Last updated: 2 April 2020

Introduction – A Guidance Note for Principals and Contractors

As governments, businesses, communities and individuals react to the extraordinary and pervasive effects of COVID-19, we examine the ways in which this declared pandemic might impact current and future infrastructure projects, and what contractors and principals should be considering in order to navigate this new environment.

The potential of COVID-19 to impede the discharge of contractual obligations is significant. Disruption to supply chains, the unavailability of labour – whether due to occupational health and safety requirements, government restrictions or illness – and increased risk of insolvencies will challenge contractors and principals in delivering projects on time and on budget.

The following are potential heads of claim under construction contracts for delays and loss suffered by contractors as a consequence of the current pandemic.

Frustration at common law

The bar for a successful frustration claim is set very high. A contract will be frustrated where:

  • the event in question could not be reasonably foreseen by the parties at the date of the contract; and
  • the effect of the event is that performance of the contract is entirely and permanently impossible or so radically different to what was envisaged at the time of contract that it is not of the same character as that originally agreed to be undertaken.

Where there are entitlements flowing from performance disruption caused by force majeure events under a contract, frustration claims are even more difficult to successfully prosecute.

If a contract is frustrated, the legal consequence is that it is discharged as at the time of frustration. Hence damages can only be claimed in respect of breaches occurring prior to the frustration, and termination, of the contract.

Potential contractual claims

Force majeure: this is not a principle of the Australian common law. Force majeure" is a label often used when contracting parties allocate unforeseeable "act of God" risks that could hinder or prevent performance. Consequently, relief or entitlements for "force majeure" events will only arise if both the events and entitlement are expressly prescribed in the contract. Some contracts exclude entitlements unless the force majeure event occurs at the construction site – which means they provide little relief for supply chain disruption.

Change in law and policy: such changes may give rise to entitlements if expressly prescribed in the contract. Much will turn on the 'change in law' or 'change in policy' definition. Broad definitions that include "declarations" and "orders" under statute might trigger successful claims.

Act of prevention: COVID-19 could affect the ability of the principal to carry out its obligations in a timely manner, for example obtaining approvals, supplying equipment or plant or access to sites. This might give rise to claims for extensions of time and delay costs based on alleged "Acts of Prevention", or separately claims for breach of contract.

Suspension: there is no common law right to suspend, but such a right will often be prescribed in a contract together with entitlements. Often contracts will include a right for the principal to suspend works with corresponding extensions of time and reimbursement of costs. 

Industrial conditions: whether circumstances brought about by COVID-19 constitute industrial actions or industrial conditions that give rise to entitlements or, alternatively, constitute proscribed behaviours will depend on the contractual definition of those actions or conditions and allocation of risk.

Other considerations

In addition to the above:

  • it is possible that some insurance policies will respond to the consequences of COVID-19; and
  • principals should consider impacts of the pandemic on their work, health and safety obligations.

Our comments here are designed to help principals and contractors to navigate some of the issues they may be facing under their construction contracts as a consequence of COVID-19.

However, this is a guide only. Liability will turn on the express words used in a contract, and because every contract is different, specific legal advice should be sought in each instance.

Frustration

The common law doctrine of frustration allows a party to terminate a contract on a no-fault basis. However, frustration is only available in the most extreme circumstances:

"Frustration occurs whenever the law recognises that 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" (Davis Contractors Ltd. v Fareham UDC [1956] AC 696 at 729)

That a contract becomes more difficult or uneconomic to perform will not be sufficient.

In the case of COVID-19, principals may need to consider whether any of their contracts have in fact become incapable of performance, or simply more costly or require more time for delivery.

In circumstances where the parties have included a clause in their contract (such as a force majeure clause) to give relief, the prospects of a contractor or principal being able to successfully argue that the contract has been frustrated is even lower.

Force majeure

The concept: Force majeure is not a doctrine recognised under Australian common law or statute. The parties' rights and liabilities in respect of force majeure need to be addressed contractually.

Force majeure clauses relieve parties (whether temporarily or permanently) of their obligations to perform a contract on the happening of disruptive events specified in the contract which are generally not foreseeable and are beyond the control of either party.

In some instances, these clauses may also provide for limited compensation, but typically they follow the principle that losses "lie where they fall".

For relief to be available, the contract needs to contain express provisions:

  • defining the force majeure events;
  • prescribing procedures (including the giving of notices) for claiming relief; and
  • specifying the consequences of a force majeure event occurring (which can include termination).

