Liquidated Damages after the COVID-19 Pandemic in the Construction Industry

The COVID-19 pandemic has severely disrupted the schedules for most construction projects in Victoria and Australia. As such, construction industry bodies (like the Master Builders Association) fear a surging wave of litigation will hit the construction sector as statutory demand and debt collection protections are lifted as the country recovers economically from the pandemic.

Liquidated Damages

Most construction contracts provide for liquidated damages, which are payable by either the builder or the client as responsible for any delay in the construction project beyond its practical completion date. Liquidated damages in most pro-forma construction contracts are stipulated at a daily rate and are generally uncapped.

Given the restrictions imposed by the Victorian government during the crux of the pandemic, it was guaranteed that all construction timelines would be blown out beyond original practical completion dates. Therefore, the two main questions faced by any party consideration such litigation will be:

• Will liquidated damages be applicable due to delays caused by COVID-19? and

• If liquidated damages are applicable, who will be responsible for their payment?

Force Majeure

Force majeure clauses are also commonly found in construction contracts and stipulate that a party will be relieved of its contractual obligations and is exempted from liability relating to non-performance, where the performance of those obligations is rendered impossible due to the occurrence of a certain specified event.

A “force majeure event” is often colloquially referred to as an “act of God”; however, a force majeure clause is likely to include an exhaustive list of specific triggering events – such as outbreak of war, acts of terrorism, industrial strikes, and natural disasters. Case law indicates that relying on force majeure clauses requires that the specific event in fact is listed as a force majeure event within the contract.

With respect to the Victorian construction industry and COVID-19, relevant events would be described as:

• Acts of government;
• Pandemics, epidemics and outbreaks; or
• (Generally) any circumstances outside of the reasonable control of either party.

Frustration

If force majeure is not applicable to a construction contract, the common law doctrine of frustration may instead apply. Frustration provides that where performance of contractual obligations becomes “impossible” or “radically different”, there should be an automatic mutual discharge of the contract.

A contract will be frustrated where:

• performance of the contractual obligations become radically different from those originally contemplated by the parties to the contract; and

• an intervening event occurred through no fault of either party.

Usually, frustration results in the automatic termination of a contract at the time of the frustrating event. As all parties are discharged from future obligations, and neither party can demand further performance by the other. However, as with the force majeure clause, any accrued rights leading up to the frustrating event will still be enforceable.

The following examples may be reasons with which to claim that a construction contract is frustrated due to COVID-19:

• Government instituted restrictions restricting workforces and construction site attendances to 25% of its original load;

• Substantially increased imported material prices or otherwise complete inability to obtain necessary and unique import construction materials; or

• Site closures due to external authority and regulatory decisions.

Outcomes

It remains to be seen how both government and the courts will treat construction litigation matters where the underlying reason for delays and non-completion is due to a pandemic.

Should liquidated damages be payable, or more generally where there are costs associated with a construction contract, it may determined that given neither party is responsible for, nor could have reasonably foreseen, a pandemic outbreak and subsequent government actions, the additional costs should be shared between both the builders and the owners. However, it is likely that such outcomes will be heavily influenced by the construction contracts between the parties.

It is strongly recommended that both developers, builders and individuals seek legal advice with respect to their contractual positions and obligations, prior to making any claims with respect to liquidated damages, force majeure or frustration or otherwise starting litigation proceedings and processes.

Should you have any questions, please contact our Insolvency team.