This article was written by Kathryn Klein, Jock Hamilton, Grace Bettridge, Katherine Vines, James Forrest, Steve Swan, Shannon Etwell and Scott Watson.
Australia is presently grappling with some unprecedented changes brought on by the COVID-19 outbreak: personnel in quarantine, borders closing and worksites at a daily risk of lock-down. In this short update, we summarise how this risk may be allocated under construction contracts and provide some practical tips on the administration of those construction contracts in light of the impact of COVID-19.
Why do we care about COVID-19 in construction contracts?
Over the past fortnight, we have seen a steady rise in contractual claims and notifications for COVID-19 related events under construction contracts around Australia. The claims and notifications we have seen typically use one or more of three key relief events: force majeure, change in law or suspension. In this update, we consider the rights and obligations for principals and contractors alike pursuant to those relief events and provide practical tips for administering and navigating construction contracts through these unchartered waters.
Force Majeure relief
Many construction contracts provide time relief (but not necessarily cost relief) for a contractor if delay is caused by a “Force Majeure” event. When considering whether COVID–19 would entitle a contractor to claim relief for Force Majeure it is important to first consider the breadth of events constituting Force Majeure. Force Majeure clauses tend to traditionally deal with events such as fire, floods, terrorist acts, war, contamination by radiation and usually include “acts of God”.
The effects of COVID-19 are too recent to have yet been tested by the courts by reference to these typical standard form definitions. Where a Force Majeure clause provides specific relief for epidemic, pandemic, pestilence or more typically for a sufficiently broadly drafted general relief, such as other acts outside the Contractor’s control, then Force Majeure clauses will likely extend to COVID-19 related events. It is also at least arguable that COVID-19 may fall within the general description of an ‘act of God’; however, such events are more typically understood to relate to events such as extraordinary weather events that do not involve any element of human involvement.
Where a Force Majeure clause does provide for relief for COVID-19 type events, the clause must also be analysed to establish whether other restrictions are placed on relief. For example, does the Force Majeure event have to occur within Australia, or will it cover delays caused by supply chain interruption in China, Italy or other countries which occurred prior to and separately from the Australian epidemic. For this reason, regard must be had to the specific drafting of particular Force Majeure clauses.
Finally, it is worth observing that the unamended Australian Standards building contracts do not provide relief for Force Majeure. Rather, time is only extended for qualifying causes of delay as defined in the contract. It is therefore necessary to assess whether the events are broadly defined as in the case of the Australian Standard Contracts or are defined by reference to specific events. The considerations are otherwise similar to the Force Majeure mechanisms described above.
Change in law relief
Every day now there appears to be increased Government intervention and restrictions being implemented as a result of COVID-19 in Australia. As an alternate to Force Majeure relief from the event itself, such government interventions to deal with the event may fall within the definition of “law” under the relevant construction contract and may entitle the Contractor to relief as a “Change in Law”. Such events may involve relief in both time and cost for a contractor.
When considering whether the relevant “law” will meet the contractual requirements for the Change in Law regime, the following matters will typically be considered:
- The precise nature of the relevant “law”: Most contractual clauses will define the “change” by reference to a class of legal instruments, such as legislation, regulations, by-laws etc. Changes in government policy or the like may not meet these requirements for “law”.
- The territorial effect of the relevant “law”: Most contractual clauses will be limited to changes in law in a particular defined jurisdiction (be it Australia or a particular Australian state). Foreign changes in law, although impacting supply chains for Australian projects, may not meet the contractual requirements.
- When the contract was signed: Most change-in-law regimes require the alleged change in law to ‘not have been reasonably anticipated by the parties’ prior to the execution date, which may pose challenges for recently executed construction contract; and
- Procedural requirements: Consideration should be given to any procedural requirements which must be complied with in the change-in-law regime, including timing and notice requirements.
