COVID-19 and Construction Contracts – how a Contractor may claim and how to draft for COVID-19 risks moving forward

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By Scott Laycock, Partner and Camilla Counsel, Lawyer

Current COVID-19 Gatherings Order

Pursuant to the Public Health (COVID-19 Restrictions on Gathering and Movement) Order 2020 (31 March 2020), a person must not, without ‘reasonable excuse’, leave a person’s place of residence.  A ‘reasonable excuse’ includes (relevantly) travelling for the purpose of work if the person cannot work from the person’s place of residence.

While a person may be able to leave their residence for a ‘reasonable excuse’, it does not permit a person to participate in a gathering of or more than 2 persons that is in a public please, unless it is a gathering (relevantly):

  1. permitted under Schedule 2; or
  2. for the purpose of work.

Further, under Part 5 of the Order, a person who is the owner or occupier of premises must not allow:

  1. in respect of an outdoor space, 500 or more persons to enter or stay on the premises at the same time;
  2. in respect of an indoors pace, 100 or more persons to enter or stay on the premises at the same time; or
  3. allow persons to enter or stay on the premises (whether indoor or outdoor) if the size of the premises is insufficient to allow 4 square metres of space for each person.

This restriction also does not apply to a gathering referred to in Schedule 2.

Relevantly, Schedule 2 includes a gathering at an office building, farm, factory warehouse or mining or construction site that is necessary for the normal operation of the tenants within the building, farm, warehouse, factory or site.

This means the current restrictions do not apply to or effect the operation of construction sites and associated offices.

Click here for the full details of this direction.

Claim pathways under existing Contracts

Under an existing construction contract, subject to drafting, a Contractor may be able to claim for COVID-19 related delays and potentially costs under the relevant provisions.  Every contract will be different, but in our experience, these will mostly be in the following areas:

  1. the extension of time (EOT) and delay cost provisions;
  2. force majeure; and
  3. change in legislative requirements.

Suspension provisions, authority delay and any termination or frustration provisions are also very relevant.

For any claim to be successful, particularly where it relates to disruption of sites as opposed to complete shut-downs, claimant’s will need to carefully record the impacts and demonstrate these as against the position were it not for the COVID-19 impacts.

Adequate and regularly updated programming will be essential for this purpose.  Similarly, record-keeping in relation to mitigation and recovery measures and resource levels, quantities or outputs achieved and productivity impacts will be an essential ingredient for any claim

Force Majeure Events

Whether COVID-19 is a force majeure event under a contract would depend on how the term is defined in that specific contract (noting that the unamended Australian Standard 4000, 4300 and 4902 doesn’t include a force majeure definition at all).  Some contracts have separate provisions dealing with force majeure events (i.e. if the event continues for an extended period of time it may give rise to a frustration of the contract and a termination right for either party) and others simply enable a contractor to claim an extension of time for such an event.

If your contract includes a ‘pandemic’ or ‘epidemic’ in the definition of force majeure event, a force majeure event will also need to be included in the definition of a ‘qualifying cause of delay’ (or similar, this will depend how your contract is drafted) to entitle a contractor to make a claim for this cause.  Notwithstanding, a contractor will still need to jump through the claim ‘hoops’ in order to be entitled to the EOT (clause 34 of an unamended AS4902) and will often be required to show that the delay affects the critical path; however, this will depend on the drafting of your contract.  Mitigation obligations are also often imposed on a contractor.

Rarely is a force majeure event one for which a contractor is entitled to claim costs (i.e. it is often not a ‘compensable cause’).  That is because the event is not within the control of the principal and the principal will also be required to bear the financing related costs associated with project delay.

In our experience, the majority of construction contracts (at least pre-COVID-19 crisis) do not include a health pandemic as a force majeure event; usually being ‘acts of God’, such as natural disasters.  Pandemics, from a definitional perspective, are acts of man.

For more information on force majeure, you can access our colleague’s article here.

