COVID-19: Implications for Construction Projects

Headlines in all media sources have been dominated by COVID-19, or the coronavirus, and governments around the globe are ramping up their protective measures to combat the spread of the virus. It has been officially declared as a pandemic, and the Australian government aims to reduce transmission rates by implementing lockdown procedures and closing non-essential services and outlets.

List of Closures

As of Tuesday, 24 March 2020, Australian Prime Minister Scott Morrison has updated the restrictions on businesses and individual behaviours. The table below summarises the current list of closures and restrictions:

Effect on the Australian Construction Industry

Whilst constructions projects and sites have not been listed in the table above, it is likely that as the outbreak worsens, the list of closures will expand to include construction sites due to large number of personnel that may be in close proximity to each other. Until such directions from the Australian government, it appears that construction companies may continue to operate whilst improving their occupational health and safety procedures to account for COVID-19.

However, it is not just government closure of construction sites that construction companies need to be wary of, but the effect of such closures on the supply of construction materials. On a national scale, closures may affect production of raw construction material, thereby limiting supply. Construction companies may be faced with delays in receiving raw construction materials, which then delays the entire project. On a global scale, as countries begin closing their borders and instigating their own lockdown procedures, any construction supplies or resources that are sourced internationally by Australian construction companies will likely be restricted, creating further delays to the project.

Force Majeure

In modern construction contracts, including many pro-forma ones, there will be a force majeure clause which deals with extreme unforeseen events.

Force majeure is a legal construct for contracts to deal with unavoidable or unforeseeable event, with its application and effect differing from contract to contract. In the context of construction contracts, force majeure clause will describe what qualifies as a “force majeure event”. Contracts generally define “force majeure event” in one of two ways; either by reference to an exhaustive list of events or by reference to a general description of the event (e.g. “an event beyond the reasonable control of the parties”) accompanied by a non-exhaustive list of events that qualify. Examples include certain weather events, contamination of various kinds, acts of war, and health related events (such as epidemics and/or pandemics). In some cases, the definition of “force majeure event” limits the qualifying effect of those events to effects at the “site” (but not to the “supply chain”).

The general elements required in order to invoke a force majeure clause are:

1. That it falls into the contractual scope of the force majeure clause;
2. That it cannot reasonably have been foreseen by the parties when entering into the contract;
3. It was completely beyond the parties’ control; and
4. The parties could not have prevented its consequences.

It should be noted that mere economic downturn isn’t, in and of itself, sufficient to constitute a force majeure event. Changes in economic or market circumstances affecting the profitability of a contract or the ease with which a parties’ obligations could be performed is unlikely to constitute a force majeure event.

Where a force majeure clause has been successfully invoked, the parties are relieved from their obligations under the contract, although accrued rights under the contract prior to the invoking of the clause remain intact.

Frustration of Contract

Where a construction contract does not have a force majeure clause, or where the scope of the force majeure clause does not cover pandemics, there exists the doctrine of frustration in contract law. Frustration generally occurs where an event renders performance of the contract into something fundamentally or radically different from what was originally anticipated by the parties.

As with the force majeure clauses, general economic downturn and difficulties would generally not constitute sufficient grounds for claiming frustration of a construction contract. Examples such as general shortage of materials, shortage of skilled tradespersons and associated construction delays would be insufficient to claim frustration as they are inherent risks associated with construction and therefore reasonably foreseeable. However, where the government shuts down a construction site and bars any personnel from accessing the site, or where the construction contract is contingent on unique materials and resources sourced from overseas and countries have closed their borders, there may exist an argument for claiming frustration of the contract. An example is where a construction company wishes to claim frustration because their usual supplier of materials has closed their business due to COVID-19, and the construction company does not wish to purchase the same materials at a higher price from a different supplier that is ready and available, they will not be able to claim that the construction contract is frustrated.

Mitigation may also play a factor in any claims of frustration and will be particularly important to subsequent claims for payment or damages. It is expected of all parties that, upon discovering an event that may give rise to a claim of frustration, the parties are expected to mitigate, or attempt to mitigate, the frustrating event insofar as what is reasonably possible. Failure to do so may result in additional costs when it comes to damages and payments.

Extensions of Time and Liquidated Damages

It is almost guaranteed that the outbreak of COVID-19 will cause delays to construction projects around Australia, and with delays will always come disputes regarding costs and liquidated damages. Unfortunately, at least one party to the construction contract will be required to bear the cost of the delays, for example the builder when it comes to liquidated damages and subcontractor costs, or the owner when it comes to variations and extensions of time.

The procedure, as well as the scope, for claiming an extension of time will vary from contract to contract. Generally speaking, a contractor will be entitled to an extension of time for delays to the project that are through no fault of their own or where the delay is caused by an event that is outside of their control. In order to successfully claim an extension of time, there are strict procedures under the construction contract that must be followed, for example notice requirements.

The importance of extension of time claims is that its effect is to push back the contractual date for practical completion by the amount of the delay. Where this is of significance is when it comes to claims for liquidated damages. In general terms, where the builder fails to complete the construction works by the due date for practical completion, the builder will be liable to pay liquidated damages at the rate specified in the contract. As it is almost inevitable that ability for any contractor to reach practical completion by the due date will be disrupted by the outbreak of COVID-19, it is important that contractors are clear on the process and scope for claiming extension of times, so that they may protect themselves from claims for liquidated damages later.

Assistance and Precautions

The Australian government has announced as $66.1 billion economic plan to help small businesses stay afloat and keep people employed until the COVID-19 related economic downturn passes. The grant has an upper limit of $50,000.00 for eligible small and medium businesses that have employees and may be claimed twice depending on the circumstances. The government has defined small and medium businesses as businesses that have an aggregated annual turnover of less than $50 million and has employees. The size of the grant will be based on PAYG taxes. Construction companies that are eligible per the government’s criteria will likely be able to claim this grant as well.

In the interim, there are several precautions that construction companies may put in place to protect themselves from the coming disruptions to the construction industry, which includes:

1. Initiating dialogues with all parties to the construction contract to cooperate and discuss plans of actions regarding the coming COVID-19 related disruptions and how it will affect each parties’ contractual obligations;
2. Review construction contracts in place to determine their rights and obligations, particularly with regards to force majeure events and procedures for claiming extensions of time;
3. Consider ‘business hibernation’ tactics to lower cost impacts during disruption phases;
4. Identify steps and actions that may be taken to mitigate the oncoming disruptions, such as identifying alternative suppliers for construction materials; and
5. Consider the effect of any such disruptions on employees and subcontracts and plan accordingly.

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For assistance and/or further information in relation to your contractual rights and obligations and their interaction with the COVID-19 outbreak, please contact us.