The standard form contracts routinely used in Australia do not contain force majeure clauses, for example, the Australian Standards contracts, JCC and NPWC3. The exception to this is the NSW Government's GC21 Contract. This provides that the contractor is entitled to an extension of time for any cause beyond its control. While this is not, strictly speaking, a force majeure clause, it provides the contractor with relief in the same way as a force majeure clause would.

FM clauses: Where bespoke or amended standard form contracts include force majeure clauses, principals and contractors will need to consider whether any of the force majeure events as defined are relevant and respond to the COVID-19 pandemic and its effects.

If they do, the claiming party will often need to satisfy contractual preconditions. Typically, the event will need to be:

  • beyond the reasonable control of the affected
    party; and
  • of such a nature that it could not have been
    avoided or overcome by the affected party.

However, in addition to these more generic caveats, force majeure events are often subject to geographical limitations such as needing to occur at a project "site" or within a jurisdiction. Requirements like this could make it more difficult to successfully claim that supply chain disruptions constitute force majeure events.

If the period of delay claimed by a contractor for force majeure is concurrent with periods of delay for which the contractor is responsible, then the contractor may not be entitled to claim for the period of the concurrent delay.

FM definition: Where your contract does include a definition of a force majeure, it might specifically include “epidemics” or “pandemics” or a similarly specific label that clearly includes the current circumstances.

If not, a court or tribunal will need to determine whether some more general language – such as "natural disaster" or "natural catastrophe" or "event of biological contamination" should be construed as responding to the COVID-19 pandemic. The approach taken is to look at the ordinary natural meaning of the words used and seek to give them a commercially sensible operation when read in the context of the contract as a whole and having regard to the objective of the transaction.

Where there is ambiguity, courts can also examine the documentary, factual and commercial context to determine the parties' objective intentions.

Change in law and policy

Depending on the nature of specific actions taken by governments or authorities to respond to COVID-19, contractors may claim relief arguing some of these actions amount to changes in law or government policy.

As with force majeure events, there is no common law or statutory entitlement for change in law or policy that may impact contract performance. Accordingly, unless addressed in the contract, a party will not have any entitlement. Also, the entitlement will often depend on how the change in law or policy is defined.

Various statutes confer on governments extensive powers to respond to situations such as this pandemic. A number these are being exercised daily. Powers include:

  • declaring a state of emergency; and
  • detaining or restricting the movement of people.

Given the breadth of available powers, uncertainty may arise as to whether a “determination” or “declaration” or potentially other actions of a government or authority will be a claimable change in law or policy. This will need to be determined having close regard to what is included in the definitions of "Law", "Policy", "Change in Law" and "Change in Policy" in the relevant contract. It may also be necessary to examine a range of other indicia, including whether the instrument:

  • is made under the authority of a statute;
  • is legally binding; or
  • has general legal application (that is, in respect of a large number of persons, rather than individuals).

Other avenues of claim may also be available. For example, in the case of Australian Standards contracts, a contractor is entitled to an extension of time for delays caused by directions of a municipal, public or statutory authority.

Acts of prevention

In the same way that contractors might be impeded in complying with their contractual obligations because of COVID-19, principals might also find themselves unable to meet certain contractual commitments.

These could include:

  • approvals for which the principal is responsible;
  • site access;
  • any principal supplied equipment for installation, commissioning and completion; and
  • insufficient personnel to, for instance, prepare or review design documents within contractual timeframes.

Non-performance by a principal of its obligations could entitle the contractor to claim extensions of time, delay costs and, potentially, could enliven contractor termination rights, providing the contractor with greater rights than it would usually have under a force majeure clause.

For example, principals will often promise in a contract to provide access to the site. What happens if a principal has to shut down a site because of a COVID-19 infection or to comply with government requirements concerning essential services or social distancing? Is this a breach of the obligation to provide site access?

To answer this question, a court will not look only at contractual provisions dealing directly with an "Act of Prevention", but will consider other relevant aspects of the contract, in particular whether the risk of an event or circumstance is expressly addressed elsewhere in the contract. By way of example, where there is a force majeure clause which expressly addresses the parties' rights in the context of a pandemic, a court might be less likely to accept a claim for breach of contract by the principal where the breach is caused by the force majeure event on the basis that the parties turned their minds to the very issue at hand and expressly addressed it in the force majeure clause.

Suspension

Construction contracts typically afford principals an entitlement to suspend works or services, sometimes in prescribed circumstances (such as when principals consider this to be necessary in the interests of health and safety) or else at the discretion of the principal.

