Australia: The impact of climate change on the risk allocation of construction projects

Introduction

There is a variety of opinions on the steps that policy makers should take to address the impacts of climate change. Those policy changes, such as the introduction of a carbon price by the Australian Parliament in 2012 and its repeal in 2014, are likely to have a direct impact on construction projects. However the naturally occurring effects of climate change, such as the anticipated increase in frequency and/or severity of adverse weather conditions, will also have an impact on the risk allocation of construction projects. In every such project the responsibility for a site, and the identified risks that may occur on that site during the construction period, are generally transferred from the principal to its builder. The transfer of any such risk from one party to another has a cost, whether by way of an adjustment to the contract price paid by the principal or to the builder's timeframe to completion. This article discusses the impact that climate change, and in particular the occurrence of such adverse weather conditions, is likely to have on the risk allocation in construction contracts.

The article concludes with a summary of the relevant construction project specific terms and conditions that may change as a result of climate change.

Design

Depending on the procurement method selected by a principal, the principal will either appoint a consultant such as an architect to design its project, or engage a builder to manage the risk of both design and construction of the project. Regardless of the procurement method chosen, it is usually the case that the principal will require that the project be designed in accordance with applicable legislative requirements and so that the works will be fit for their stated purpose. Sometimes this requirement is expressed instead as the works being fit for their intended purpose.¹

The Building Code of Australia (Building Code), which is produced by the Australian Building Codes Board (ABCB) and forms part of the National Construction Code, is given force as a legislative requirement in all Australian States and Territories (with the option for each jurisdiction to opt-out of or amend certain provisions of the Building Code under legislation or the jurisdiction specific technical appendices to the Building Code).² The Building Code has been progressively revised and reissued since its first publication in 1988. Since 2004, it has undergone an annual review before publication.³

The ABCB has examined the possible implications of climate change for the Building Code, including in 2010 publishing a report regarding the possible Building Code adaptation measures for climate change. More recently in April 2014, the ABCB issued a draft discussion paper regarding the resilience of buildings to extreme weather events.⁴ The draft discussion paper highlights the limitations in the production of a Building Code that would address the impacts of climate change on residential and commercial buildings, which include the policy role of the ABCB, the focus of the Building Code on life safety (rather than property protection), the general application of the Building Code to new buildings only and the affordability of increasing building resilience to adverse weather conditions. While the ABCB has committed to "comprehensively review and consider the impacts of extreme weather events in relation to all relevant new regulatory initiatives," it is likely that any changes to the Building Code will involve regulatory and industry consultation and progressive incorporation of additional measures into the Building Code.⁵

To the extent that the Building Code is updated to address the impact of climate change, then builders and consultants will need to consider whether to prepare claims responding to the change in legislative requirements. Under the Standards Australia suite of construction contracts, relief is claimable for a change in legislative requirements that necessitates a change to the applicable work or services, takes effect after a specified date (usually the date of contract or tender) and could not reasonably have been anticipated. ⁶ Claimants should pay particular attention to the final requirement that the change could not reasonably have been anticipated. If for instance a change to the Building Code has been announced by the ABCB for consultation, then this is likely to provide a reasonable basis for anticipating that the change will be made.

In the author's opinion, this represents a fair and reasonable risk allocation, and it is likely to prevail. Contract pricing exclusions may be justified for any particularly controversial changes proposed by the ABCB that are not acceptable to the building industry.

The risk of other changes in legislative requirements, such as the reintroduction of a carbon price, or similar legislation, would also remain subject to these provisions.

The occurrence of more frequent or extreme adverse weather conditions during construction is also likely to raise the issue of whether the person with design responsibility has met their obligation to ensure that the building has been designed to be fit for its stated or intended purpose.

By way of example, in 1968 the High Court considered a case that arose from the destruction of piers for a new railway bridge that had been destroyed in a flood during their construction (suffering the same fate as the earlier bridge of 1897 which had also been destroyed in a flood in 1957). The flood that destroyed the piers was described as having a "magnitude not previously realized or recognized by engineers." ⁷ The High Court had to determine whether the failure of the piers was due to 'faulty design,' for which there was an exclusion to the insurance policy. The Court determined that regardless of the unexpected severity of the flood, the loss arose from a faulty design, as the piers were designed on the basis of existing engineering knowledge and practice, which were deficient.

As a result, both designers and builders with design responsibility should take care to specify the extent to which they are designing a building or structure to avoid the potentially adverse consequences of climate change. In the author's opinion, such parties are likely to increasingly specify in contracts any weather related design limitations. In the example of the bridge mentioned earlier, one might say in the contract that the structure has been designed to withstand a 1 in 50 year flood, but the fitness for purpose and warranty provisions are excluded for floods of any greater severity.

