COVID-19 and Construction Contracts

Christopher Larcos, Shanna Beeton , 25 March 2020

What does COVID-19 mean for architects administering ABIC contracts? Christopher Larcos and Shanna Beaton of Moray and Agnew Lawyers outline key considerations.

The commercial, legal, and economic impacts of the COVID-19 (coronavirus) global pandemic are escalating. Contractors in the Australian construction industry are urgently considering the contractual relief to which they may be entitled as changes to work methods, and disruptions to supply chains and project timeframes become almost a certainty. Architects administering contracts, whether it be the ABIC Simple Works Contract (ABIC SW 2018) or otherwise, should therefore expect an increase of the number of claims from contractors.

Adjustments to the Date for Practical Completion and Adjustment of Time Costs

The first consideration for most contractors will be whether they can claim for either or both of the following as a result of delays caused by the pandemic:

  • an extension of time, which is referred to in ABIC SW 2018 as an adjustment to the date for practical completion; and
  • delay costs, which is referred to in ABIC SW 2018 as an adjustment of time costs

Reasons may include, for example, shortages of materials or labour, or even site shutdowns.

The answer will depend on the terms of the relevant contract, and so must be assessed on a case-by-case basis. However, the unamended version of ABIC SW 2018 limits the circumstances in which a contractor is entitled to claim either an adjustment to the date for practical completion or an adjustment of time costs to those causes listed in clauses L1 and L2 respectively, none of which will be triggered by delays (or increased costs) caused by the COVID-19 outbreak.

Having said that, clause L2 does allow contractors to make a claim for an adjustment to the date for practical completion (but not an adjustment of time costs) for delays caused by “other circumstances exceeding the allowance shown in item 21 of Schedule 1.

Architects will need to carefully consider how this item 21 in Schedule 1 has been filled out when assessing claims, as it may entitle the contractor to claim an adjustment to the date for practical completion for delays caused by COVID-19. For example, if item 21 listed “any cause beyond the contractor’s reasonable control” as a circumstance in which the contractor is entitled to claim an adjustment to the date for practical completion, delays caused by COVID-19 are likely to trigger the contractor’s right to make such a claim where delays exceed the allowance stated in item 21.

Scenarios architects may encounter

Under the unamended version of ABIC SW 2018, however, it is unlikely that a contractor will be entitled to relief where, for example:

  • the contractor is unable to source intended materials (from China or elsewhere) where similar materials can be sourced elsewhere;
  • a tradesperson is unavailable because they have to self-isolate for two (or more) weeks, even where sourcing an alternate tradesperson will come at a premium; or
  • a site is closed because a labourer has tested positive for COVID-19.

Force majeure

Force majeure is a contractual mechanism designed to provide relief to parties affected by unforeseeable events that are beyond their reasonable control. In Australia, there is no common law concept of force majeure. Instead, whether a party is entitled to force majeure relief hinges on the terms of the relevant contract.

The unamended version of ABIC SW 2018 does not include a force majeure provision, leaving contractors open to COVID-19 risks. However, a force majeure clause may be inserted as a Special Condition to ABIC SW 2018 where owners wish to provide the contractor with relief for such events.

The Association of Consulting Architects has developed a Special Condition to address force majeure events – this is available to members through the ACA Member Toolbox.

Force majeure clauses in the construction context:

  • may: list events such as pandemics or epidemics;
  • usually:
    • define what constitutes a force majeure event with an exhaustive list of events that are “beyond the reasonable control of the affected party”;
    • require that the affected party must not have caused or contributed to the relevant event, and must take reasonable steps to overcome its effects;
    • require that the force majeure event prevents the performance of some or all of the affected party’s contractual obligations; and
    • provide that if these pre-conditions are satisfied, the affected party is excused from performing all affected obligations for so long as it is prevented from doing so by the force majeure event; and
  • always: require careful consideration of whether the party claiming relief has actually been delayed by the relevant event, and has taken reasonable steps to overcome or mitigate such effects. For example, in Hyundai Merchant Marine Co Ltd v Dartbrook Coal (Sales) Pty Ltd (2006) 236 ALR 115, Kiefel J held that: “Impractability of performance is not generally recognised as a ground of discharge of a contracting party’s obligations.” The unavailability of, or delay in the supply of, goods and materials from an intended supplier may, therefore, not be sufficient to trigger relief as the contractor will need to demonstrate that it could not fulfil its contractual obligations by sourcing materials elsewhere, even if it is uneconomic or less profitable to do so.