Suspension or deemed suspension
Most construction contracts will typically entitle a contractor to time and, frequently, cost relief where a contractor is directed to suspend works other than where such suspension is required as a result of a default of a contractor. In the context of certain recent government announcements shutting down all but ‘essential services’, and certain overseas jurisdictions putting city-wide suspensions on all construction work, there is an increased likelihood of suspension events arising through the fault of neither party to the construction contract.
To determine the extent of any relief available for a suspension of works, the drafting of the suspension clause must be analysed. For example:
- if the contractor is only entitled to relief where the suspension is directed by the principal, this may not entitle the Contractor to relief where, for example, a worksite is shut down as a result of a COVID-19 outbreak;
- if the contractor is entitled to suspend for health and safety reasons (not caused by the contractor’s breach) then this may entitle the Contractor to suspend and claim relief; or
- where a contract entitles the Contractor to relief where suspension is required by law or by order of an authority, the Contractor may be entitled to relief if a site is shut down by order of Government authorities, depending on the nature of the suspension or shut down and the drafting of the clause.
If I have a relief event - what should I do next?
Having identified the relevant relief event in your construction contract, it is important to then consider what you can do to protect your position under your contract.
The relevant construction contract will inevitably require some form of notification of the relief event within a specified time period, together with the provision of certain information about the consequences of that event on the progress of the works. Notification is often required as soon as you anticipate that a delay may arise to the project (even before the project actually becomes delayed by COVID-19 or the corresponding change in law is implemented). As the COVID-19 events will be ongoing for some time yet, it is unlikely that all information will be to hand, however parties should provide as much of the information required as is presently available and thereafter provide regular updates to the counterparty.
In time, a formal claim submission is likely required under the construction contract and will need to set out the time and cost consequences of the event. When planning for that submission, we suggest you ensure you have sufficient project documentation to answer the following questions:
- What is the status of the project at the start of the event? It will be important to establish the stage at which the project is immediately prior to the event. This includes collating status programs, photographic records, fabrication, shipping and delivery records, financial records and detailed daily site diaries regarding the status of the works.
- What is the impact of doing nothing? To establish a baseline for any subsequent acceleration or mitigation measures which may be directed, it will be important to establish what the unmitigated outcome would be on the program and costs of the project.
- What is the cost and impact of recovery measures? Documentation on costs of specific recovery actions, as opposed to costs which would have otherwise been incurred in any event, are important. Identify the effect of those recovery measures on the project program and the costs (as they are incurred), and consider whether systems should be put in place now to capture and allocate costs.
- Can you prove a loss of productivity? In addition to traditional delay to a project, it is expected that the effect of COVID-19 will be disruption and loss of productivity for some time. Such disruption may arise in relation to interruptions to the supply chain, subcontractor availability or restrictions on staffing levels or working practices for some time. To quantify these disruptive consequences, effective records should include daily resource levels, time-based productivity outputs achieved and more regularly updated programs.
Are there any other considerations – Am I frustrated?
Finally, as a state of emergency is declared around the country, one final consideration is that parties may also claim that their construction contract has been ‘frustrated’ by the impact of COVID-19.
A contract is frustrated where an unforeseen event (a “frustrating event”), out of the control of either party, renders the contract incapable of being performed, or renders the obligations under the contract radically different from those contemplated by the parties. For instance, this may occur if a change in law renders performance illegal. However, the doctrine of frustration has narrow application, and it will not apply simply because a contract becomes more onerous, difficult or expensive to perform. Further, the doctrine of frustration is unlikely to apply if the parties have included a Force Majeure Clause which deals with the relevant issue. This is because such a clause demonstrates that the parties have turned their minds to the issue and the associated allocation of risk.
If a construction contract were held to be ‘frustrated’, then all losses resulting ‘lie where they fall’. In other words, from the date of the frustrating event, the ongoing obligations of each party cease; this includes non-accrued rights to payment.
If you would like further information on the doctrine of frustration, KWM has published several articles providing further detail on this topic: