As COVID-19 continues to disrupt the global economy, Australian businesses are facing unprecedented uncertainty. The construction industry is particularly susceptible to supply chain disruptions and shutdowns during this time. This article explains legal and contractual options that may assist businesses involved in construction to navigate the repercussions of COVID-19.
Australian businesses are already experiencing massive disruption and uncertainty due to the COVID-19 pandemic. We anticipate that these impacts will only increase in coming weeks.
Contractors (including subcontractors) in the building and construction industry are particularly likely to be affected by delays caused by COVID-19.
A number of our clients in the commercial construction, engineering and manufacturing industries have already sought our advice about the effect of recent shutdowns in China on critical supply chains. We are now also seeing evidence of significant supply chain disruptions in the local residential building industry. An unprecedented shutdown of the construction industry as a whole may also be imminent.
Impacted contractors need to act quickly and with care to protect themselves as delays and disruptions arise. This article discusses some ways that contractors can do so.
Options for contractors beyond an extension of time
A contractor's options to deal with COVID-19 disruptions will depend on the specific terms of the contract for the relevant work.
Typically, contractors facing potential delay or disruption will first look to their right to claim an extension of time, with a view to avoiding liquidated damages or other liability for delay. As always, any contractor entitled to claim an extension of time must strictly comply with all applicable notice requirements (including any time bars) to ensure that they do not lose their entitlement.
However, in our experience a contractor facing supply chain constraints or a business shutdown often will have no entitlement under their contract to claim an extension of time, nor to claim their costs associated with any delay. Construction contracts commonly allow these kinds of relief only in a narrow range of circumstances that does not include supplier delays or shutdowns.
Contractors may also consider their rights under the suspension clauses that are included in most construction contracts. Again though, construction contracts usually do not allow contractors to suspend work unilaterally and then claim the time and cost impacts of suspension. (Having said this, a contractor may have additional rights if the other party elects to suspend.)
Contractors still have other options to deal with COVID-19. In particular, a contractor may seek to rely on a force majeure clause in a contract, or alternatively to rely on the legal doctrine of frustration. Any 'change of law' clause may also assist contractors in some circumstances. We discuss each of these options below.
Force Majeure clauses
Construction contracts often include a force majeure clause. Force majeure clauses may allow the parties to suspend their obligations under the relevant contract if work is disrupted by certain events that are outside the control of either party.
COVID-19 may amount to a force majeure event in some cases. However, under Australian law force majeure is only available where the relevant contract contains a clause which, it its terms, applies to the particular circumstances impacting work. (The position is different in some other jurisdictions, such as in China and some countries in Europe, where force majeure laws apply to all contracts.)
Some contracts that we see do not include a force majeure clause at all. Many commonly used standard form contracts do not include force majeure clauses unless amended. Where there is no such clause, force majeure will be unavailable.
Even if a contract does contain a force majeure clause, whether there is a force majeure event that is covered by the clause will always depend on the particular drafting of the clause in question. Force majeure clauses range from those that define a force majeure event relatively broadly (for example, 'any event unforeseen by the parties that affects the performance of the contract'), to those that define force majeure events much more narrowly (for example, as including only specific occurrences such as 'pandemics' and 'acts of terrorism').
Usually a party must serve a notice on the other party to trigger a force majeure clause. The outcome of triggering the clause will, again, depend on the particular terms of the contract. Typically a force majeure results in the extension of deadlines and the suspension of performance obligations under the contract. That will obviously be useful to contractors dealing with the impacts of COVID-19.
Often, if suspension under a force majeure clause continues for some time, then the contract will automatically be terminated. Parties considering force majeure should always assess whether triggering the clause is likely to achieve the ultimate outcome that they want.
If a contract does not contain a force majeure clause, then parties may alternatively argue that the contract has been 'frustrated'.
The legal doctrine of frustration may apply where the ability of a party to perform a contract is fundamentally disrupted by events beyond their control. Frustration can be difficult to establish, but where it does apply it will completely discharge the parties' future obligations under the contract and bring the contract to an end.
In Codelfa Construction Pty Limited v State Rail Authority (NSW),the High Court of Australia summarised the circumstances in which frustration can be relied upon as follows:
‘[Frustration occurs where] without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract'.
A party claiming that a contract has been frustrated must demonstrate that the relevant contract is now essentially impossible to perform, and that this is due to a 'radical change' in circumstances from what was contemplated when the parties first entered into the contract. For this reason, frustration is less likely to assist parties entering into new contracts post-outbreak than those who entered into contracts prior to it.
If the relevant contract contains a force majeure clause, then it may be particularly difficult to rely on frustration. A court is unlikely to conclude that performance has become radically different if the contract already dealt with major unexpected events.
It is likely that any claim that a contract has been frustrated will be disputed. The legal test to establish frustration is difficult to meet, and the party that is not claiming frustration often stands lose a great deal due to the contract being discharged.
Given this, and the unprecedented nature of COVID-19, it is likely that courts will be asked in the relatively near future to consider whether COVID-19 has frustrated a contract. Courts overseas have already considered frustration after other recent unexpected events with major impacts on business, such as Brexit.
Change of Law clauses
All non-essential businesses have been shut down in China and parts of Europe, and increasingly strict quarantine measures are now being enforced in Australia. In coming weeks governments may introduce further restrictions that could have even more significant impacts on normal business operations.
Some construction contracts (including many standard from contracts) include 'change of law' clauses that could assist contractors in these circumstances. Generally the clause will allow the parties' obligations under the contract to be varied to take into account changes to legislation that were not anticipated when the parties entered into the contract.
Where a typical clause of this kind applies to construction work, any new laws or legal restrictions that are passed while the contract is ongoing may give rise to a variation and, accordingly, give a contractor the right to claim an extension of time and costs.
Once again though, the nature and effect of a change of law clause will depend on its particular wording. Sometimes the change of law clauses that appear in standard form contracts are deleted, or amended to limit contractors' rights.
Considerations moving forward
Given the risk currently posed by COVID-19, parties negotiating new contracts should consider amending them to include tailored force majeure clauses or other measures which specifically address the potential impacts of COVID-19.
It is also essential that parties do whatever they can to limit the delay and costs caused by COVID-19. Even where one of the options discussed in this article might give a contractor relief, usually the contractor will be entitled only to additional time and (if they have any right to costs at all) only their reasonable costs. Of course, any attempt to rely on these options could also be disputed.
As the extent of the pandemic and its impacts continues to rise in Australia, contractors should keep abreast of what those impacts mean for their contractual commitments. If COVID-19 has impacted or is likely to impact your ability to meet your obligations under a contract, then you should seek advice on your particular circumstances. This article is not legal advice, and provides general information only.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.