Inclement weather or force majeure

The Intergovernmental Panel on Climate Change (IPCC) outlines that some of the potential adverse weather impacts of climate change may include sea level rises, floods, droughts, cyclones and heat waves.⁸ The occurrence of such events has the potential to cause damage to or destruction of infrastructure, including buildings that are being constructed. As under most construction contracts the builder generally bears the risk of loss or damage to the work that they are carrying out, builders should examine the basis on which contractual claims for relief can be submitted. The most likely bases for claims are inclement weather or force majeure.

Whether a builder will be able to claim an extension to the time for completion will depend on the agreed qualifying causes of delay under the construction contract. Under the Standards Australia suite of construction contracts there is a varying approach to the inclement weather entitlement.⁹ However these provisions are often amended and in the author's experience, it is becoming more common that builders are tendering on the basis of an entitlement to relief for inclement weather, particularly in the case of civil works.

Those building contracts that do include an entitlement for the builder to claim relief for inclement weather do not usually include a definition for that term, which does not have an established meaning at common law.¹⁰ This leads to programming uncertainty if there is neither a limitation on the maximum number of days for which the builder may claim an extension of time for inclement weather, nor a definition for 'inclement weather' that sets out the types of adverse weather events and the required level of severity in order to submit an extension of time claim.

If climate change results in the increased frequency and severity of adverse weather events, then in the author's opinion this will have an impact on the risk allocation of construction contracts, as builders will become more insistent on being provided with time and cost relief for inclement weather that occurs during the construction period. In turn, principals will require an appropriate definition for inclement weather be included in the contract that sets out the types of weather covered, the required extremity and possibly the records to be relied on as well (such as the climate data recorded and published by the Australian Bureau of Meteorology at a monitoring station close to the construction site).

The principle of force majeure is, in summary, that either one or both parties are relieved of their obligations under a contract to the extent that an event beyond their control has occurred. While it normally relates to both human causes (such as civil commotion or war) and natural causes (such as earthquakes), there is no common law doctrine of force majeure, so the extent of any relief claimable will be determined by the applicable contract. There is also no standard definition of what constitutes force majeure. However as it relates to adverse weather conditions that may be caused by climate change, it is usually the case that a more severe weather event is required, more akin to natural disasters than inclement weather.¹¹

Given that climate change may lead to the occurrence of adverse weather conditions in previously unexpected locations (such as the poleward shift of tropical storms), ¹² this will also have an impact on this aspect of the risk allocation of construction contracts. Builders are likely to require a more expansive range of adverse weather conditions be included in the concept of force majeure, such as prolonged periods of extreme heat, landslides or landslips, flooding, hailstorms and fire (including bushfire), as well as the more severe events such as tsunamis, cyclones, tornadoes, earthquakes and other natural disasters.

In the author's opinion, over time the concept of naturally caused force majeure is less likely to be restricted to natural disasters, and is more likely to resemble the above list of extreme adverse weather events.

This will be more likely in coastal locations where the effects of sea level rises and cyclones are likely to be most severe. As the ABCB highlights "even if the risk of extreme weather events does not increase, the greater density and value of settlements exposed to these risks will mean that losses of life and property will inevitably also increase." ¹³ Correspondingly the significance of the potential risk to a builder in such areas will also increase.

Latent conditions

Climate change has the potential to impact the groundwork and foundations required for buildings, due to the increased likelihood of soil moisture variations resulting in greater ground movement.¹⁴ Most construction contracts include an entitlement for the builder to claim time and cost relief for latent conditions, which in summary are adverse conditions of the site that were not anticipated by the builder. Under the Standards Australia suite of construction contracts, due diligence criteria apply to limit the builder's ability to claim relief to what the builder should have reasonably anticipated from the builder's examination of the information made available, any information that could have been obtained by making reasonable enquiries and from having inspected the site and its surroundings.¹⁵

As weather conditions are usually excluded from any latent conditions entitlement, the builder will not be able to formulate a claim for latent conditions on the basis of an adverse weather event itself (such as excessive rainfall or a flood impacting the site). Instead the builder will need to formulate any claim based on the conditions that are discovered on site, but were not anticipated. Such claims are more likely to be based on soil moisture and instability concerns, which may or may not themselves have been caused by adverse weather conditions. This will naturally be an area in which it is difficult to distinguish between weather related causes, and independent causes.¹⁶

In the author's opinion, the latent conditions risk allocation of contracts is likely to adapt as a result of climate change. Latent conditions are already a heavily negotiated topic on most construction projects, due to the different conditions of each site and quality of information that may be available. In the future, we are likely to see the due diligence criteria referred to above no longer applying to specific conditions that may be discovered on site, such as groundwater, principally due to the difficulties of anticipating the effect of adverse weather on the site.