Changes in law

Change in law clauses in the construction space usually provide that where an unforeseen legal requirement adversely affects the ability of a party to perform its contractual obligations, the affected party is entitled to claim an extension of time and delay costs, and sometimes a variation.

However, clause R10 of ABIC SW 2018 is more narrowly stated. It provides that if any relevant legislation changes or new legislation comes into force that requires a change in the works the contractor must promptly notify the architect, including providing details of the effect on the works, and the architect must promptly issue an instruction to the contractor.

While government actions to limit the spread of the COVID-19 virus have escalated dramatically in recent days, it is unlikely that any of these measures will trigger clause R10 because none will actually have any impact on the works. A distinction needs to be drawn here between the works and necessary work; while clause R10 allows relief for the former, it does not allow relief for the latter.

Frustration

The doctrine of frustration will apply regardless of whether a contract expressly provides for its application. Clause Q19 of ABIC SW 2018 sets out the parties’ entitlements and obligations if the contract is frustrated as a matter of law or if the parties otherwise agree that the contract is frustrated.

However:

  •  frustration at law is not easy to establish. For a contract to be frustrated:
    • the nature of its performance must be radically changed since it was agreed so that it has become impossible to perform1; and
    • merely making performance more difficult or costly is insufficient;2
  • the only remedy available in the case of frustration is the termination of the contract;
  • whether the doctrine can be invoked depends on the nature of the contract and the obligations in question; and
  • if a contract is frustrated as a matter of law, losses will usually lie where they fall and this can result in harsh outcomes for all parties, even with the benefit of legislation aimed at ameliorating this harshness.3 However, clause Q19 of ABIC sets out those costs and losses which the contractor is entitled to claim if the contract is frustrated.

The way forward

Where contracts have already been executed, architects should work closely with clients and contractors to mitigate the risks to the project, including:

  • actively communicating with contractors and clients to forecast potential delays;
  • methodically administering contracts in accordance with their terms; and
  • assessing and responding to claims in accordance with the terms of the contract.

Where construction contracts have not been executed, contractors are likely to request relief where they are delayed in, or prevented from, performing as a result of the COVID-19 pandemic. Where owners are willing to provide such relief, there are some simple amendments that can be made to ABIC SW 2018 to accommodate this, including the insertion of the ACA’s Special Condition.

 

Footnotes
  1. Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.
  2. Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696.
  3. See Frustrated Contracts Act 1978 (NSW), Frustrated Contracts Act 1988 (SA), and Australian Consumer Law and Fair Trading Act 2012 (Vic).

Christopher Larcos is a Special Counsel with Moray & Agnew Lawyers. He is also a registered architect with over 20 years’ experience and an adjudicator for security of payment matters. Prior to his present role, he spent a decade as a front-end construction lawyer at King and Wood Mallesons and Allens Linklaters.

Shanna Beeton is a commercial lawyer who advises clients on major projects and procurement involving the construction and services sectors. Her experience includes advising government and private sector clients on tendering processes, risk allocation, and the preparation, negotiation and administration of all forms of commercial and construction-related contracts. Shanna regularly advises both principals and contractors on high risk and high value construction contracts. Prior to joining Moray & Agnew, Shanna worked in the major projects and construction and infrastructure teams at Herbert Smith Freehills in Sydney and for a local government entity on procurement projects and governance issues.

Further Questions? Please contact Christopher Larcos (+61 2 4911 5428, clarcos@moray.com.au) if there are any further queries.