Principals should be considering whether these powers are available to it under contracts to which it is party and, if so, what the consequences of directing a suspension are (in terms of relief and compensation available to the contractor).

Generally, contracts will prescribe that contractors are entitled to at least time extensions and, in some instances, reimbursement of costs necessarily incurred as a result of a suspension for which it is not responsible.

Contractors may similarly be entitled to effect a suspension (in narrower circumstances).

Critically, there may be a number of avenues available to a principal in terms of how it treats and manages COVID-19 disruptions under its construction contracts.

Some may only entitle an extension of time while others may also provide for compensation.

Principals should consider which is the best option to exercise in the circumstances before taking any action.

Industrial action

Construction contracts often grant contractors relief (usually time) for the occurrence of industrial actions or conditions for which the contractor is not responsible.

For example, AS4300 allows the contractor to claim an extension of time for "industrial conditions" occurring on or before the Date for Practical Completion, provided they are beyond the reasonable control of the contractor.

In the context of COVID-19, much will depend on how "industrial actions" or "industrial conditions" are defined in the contract and how the risk is expressly allocated.

If, for example, the term "industrial conditions" is given a broad interpretation to mean issues relating to the construction workforce, potentially circumstances such as skill shortages attributable to the "self-isolation" of workers en masse could give rise to extension of time relief.

Principals should be cautious in assessing whether behaviours such as failing or refusing to attend for work constitute industrial action for which the contractor may be liable under the contract.

Under the Fair Work Act 2009 (Cth), conduct based on an employee's reasonable concern about an imminent risk to their health or safety does not constitute industrial action (provided that the employee does not "unreasonably fail to comply with a direction of his or her employer to perform other available work").

The response of the construction industry to COVID-19 may well necessitate scrutiny of industrial relations clauses and their interplay with, in particular, contractual obligations to comply with legislative requirements including occupational health and safety laws.

Insurance

Principals should be actively reviewing the terms of their insurance policies to ascertain whether any will respond to cover losses and liabilities stemming from the current crisis.

Contract works insurance for material damage and project delays during the construction period may only provide limited or no cover at all. There are, however, some policies issued which will cover delays to projects arising where there has been a loss of access or loss of use of the works site. This can potentially cover the financial losses consequent upon a delay in the completion of the project.

Public & Product Liability policies should respond to COVID-19 related liabilities in accordance with their normal terms and absent a special exclusion there is no reason why, for example, a principal should not have cover if a member of the public or guest to the work site were to sue the principal alleging that they caught the virus on site. The affected person would, however, have to show that the principal had negligently caused that person to become infected with the virus. 

For completed projects, property policies, such as Industrial Special Risks, will typically only respond to business interruption consequent upon physical damage to insured property. That said, some insurance policies give some cover for business interruption losses flowing from pandemics. Typically though, the cover is not standard and it is not ordinarily full cover (sometimes sub-limited or otherwise restricted by the policy language), so principals should be checking as a matter of urgency their property insurance and:

  • ascertain whether or not the terms of those policies extend to the financial losses that may be suffered by principals as a result of the pandemic; and
  • giving requisite notices under and in accordance with the terms of those policies.

Work health and safety

For those working on construction projects, the option to work from home is not available, meaning principals and contractors must consider COVID-19 WHS issues and how they will impact construction projects.

Principals and contractors have a duty to ensure, so far as is reasonably practicable, the health and safety of workers and others present at or in the vicinity of a workplace. To discharge these obligations, they should be regularly monitoring the COVID-19 situation as it develops and:

  • conducting/documenting risk assessments and implementing risk mitigation/elimination strategies
  • regularly reviewing risk assessments and risk management strategies, including control measures
  • developing a pandemic plan/emergency plan and updating project specific WHS plans (as relevant)
  • consulting broadly with each other and project personnel.Consultation is critical (including consultation mandated by legislation)

Principals should consider:

  • including COVID-19 screening into their organisation's induction agenda/processes
  • sharing relevant information with contractors regarding COVID-19, including possible impacts on work and health and safety
  • seeking confirmation from contractors regarding their risk assessments/control measures and WHS plan updates
  • seeking confirmation from contractors that workers are trained in using PPE and other control measures so they can be effectively implemented
  • consistent with social distancing measures, avoid holding meetings with large numbers of project stakeholders (instead use technological solutions for meetings)
  • cross-training project personnel who perform critical tasks in the event of unexpected absences or quarantine
  • encouraging project personnel and contractors to use proper hygiene etiquette and report any contact with any infected individuals