Conclusions

The most severe impacts of climate change are yet to be encountered. However there is likely to be an increase in the occurrence and severity of adverse weather conditions as a result of climate change. This in turn will have an impact on the risk allocation of construction contracts. In particular, it is expected that the following terms and conditions may be adjusted:

1. compliance with changes to legislative instruments such as the Building Code that have been announced for consultation, but not yet incorporated, where those changes are particularly controversial or costly to implement;
2. greater clarity on the design limits of buildings, in the context of a designer's fitness for purpose obligations;
3. a more common entitlement to claim relief for inclement weather during construction, with a corresponding improvement in the clarity of the severe weather required to claim the entitlement and how such weather should be measured;
4. the relief available to parties for force majeure increasing in scope from natural disasters to also encompass severe adverse weather conditions; and
5. some aspects of the latent conditions entitlement no longer being subject to due diligence criteria, but leading directly to claims for relief.
6. The author invites the building and construction industry to carefully consider the changes in risk allocation of construction contracts that may be due to climate change in the coming years.

Footnotes

¹ See for example clause 4.1 of AS4300-1995 (General conditions of contract for design and construct) and clauses 2 and 3 of AS4122-2000 (General conditions of contract for engagement of consultants).
² See for example regulation 109 of the Building Regulations 2006 (Vic) which adopts the Building Code as part of those regulations (as modified by those regulations) and sections 98 and 136A of the Environmental Planning and Assessment Regulation 2000 (NSW) which impose the requirements of the Building Code as conditions of development consents and certificates for buildings.
³ ABCB, History of the National Construction Code (22 November 2013) ABCB http://www.abcb.gov.au/en/about-the-national-construction-code/history-of-the-ncc
⁴ Draft: Resilience of Buildings to Extreme Weather Events, ABCB Discussion Paper (April 2014).
⁵ Draft: Resilience of Buildings to Extreme Weather Events, ABCB Discussion Paper (April 2014), p22.
⁶ See for example clause 14.2 of AS4300-1995 and clause 11.5 of AS4122-2000.
⁷ Manufacturers' Mutual Insurance Ltd v Queensland Government Railways (1968) 118 CLR 314.
⁸ IPCC, 2014: Summary for policymakers. In: Climate Change 2014: Impacts, Adaptation and Vulnerability. Part A: Global and Sectoral Aspects. Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Field, C.B., V.R. Barros, D.J. Dokken, K.J. Mach, M.D. Mastrandrea, T.E. Bilir, M. Chatterjee, K.L Ebi, Y.O. Estrada, R.C. Genova, B. Girma, E.S. Kissel, A.N. Levy, S. MacCracken, P.R. Mastrandrea, and L.L White (eds.). Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, pp 1-32.
⁹ See for example clause 35.5 of AS4300-1995 as an example of there being no entitlement and clause 1.1 of AS4000-1997 (General conditions of contract) as an example of where there is an entitlement.
¹⁰ For a discussion on suggested definitions of inclement weather, refer to A. Hartmann & J. Truong 'Inclement weather – We'll weather the weather, whatever the weather, whether we like it or not' ACLN #140 (Sept/Oct 2011) pp6-14.
¹¹ For example there is no concept of 'force majeure' under AS4300-1995, however the relevant limb of the definition under the Federation Internationale Des Ingenieurs-Conseils (the International Federation of Consulting Engineers, commonly know as FIDIC) Conditions of Contract for Plant and Design-Build (1999) at clause 19.1(v) is "natural catastrophes such as earthquakes, hurricane, typhoon or volcanic activity."
¹² Draft: Resilience of Buildings to Extreme Weather Events, ABCB Discussion Paper (April 2014), p10.
¹³ Draft: Resilience of Buildings to Extreme Weather Events, ABCB Discussion Paper (April 2014), p11.
¹⁴ Draft: Resilience of Buildings to Extreme Weather Events, ABCB Discussion Paper (April 2014), p10.
¹⁵ See for example clause 12.1 of AS4300-1995 and clause 25.1 of AS4000-1997.
¹⁶ Downer Construction (Australia) Pty Ltd v Energy Australia and Others (2007) 69 NSWLR 72.