plans
How to avoid scope disputes
- Provide detailed descriptions, plans, and drawings as part of the contract
- Include a clear variation and change order process requiring written approval before any work begins
- Tie the scope to milestones and agreed deliverables to limit scope creep
Payment Terms and Liquidated Damages
Money is a major flashpoint in construction. Vague or inconsistent payment schedules, late payments, or unclear retainage terms are a recipe for conflict. Meanwhile, poorly worded liquidated damages clauses can turn delays into legal battlegrounds.
Why payment clauses cause disputes
- Misunderstanding of due dates and payment stages
- Excessive or unenforceable penalty clauses for delays
- No linkage between project milestones and payments
How to avoid payment disputes
- Create a clear, itemised payment schedule linked to specific milestones
- Set realistic liquidated damages with enforceable caps and timelines
- Clarify how progress claims are assessed and processed
Under the Building and Construction Industry Security of Payment Act (applicable in NSW, VIC, QLD, and other states), contractors have the right to receive progress payments on time. Make sure your payment terms comply with state-specific security of payment legislation.
Dispute Resolution and Forum Selection
When a dispute does happen, the contract should guide how it is resolved. But if the dispute resolution clause is vague or overly rigid, it can make things worse.
Why dispute resolution clauses cause problems
- Disagreement over how and where to resolve disputes
- Clauses that favour one party's local court or legal system unfairly
- Lack of a tiered process, such as mediation before arbitration or litigation
How to avoid it
- Use step-by-step dispute resolution (negotiation, then mediation, then arbitration)
- Clearly identify jurisdiction and governing law in the contract
- Make sure the clause does not conflict with applicable Australian laws
In Victoria, for example, many residential building disputes are heard at VCAT. In New South Wales, NCAT handles similar matters. Knowing the correct forum before signing avoids confusion later.
Indemnity, Liability, and Exculpatory Clauses
These clauses are about who pays if things go wrong. If they are written too broadly, or attempt to waive responsibility for serious issues like gross negligence, they often end up being challenged in court.
Why these clauses cause disputes
- Overreaching indemnity requirements that shift all liability to one party
- Exculpatory clauses attempting to avoid liability for major failures or legal breaches
How to avoid it
- Keep language balanced and specific
- Limit indemnity to direct damages and lawful risks only
- Make sure waivers do not breach consumer protection laws or statutory warranties under the Home Building Act 1989 (NSW) or Domestic Building Contracts Act 1995 (VIC)
Force Majeure and Time of the Essence
Unexpected events like bushfires, floods, or supply chain disruptions can throw construction timelines into chaos. Force majeure and time clauses address these situations, but only if they are written well.
Why these clauses cause disputes
- Unclear definitions of what counts as a force majeure event
- Misuse of "time is of the essence" to unfairly penalise minor delays
- Disagreement over entitlement to time extensions or relief
How to avoid it
- Define force majeure events precisely, including natural disasters, pandemic restrictions, or government delays
- Allow reasonable extensions where justified and document notice procedures in writing
- Include time-of-the-essence language only where truly necessary and tied to key milestones
Termination and Acceleration Clauses
These determine how either party can exit the contract or speed up delivery. Poor drafting can lead to claims of wrongful termination or unfair pressure to finish early without proper compensation.
Why these clauses cause disputes
- No clear conditions for termination
- Ambiguous acceleration triggers that leave costs or liabilities unaddressed
- Disputes over whether notice was adequate or if cause for termination was valid
How to avoid it
- Spell out termination rights, notice periods, and breach consequences
- Define when acceleration is allowed, who pays for it, and how it impacts the construction schedule
- Clarify mutual rights in the event of contract frustration
How Disputes Typically Show Up
Disputes frequently come to light in the form of:
- Late payments or withheld progress claims
- Claims for variations that were never formally approved
- Arguments over quality or defective work
- Finger-pointing about delays or miscommunication
- Disagreements about forum selection or contract interpretation
These conflicts drain budgets, ruin timelines, and often end up souring long-term working relationships. Even minor oversights in contracts can spiral into major legal issues.
Best Practices to Avoid Contract Disputes
- Always use plain English rather than legal jargon
- Tie every clause back to referenced drawings or specifications
- Include a fair and logical dispute resolution pathway
- Make termination, payment, and variation processes clear and specific
- Do not skip the contract review. Get a professional set of eyes on it before signing
- Keep detailed records and correspondence throughout the project
Key Takeaways
- Most building disputes stem from poorly worded contract clauses rather than bad workmanship.