Authority delays

Some contracts are drafted to enable a contractor to claim an EOT in circumstances where an authority has caused delay to the works, provided the contractor has not caused or contributed to that delay.

In such circumstances, a Government ‘shut-down’ (or potentially other restrictive measures beyond what is already imposed), depending on drafting, may fall within the category of an authority delay.  The current Government measures could also result in an impact to the supply-chain, which in turn could (again, depending on drafting) fall within the meaning of an authority delay.

Any entitlement of a contractor in this regard would depend on the drafting of the delay entitlement and the definition of ‘authority’.  Many definitions do not include foreign authorities and therefore an effected supply-chain may not enliven an entitlement to claim an EOT unless it is in relation to domestic goods provided by a business affected by the relevant Government order, direction or legislative requirement.

Many definitions of ‘authority’, however, include a statement to the following effect: “having jurisdiction over WUC”.  An interpretation of this part of the definition could therefore possibly extend to include foreign authorities; however, this would need to be interpreted on a case-by-case basis.

Change in legislative requirements

Clause 11.2 of an unamended AS4902 entitles a contractor to claim for a change in law.  Specifically, if a legislative requirement:

  1. necessitates a change to the principal’s project requirements, the works, the provision of services by a public or statutory authority in connection with the work under contract;
  2. comes into effect after the 14th day before the closing of tenders (usually amended to state after the date of the contract);
  3. could not have been reasonably anticipated by a competent contractor at that time; and
  4. causes the contractor to incur more or less costs than it otherwise would have,

then the difference will be assessed and added to or deducted from the contract sum.  Most other contracts, including the GC21 for example, deal with changes in law in similar ways.

Therefore, if the State or Federal Government makes an order, gives a direction or brings into effect legislation that necessitates a change to the works, the principal’s project requirements or provision of services by a public or statutory authority in connection with the work under contract, a contractor may be entitled to claim for any additional costs it may incur.  In effect, subject to drafting, it will be treated as a variation.

At this time in NSW, essential gatherings are permitted to continue.  Construction sites are included in the Schedule 2 exclusions and therefore work on construction sites, and in associated offices, is permitted to continue as usual and there is not at this time change triggering this clause.

Contractors should be keeping a very close eye on updates to legislation and new Orders issued under the relevant public health legislation in each State and Territory as prompt notification and time bars are commonly applicable.

Can a Contractor suspend works?

The below analysis is based on an unamended AS4902, however, each contract will need to be read and interpreted individually.

Superintendent suspension

Clause 33 of an unamended AS4902 deals with suspension.  Under clause 33.1, the superintendent is entitled to suspend the works for (amongst other things) the protection or safety of any person or property.  Whether this is sufficient to permit a superintendent to suspend the work because of COVID-19 is largely dependent on whether the individual site workforce has been affected (i.e. has anyone been infected).

If work is suspended under this clause, a contractor will be entitled claim for the costs it otherwise would not have incurred but for the suspension (unless it made the suspension necessary – which is unlikely to be the case in these circumstances).

While the unamended AS4902 does not entitle a contractor to claim an EOT for a suspension, a superintendent may choose to direct an EOT in its discretion (under an unamended AS4902 clause 34.5).

Contractor’s suspension

A contractor must obtain the superintendent’s permission to suspend the work and will bear the cost of suspension under this clause (clause 33.2 of an unamended AS4902).

At this time, it is not necessary for works to be suspended.  If the Government orders a full shut-down, whether a contractor is entitled to claim time and/or cost for this shut-down would need to be assessed on a case-by-case basis.

NSW Health Guidelines and suspension

If a person employed by a contractor is diagnosed with COVID-19, that person will need to self-isolate.  Persons risk arrest and fines if they do not comply with this Order.

The NSW Health Guidelines provide that if a person is in close contact with a person diagnosed with COVID-19 they too must isolate; however, at this time it is unlikely that this guideline will be considered to be a legislative requirement for the purpose of a common definition of ‘legislative requirement’ under a contract.

