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COVID-19 Australia: Managing the impact of a global pandemic on projects and construction

  • Legal Development 24 April 2020 24 April 2020
  • Asia Pacific

  • Coronavirus

COVID-19 Australia: Managing the impact of a global pandemic on projects and construction

Introduction

Within less than a month since the World Health Organisation declared COVID-19 a pandemic on 11 March 2020 we witnessed rapid and widespread changes to the world as we knew it. Governments globally declared states of emergency to invoke extraordinary powers and implement controls aimed at limiting the spread of the virus, and imposed unprecedented restrictions on the way we live and work. As a result, Australia has imposed restrictions on individual travel (internationally, interstate and regionally) and the proximity within which we can interact. States have closed their borders and mandated periods of quarantine for the limited few still able to travel under exceptions, and social distancing restrictions have been put into effect with many areas already on 'lockdown'.

The construction and infrastructure sector is already weathering the impact of delays in obtaining fabricated goods, plant and equipment from COVID-19 affected countries such as China and Indonesia, which have in part shut down both industry and shipping services. These latest measures impose a further layer of difficulty and risk. As production on projects is heavily reliant on the ability of workers to travel to often remote work sites, and project materials to be procured from interstate and overseas, the level of intervention being exercised has the potential to cripple project delivery.

Most construction contracts on major projects will include a number of provisions that may provide relief for stakeholders that are no longer able to perform their obligations – either within the agreed time and cost parameters or at all. There are also Common Law legal principles that may assist with navigating delays and additional costs associated with obtaining plant and materials, labour shortages and lost productivity. The operation and effect of these provisions and principles depends on the specific terms of each contract and the unique facts applicable in each case but the general principles are likely to apply across the board. Some of the main considerations are discussed below, along with some practical suggestions that may assist in navigating the challenges.

Key contractual provisions

Force Majeure

Force majeure has been recognised by Australian and other Common Law jurisdictions as an event which is irresistible, unforeseeable and external (not the fault of the parties) that has made performance impossible and not merely more onerous or difficult.[1] However, in Australia, it is not a standalone Common Law concept, so it must be included in the contract and the words of the contract alone will determine its operation and effect.

Most construction contracts on major projects will include a force majeure clause although the application of a force majeure provision will depend on the specific events described to trigger its operation. Some clauses may be general in nature, while others may set out an exclusive or non-exclusive list of events that amount to force majeure. Australian Standard contract AS4902-2000 specifies that biological contamination qualifies as a force majeure event, although it remains to be seen how that provision will be interpreted in the context of COVID-19 and whether its application would be restricted to conditions on site.

In order for a party to be granted relief under a force majeure clause it is necessary for there to be a causal connection between the triggering event and the party's ability to perform its obligations under the contract. It seems likely that supply chain shortages following port closures or an Australia-wide outbreak would have a sufficient causal connection to the pandemic. The position is slightly less clear in the case of labour shortages due to government restrictions on movement of personnel, although it seems likely that those restrictions would be considered so closely related to the pandemic that there would be a sufficient nexus. In AS4902-2000 contracts government actions are not identified as a force majeure event and may be more likely to be covered by the change in law provision (discussed below).

The terms of each contract will also determine the consequences that flow from a force majeure event. If the force majeure clause is broad enough to cover a situation where performance is still possible, albeit at an increased cost, or within a prolonged timeframe such as may result from restrictions on the availability of labour, delays with procurement or decreased productivity due to social distancing restrictions, the result of a successful force majeure claim may be an extension of the time for completion of a project and its various milestones. In AS4902-2000 contracts force majeure is itself a qualifying cause of delay, although if performance is rendered wholly impossible, it may result in discharge of obligations for performance altogether or at least that performance is suspended for a period of time.

Frustration

Where a contract does not contain a force majeure provision, parties may look to the Common Law doctrine of frustration. A contract is frustrated when, due no fault of the parties, the obligations become impossible or illegal to perform, or the circumstances change so fundamentally that the contract becomes radically different to the bargain that was struck at the time the contract was entered into.

For a contract to be frustrated it is not enough for performance to merely be more onerous, expensive, or time consuming. It is necessary that the cause of delay or the delays must be "fundamental enough to transmute the job the contractor had undertaken into a job of a different kind, which the contract did not contemplate and to which it could not apply."[2] Therefore, a contract may not be frustrated by the COVID-19 pandemic and related events where the contract includes a force majeure provision.

Only time will tell whether disruption caused by COVID-19 will be sufficient to amount to frustration. It seems likely that the inability to source plant and materials from overseas as a result of the pandemic may amount to frustration as to some extent on certain contracts as it has rendered parties unable to perform their obligations. However disruption due to labour shortages associated with sickness and travel restrictions, and lost productivity due to social distancing and other working restrictions, may not amount to frustration where these impediments are able to be addressed through additional time or costs.  Australian courts have acknowledged that frustration may arise by operation of law,[3] but for the threshold to be reached from COVID-19 restrictions, it is likely that the restrictions would have to continue and work sites be placed in caretaker mode for an extended period of time so as to fundamentally alter the nature of the contract.