- Scope of work, payment terms, and variation clauses are the three most common sources of conflict.
- Liquidated damages clauses must be reasonable, capped, and tied to actual losses to be enforceable.
- A multi-tiered dispute resolution process (negotiation, mediation, then arbitration) reduces the chance of costly litigation.
- Indemnity clauses should be balanced and must not breach Australian consumer protection laws.
- Force majeure clauses need specific definitions and clear notice procedures to be effective.
- Always have a qualified professional review your contract before you sign.
Frequently Asked Questions
QWhat is a scope of work clause, and how can its ambiguity cause disputes?
A scope of work clause defines what the contractor is expected to deliver. If it is vague or missing key details, both sides may disagree about what is included. This can lead to cost blowouts, delays, and claims for extra work that was never formally agreed upon. Always attach detailed plans, specifications, and drawings to the contract to reduce ambiguity.
QHow do payment terms or retainage clauses lead to conflicts?
Late payments, unclear milestones, or withholding too much money can cause cash flow problems and erode trust between the parties. In Australia, the Security of Payment Act in most states gives contractors the right to receive progress payments on time. Disputes often arise when payment schedules are not linked to specific project stages.
QWhy are liquidated damages clauses often contested in building disputes?
Liquidated damages clauses are contested when they appear punitive or are not tied to a genuine pre-estimate of actual loss. Australian courts may strike down clauses that are unreasonable or amount to a penalty. Setting a fair, capped figure that reflects real financial impact is the best approach.
QWhat are the advantages of including a dispute resolution clause?
A dispute resolution clause provides a roadmap for settling disagreements before they escalate to court. A well-drafted clause typically includes negotiation, then mediation, then arbitration. This tiered approach saves time, reduces legal fees, and preserves working relationships.
QHow can a forum selection clause impact where a dispute is resolved?
A forum selection clause dictates which court or tribunal handles the dispute. If it favours one party's location or legal system, the other party may face additional travel costs, unfamiliar procedural rules, and an unfair disadvantage. In Australia, VCAT (Victoria), NCAT (NSW), and QCAT (Queensland) are common forums for residential building disputes.
QWhat is an indemnity clause, and what makes some versions too broad?
An indemnity clause transfers risk from one party to another. It becomes problematic when drafted too broadly, making one party responsible for losses beyond their control or legal responsibility. In Australian construction contracts, indemnity clauses must not breach statutory warranties or consumer protection laws.
QAre exculpatory clauses enforceable if they limit liability for gross negligence?
Generally no. Australian courts often strike down clauses that attempt to waive responsibility for gross negligence or illegal acts. These clauses must be carefully drafted to comply with the Australian Consumer Law and relevant state building legislation.
QWhat qualifies as a force majeure event, and how does it affect obligations?
Natural disasters, government actions, pandemics, and severe supply chain disruptions can qualify as force majeure events. They may excuse delays or non-performance, but only if clearly defined in the contract with proper notice procedures. Without a well-drafted clause, proving force majeure in court is much harder.
QWhy is a time-is-of-the-essence clause significant in contract performance?
This clause makes deadlines strictly enforceable. If a party misses a deadline marked as "time is of the essence," it can be treated as a breach of contract, even for relatively minor delays. It should only be applied to truly important milestones, not every administrative deadline.
QWhat disputes arise from termination or acceleration clauses?
Poorly defined termination rights can lead to claims of wrongful termination. Acceleration clauses that do not specify who pays for the faster timeline or how it impacts the schedule create disputes about compensation and liability. Clear drafting with mutual consent requirements is the best protection.
QShould I have a lawyer review my building contract before signing?
Yes. Having a construction lawyer or building professional review your contract before you sign is one of the most effective ways to prevent disputes. They can identify risky clauses, suggest fairer wording, and confirm that the contract complies with your state's building legislation.
References and Resources
- NSW Fair Trading - Home building contracts - Contract requirements for NSW building projects
- Victorian Building Authority - Building regulations and dispute guidance in Victoria
- QBCC - Queensland Building and Construction Commission - Contractor licensing and dispute resolution in Queensland
- Domestic Building Contracts Act 1995 (VIC) - Victorian legislation governing residential building contracts
- Home Building Act 1989 (NSW) - NSW legislation covering home building contracts and warranties
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Need help spotting risky clauses in your building contract? Owner Inspections provides independent building inspection services and expert advice to help protect your project from disputes. Contact us today or call 1300 471 805 for a consultation.