Coronavirus (COVID-19): How will it affect your construction contract and what are your duties?

The recent outbreak of COVID-19 (now declared a pandemic by the World Health Organisation) and the significant issues it is causing is currently being felt by all businesses across Australia and around the world.

Some of the businesses most severely impacted by COVID-19 are those in the construction, development and infrastructure industries, with COVID-19 causing:

1. the potential risk of death or serious illness to infected persons and an exposure to a risk of death or serious illness for persons in proximity of an infected person;
2. restrictions on travel and the gathering of people;
3. delay and disruption to projects and the potential for projects to be shut down; and
4. restrictions on importation of site materials and/or prefabricated modules.

With the pandemic rapidly evolving, it is important that you understand your rights and obligations regarding COVID-19 and how to best address its inevitable impact.

This article addresses:

1. how COVID-19 will likely affect your existing construction contracts and your rights and obligations;
2. what amendments you should immediately make to your suite of contracts or any construction contracts you are currently negotiating; and
3. your rights and obligations regarding COVID-19, including your work health and safety obligations.

Existing construction contracts

Typically, in a standard construction contract, contractors are responsible for the types of delays that are predicted to be experienced as a result of COVID-19, such as reductions in the workforce, delays with the supply of materials and subcontractor caused delays.

As a result, contractors will likely be liable to liquidated damages as a result of COVID-19, if (and when) works are not completed by the date for practical completion; unless of course, the contractor is entitled to an extension of time (EOT).

Is COVID-19 a qualifying cause of delay?

Subject to the terms of the contract, the first point to consider is whether COVID-19 can be classified as a “force majeure” event and whether it triggers an entitlement to an EOT under the contract as a qualifying cause of delay.

Force majeure is a term which is often included in construction contracts in relation to events that are an “act of God” such as floods, cyclones and natural disasters, in addition to wars, riots, terrorism and other unforeseeable circumstances that prevent a party from fulfilling the contract.

If included in the contract, a force majeure event will usually entitle a contractor to claim an EOT, provided the contractor can demonstrate that the force majeure event has delayed practical completion of the works. Whether you are entitled to claim an EOT (and potentially delay costs) due to a force majeure event for COVID-19 depends entirely on the terms of your contract. You must first carefully review your contract and determine whether the contract includes provision for force majeure and if so, whether the definition of force majeure is broad enough to include COVID-19. If the force majeure definition contains references to “an act of God”, “outbreak of an infectious disease”, or even a catch all phrase such as “any other matter reasonably beyond the control of either party or reasonably anticipated by a competent contractor”, it is arguable that the impact of COVID-19 will be covered under the clause.

We recommend that you seek legal advice on the terms of your contract and the potential impact that COVID-19 may have on your project, prior to taking any steps to enforce a purported entitlement.

If you don’t have a Force Majeure clause, is COVID-19 a qualifying cause of delay?

If there is no force majeure clause in your contract, you should also closely consider the actual delays that occur as a result of COVID-19 and determine whether they may still in fact be qualifying causes of delay under your contract. For example:

1. Has there been a delay to the supply of materials that have been placed in quarantine? If so, who is responsible for the supply of those materials?
2. Have personnel died, become sick, been placed in forced quarantine or are otherwise unable to work as a result of the COVID-19? Are any of those personnel necessary to the Principal’s performance of the contract, such as the Superintendent or Principal’s Representative?
3. Has the site been shut down or become unavailable outside of your control or at the direction of the Principal? If so, are there any provisions in the contract mandating site availability?
4. Has there been legislative changes that restrict the number of personnel on site, the supply of material, fees or charges or site availability and does your contract contain an entitlement to additional costs as a result of legislative changes?

Similarly, we recommend that you seek legal advice before taking any steps in relation to a purported entitlement under your contract as a result of COVID-19.

Is your contract frustrated?

If your contract does not contain a force majeure clause or you are unable to establish a valid entitlement to an EOT as a result of COVID-19, and the contract becomes uneconomical, you may be able to rely on the common law doctrine of frustration to terminate the contract. Frustration is where the performance of a party’s obligations under a contract would be impossible or fundamentally different from what was contemplated at the time of entering the contract.

We recommend that you seek legal advice if you wish to consider terminating a contract for frustration, as frustration requires a high standard to establish.

Amendments to your Contract Suite and Contracts being negotiated

For contractors, we recommend that consideration is given to amending all future contracts to include:

1. “force majeure” events as a qualifying cause of delay and a compensable cause of delay;
2. a broad definition of “force majeure”, which includes an “outbreak of an infectious disease” and “any other matter reasonably beyond the control of either party”;
3. “any industrial conditions beyond the reasonable control of the contractor” as a qualifying cause of delay and a compensable cause of delay;
4. a clause that entitles a contractor to an EOT and/or additional costs caused by “a legislative change that could not have been anticipated by a reasonably competent contractor”; and
5. ensuring time bars are reasonable and can be met in the event of force majeure.

Principals should expect to see contractors attempting to include these types of provisions in future contracts and should consider how such amendments may impact the cost of a project.

Work Health and Safety – requirements and considerations

Under the work health and safety laws across Australia, you will almost certainly be responsible for certain duties of care.

Those duties include ensuring, so far as is reasonably practicable:

1. the health and safety of all workers; and
2. that the workplace is without risk to the health and safety of any person.

What is considered “reasonably practicable” in relation to these duties is determined on what is, or was at a particular time, reasonably able to be done to ensure the health and safety of those persons.

With COVID-19 having caused a significant number of deaths worldwide, any failures to comply with these duties and ensure safety may result in serious consequences and charges under the work health and safety law, as there is a potential that such a breach exposed a person to the risk of death or serious illness.

At the very least, we recommend that the following general steps are taken by all businesses as part of discharging their health and safety duties in relation to COVID-19:

1. implementing and communicating a COVID-19 management policy which is in line with the Government’s current recommendations and prevents the spread of COVID-19;
2. ensuring that any person exhibiting COVID-19 symptoms takes immediate steps, in line with the Government’s current recommendations; and
3. encouraging workers to practice good hygiene and providing ready access to tissues, handwashing facilities, hand sanitisers and cleaning supplies.

As the situation escalates, or as the advice and recommendations (and potential legislative provisions) change, we expect that what is considered reasonably practicable may also change. We therefore recommend that you frequently check for updates and reflect those recommendations in your company policies and requirements.

Key Takeaways

The impact of COVID-19 is unprecedented and the duration and the severity of that impact is presently unknown. We recommend that everyone prepare themselves as much as possible, including keeping up to date with and following the official guidance and recommendations regarding COVID-19.

If you have contracts presently on foot, you should carefully review them and consider the best way to address the inevitable impact of COVID-19. You should also review all future contracts and consider whether provision should be made to address any potential impact from COVID-19 or similar events in the future.

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