The result of a frustrated contract is that the contract comes to an end. In those circumstances it is likely that the principal would have to pay the contractor for works executed, materials procured and other costs reasonably incurred up to the time of the date of the triggering event. However, as regards future obligations, as the intervening event was not the fault of either party, each party would be liable for its own losses.

Parties should seek advice before ceasing work or terminating on the basis of frustration as that conduct may itself be repudiatory and give rise to a right for the counterparty to terminate the contract.

Extensions of time

Construction contracts commonly contain provisions that can allow additional time where the contractor is delayed by a qualifying cause of delay that was beyond the reasonable control of the contractor and affects the project schedule's critical path. As mentioned above, force majeure is sometimes included as a qualifying cause of delay and may thereby trigger the extension of time provision. However, depending on the terms of the contract, even if force majeure does not apply, a contractor may nonetheless be entitled to an extension of time to accommodate delays and drops in manning levels due to travel and quarantine restrictions.

In order to be entitled to an extension of time it is usually necessary for the contractor to have taken all reasonable steps to mitigate the effect of the delay. Costs associated with extensions of time will usually only follow if the cause of the delay is compensable under the terms of the contract. Under AS4902-2000 force majeure is not a compensable cause of delay unless it is listed in the special conditions.

Change in law

Change in law provisions may entitle contractors to compensation for the additional costs incurred in complying with changed legislative requirements where the legislative changes necessitate a change to the project requirements or the works. Usually relief is limited to changes that came into effect after the date of the contract that could not reasonably then have been anticipated.

For contracts entered into prior to January 2020, it seems possible that a change in law clause may entitle contractors to additional time and possibly costs associated with dealing with new restrictions to the freedom of movement and the practicability of small work forces complying with social distancing rules and norms. Under Australian Standard contracts, these additional costs may be able to be added to the contract sum.[4]

Suspension

In extreme circumstances, it may be necessary to suspend the works. Australian Standard contracts include provisions that enable a contractor or principal to suspend all or part of the work under a contract if they consider it is necessary for the protection or safety of personnel or property, and commonly expressly require compliance with legislative requirements in relation to health and safety legislation.[5]

Therefore, if a single case of COVID-19 is detected among site workforces, it may be necessary for a suspension clause to be invoked to stop all work until a mandated 14 day quarantine period has been served by the diagnosed worker, and all workers have been tested for COVID-19.

The party invoking a suspension clause will usually be required to bear the cost of suspension, although in these circumstances suspension may be necessitated by legislative requirements outside a party's control so may be covered under other provisions.

Steps to combat the crisis

With the myriad of challenges currently being experienced and ahead, stakeholders in the construction and infrastructure sector will need to remain flexible and take steps to comply with regulations and mitigate the impact of future events. Needless to say, parties should ensure they have a thorough understanding of the rapidly changing regulations as well as the contractual provisions that may apply, and seek advice before taking steps to refuse access to a site or other measures that may result in claims or lost production such as terminating contracts.

The contractual provisions set out above are a starting point. Other contractual provisions relating to access to site, step in rights and variations should also be carefully considered, along with applicable legislative requirements that may restrict the operation of provisions such as termination, de-scoping or other actions under ipso facto clauses where solvency is in issue.

In addition to the contractual provisions that may assist in providing relief, there are also practical considerations that need to be taken into account, some of which are outlined below.

Compliance with notice and claims procedures

In the event that a party determines that it has an entitlement to relief under a construction contract as a result of the COVID-19 outbreak, it is imperative it follows any contractual notice and claim procedures in order to ensure the right to that relief is not time barred. Many contracts state that if notices are not given on time, entitlements are waived. Parties must be mindful of the specific contractual triggering events and ascertain exactly when the event first occurs so they can ensure that notice is given in a timely manner by reference to that date.

Delay minimisation plans

Contractors will often have an express contractual duty to minimise delays or other impacts caused by Force Majeure events.  As such, contractors should be prepared to provide a delay minimisation plan to the principal to enable the principal to assess whether the steps proposed to be taken by contractors are adequate and to monitor compliance with the plan as time progresses. A contractor's failure to do so may undermine their contractual entitlements arising from the outbreak.

Standstill agreements

In the current economic climate, it may not be commercially feasible to continue work on projects, or it may be more commercially advantageous for construction and even operational resources projects to defer work, or part of projects, until the outbreak and shutdown measures ease and conditions are more favourable. In some instances, if permitted under the contract, this may be possible by deferring work on a separable portion of the work scope or otherwise reducing the scope altogether until such time as productivity can resume to normal levels.