If a contractor does choose to comply with this guideline and that compliance results in it having to suspend works, such a suspension would likely fall within the ambit of clause 33.2 of the contract, meaning, the superintendent’s written permission will need to be obtained and the contractor will bear the costs associated with that suspension.

Safe Work Australia has also published guidelines and collated relevant resources here.

Frustration

If a contract does not contain provisions dealing with extended force majeure events, the doctrine of frustration may apply where a party is unable to continue to perform its obligations under the contract.

If the Government were to order a ‘shut-down’ for an indefinite period, a contract could become frustrated; however, at this time most of the NSW Government Orders will ‘expire’ on 23 June 2020.

At common law, a contract is frustrated when it is incapable of being performed due to an unforeseen event (or events), resulting in the obligations under the contract being radically different from those contemplated by the parties to the contract.

While frustration of contract discharges both parties from further performance under the contract, parties should be aware that it does not relieve them of liability to fulfil obligations which fell due for performance prior to the frustrating event.

When a contract is terminated due to frustration, the common law position is that ‘losses lie where they fall’ and amounts paid before the frustration event are not recoverable, unless the contract or relevant state legislation provides otherwise.

The NSW Frustrated Contracts Act 1978 (NSW) provides that where the whole of the performance to be given by a party under the contract has been received prior to the date of frustration, the performing party is entitled to be paid the agreed value of that performance.  Where only part performance is received, the performing party is entitled to be paid an amount equal to the attributable value of the performance (i.e. the proportionate allowance for that performance reduced by the lost value of that performance).  Given the complexity, we do not delve further into this matter in this article, but please contact us should you require further advice on payment for partial performance in circumstances of a frustrated contract.  Further, the applicability of the Act will need to be assessed on a case-by-case basis.

In short, if a contract is frustrated, a principal should ensure that the contractor has been paid all amounts due for the proper performance of work under the contract up to the date of frustration, unless a provision of the contract states otherwise.

Termination for convenience

If your existing contract so provides, principals may look to terminate the contract for its convenience.  This option is only available if there is specific drafting to that effect.

The rights of a contractor upon termination of a contract for convenience will depend on the terms of the clause, however, ordinarily, the contractor will be entitled to be paid for work performed to date and the cost of materials properly ordered (provided that upon payment ownership of those materials will transfer to the principal), and reasonable demobilisation costs.  Some contracts may also entitle the contractor to claim an amount in respect of loss of profits.

A principal should carefully consider the rights of a contractor under such a clause before proceeding to terminate for convenience. 

How to draft for COVID-19 risks in new contracts

COVID-19 is a known risk and therefore should be appropriately drafted for in new contacts.

Principals should consider whether they will grant a contractor time only or time and cost.  Given the currently anticipated nature of a COVID-19 related delay, our recommendation is that a contractor only be entitled to time – this is because neither party is responsible for the delay and a principal will also be bearing its own costs in respect of project delays.

Contractors should be wary that for new contracts into now or very recently they may not be able to make a claim for costs associated with a change in legislative requirement, as that change is arguably one that could have been anticipated by a competent contractor at the time of entering into the contract.  This claim entitlement will vary, however, depending on the drafting of the contract.  It is therefore important for contractors to also ensure that COVID-19 related risks are contemplated and drafted for prior to signing a contract at this time.

Other issues to consider would be the impact of a contractor’s supply chain (are materials being sourced overseas or from within Australia) and how a contractor plans to comply with the NSW Health Guideline regarding isolation of persons who have come in contact with a confirmed COVID-19 case.

Should you require any assistance with navigating the web of COVID-19 either under your existing contract or one you are entering into, please contact us.

For more information, you can access our most recent article detailing how the current NSW Government COVID-19 Orders affects your construction site – what gatherings are permitted and extended working days, here.

For further information, please do not hesitate to contact us.

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