In some circumstances, it may be possible and necessary at some point to negotiate standstill agreements with subcontractors and principals to effectively cease work for the time being. These agreements may allow for hired plant and equipment to be secured or removed from site and, subject to workplace relations considerations, non-essential staff to be furloughed or their involvement reduced so that the site can be operated with a skeleton crew who can ensure site security and integrity while normal construction operations are suspended. Where possible, these agreements should cover the entire period over which the current severity of disruption remains, with aspects to be reviewed as restrictions to movement and assembly are lifted. To facilitate this, it may be necessary to stage the agreement to an initial period with an option to extend if conditions have not improved.

If permissible, standstill agreements would provide for the suspension of all contractual milestones and allow for the automatic extension of time to complete milestones and the work in its entirety by a period equivalent to the duration of the interruption. They may specify that no fault is to be attributed to any party due to the delay, and that the rights of all parties are preserved as at the date of the standstill agreement.

Variations to contracts in the form of standstill agreements or alterations to the scope of the works must be made in accordance with the requirements of the relevant clauses in the contract. By way of example, AS4902-2000 provides that the superintendent may give the contractor written notice of a proposed variation, whereby the contractor must as soon as practicable after receiving the notice, notify the superintendent whether the proposed variation can be effected and the impact it will have on the program. If parties intend to waive any rights under the contract, it is crucial that prior written consent is given by the parties to this effect. Parties seeking to vary contracts should also be mindful of prohibitions on actions that have the effect of circumvention ipso facto prohibitions if solvency is in issue.

Care should be taken in implementing these type of changes and parties considering these options should seek advice to ensure it would not contravene any legislative requirements, particularly given the rapidly changing legislative landscape emerging in response to COVID-19.

Further practical measures

Further preventative measures should be implemented on site to deal with the effects of an outbreak at a practical level. Additional cleaning, temperature checking, leave modifications, quarantine orders and additional accommodation should all be considered. Proactive measures should also be taken to ensure workarounds are able to be quickly implemented in the event that further restrictions on travel are implemented, to deal with supply chain challenges and labour shortages and to manage personnel health and safety. Some companies have already relocated workers and implemented elongated rosters to extend the length of working 'swings' for fly-in-fly-out workers and thereby minimise lost time due to quarantine requirements associated with travelling. Alternative sources of supply of both labour and materials should be considered where possible.

Maintaining good inter-party relations will also be critical in the times ahead. By fostering open lines of communication between parties to the contracting chain and increasing visibility over designs and project records it will assist in foreseeing potential problems early enough to be able to negotiate arrangements. It is expected that parties will use working agreements in order to continue to work together to complete projects which may include relaxation of time related obligations and changes to payment structures.

Where disputes arise they should be resolved swiftly and parties should be aware of the availability of and relevant timeframes relating to fast-tracking dispute resolution through security of payment legislation. In some circumstances early resolution of disputes by adjudication may be the most decisive, timely and cost effective means of avoiding protracted derailment of a project. Parties should have a good knowledge of contractual requirements surrounding dispute resolution methods, the records that will be necessary and the notice periods and timeframes that apply. Steps should also be taken to ensure all records, materials, site security and books are in order and available to ensure responsiveness at short notice if required.

Conclusion

New restrictions on travel and distancing are just two factors that will add to existing supply chain difficulties and impact project delivery as a result of COVID-19 and it is inevitable that projects will experience delays and cost overruns that will impact project delivery as a result. These and future challenges call for all stakeholders to rise to new levels of resourcefulness to proactively manage the increased risk and adapt to the rapidly changing circumstances.

Most standard contracts provide multiple courses of action for both contractors and principals to take to mitigate delays and losses, and various forms or relief are potentially available at Common Law. Parties should ensure they have a thorough understanding of how the specific provisions of their contracts are likely to operate, including the terms describing triggering events and timeframes around notice requirements, and practical steps can also be taken to navigate existing challenges and prepare for future changes. For some industry participants it may be inevitable that conditions will make construction work impossible or unprofitable and work sites may need to be closed - in whole or in part - for a period of time, so it will be important to ensure appropriate measures and agreements are put in place.

While we are yet to experience the full force of the direct and knock-on effects of COVID-19, industry participants should not lose sight of the fact that this current crisis will pass. Whatever steps
are taken now to adapt to the challenges faced in the immediate and foreseeable future will inevitably pave the way for the future viability. By taking early preparatory measures and practical steps to mitigate against future challenges wherever possible, maintaining good relations and resolving disputes quickly, parties will be better positioned to respond with resilience and resourcefulness in the times ahead and effectively transition once the immediate crisis passes.

 

 


[1] Hyundai Merchant Marine Co Ltd v Dartbrook Coal (Sales) Pty Ltd [2006] FCA 1324 at [61].

[2] Davis Contractors Ltd v Fareham Urban District Council (1956) AC 696 at 723.

[3] Codelfa Construction Pty Ltd v State Rail Authority for NSW (1982) 149 CLR 337

[4] See for example, AS4902-2000, GC 11.2

[5] See for example, AS4902-2000, GC 12.2

End

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