COVID-19 Fallout - Contract Questions

Wendy Poulton , 1 April 2020

As COVID-19 disruption hits projects, supply chains and timelines, Wendy Poulton, Principal of informed Lawyers Pty Ltd, looks at some popular contract questions.

Has any event since the end of World War II caused levels of disruption equivalent to what we’re seeing flow from COVID-19 today? The repercussions will no doubt take months to become fully apparent, perhaps years, but for the time being this article plays its part in examining some of the likely questions from consultants thinking about their construction projects.

Can my client terminate my services?

Yes, if you have committed a material breach of contract and the client has correctly followed any termination procedure laid out in your consultancy agreement. Yes, if the consultancy agreement gives the client the right to terminate for convenience, without proof of breach, and any contract termination procedure has been followed. If the contract provides that the client must give consent before commencement of each stage, the client may withhold its consent at the end of the current stage.

Client-drafted contracts usually give the client an alternative right to suspend your services instead of terminating, perhaps for specified events only, or perhaps at the client’s discretion.

The consultancy agreement will usually set out the fees and costs that the client must pay you upon termination or suspension, and when they must be paid.

Can I suspend or terminate my services if my invoices aren’t paid?

The primary answer is in your consultancy agreement. It will clarify what circumstances entitle you to terminate or suspend, and what procedure you have to follow to do that. Unfortunately, many client-drafted contracts provide only very limited rights for consultants to suspend or terminate, and require long notice periods before doing so.

If your contract is unhelpful, consider seeking advice from solicitors who understand the security of payment regime in your state or territory. Security of payment legislation may give you a statutory right to suspend your services that overrides your contract, but only if you carefully follow the payment claim procedure in the legislation.

Before suspending or terminating, it is important to satisfy yourself that you have a contractual or statutory right to do so. Otherwise, you can become the party in the wrong, and wind up having to pay compensation for breach or repudiation of contract.

Can I claim variations / extensions of time under my contracts because of COVID-19 related delays?

Again, the answer is in your contract, chiefly in two provisions.

The time clause in your contract should set out extension of time rights. Ideally, your contract provides that you are entitled to extensions of time for delays caused by anything outside your reasonable control, and if you’re working under such a clause, that ought to give you entitlements for COVID-19 disruptions that delay your performance of services. The extension of time means that your late performance will not constitute a breach of contract for which the client can terminate or claim compensation.

However, the trend in client-drafted contracts is to clearly state that you are only entitled to extensions of time for delays caused by the client’s conduct. If working under that kind of clause, you may not have any rights arising out of COVID-19 delays.

Another source of relief is force majeure clauses. Not all contracts contain these. Where they exist, force majeure clauses usually stipulate that the contract parties are relieved of their obligations to the extent that the force majeure prevented them from complying. Each contract defines what qualifies for “force majeure”, and usually lists qualifying events, such as war, earthquake, riots, flood. The definition may or may not include pandemics. All you can do is read the clause in your contract (if there is one) and apply it.

By way of example, AS 4122-2010 covers both extension of time and force majeure in unusually broad terms. The definition of force majeure in clause 1 encompasses any event which is beyond your reasonable control, and not caused by you, and not reasonably foreseeable by you at the time of entering the contract, and the consequences of which you could not have reasonably prevented. Most COVID-19 delays ought to come within this definition, triggering the protection in clauses 12.2 which provides you with a right to a reasonable extension of time for force majeure.

Any entitlements you may have to extensions of time, variations, or force majeure relief will probably be subject to compliance with strict notification requirements (for example, notice must be provided to the client within three business days, and the contract may specify a particular form to be completed or paperwork to be provided). Read your contract carefully and comply with any such conditions, as failure to do so can invalidate your claim.

Some (rare) contracts may not require extension of time or force majeure rights, because the contract does not impose a strict program or completion date on you in the first place. Even so, if you are delayed by COVID-19-related causes, you should keep your client informed of delays and estimated timing, in writing.

Another relevant legal concept is frustration, which provides that a contract may be brought to an end if, through neither party’s fault, a contractual obligation has become incapable of being performed because the circumstances of performance have become radically different from those which the contract called for. Unlike extensions of time and force majeure, frustration can be called on even if there is no clause in the contract that mentions it, although there often is a clause that prescribes some definition and procedure around it and, if so, this will need to be followed.

In a superintendent role, how do I assess the builder’s claims for variations / extensions of time arising from COVID-19?

The superintendent of a construction contract has a duty to act fairly and impartially when assessing the builder’s entitlements under the contract. That is your primary duty: to read the relevant contract provisions (looking out for some of the extension of time and force majeure points noted above) and make a fair and impartial assessment of the builder’s entitlements.

If the builder does not have a contractual entitlement, the client may be persuaded to grant compassionate relief given the extraordinary scenario we are in. Granting compassionate relief would require the principal’s consent, so clear communication and a thorough paper trail is vital.

How am I affected by product supply chain delays?

Your duty of care, which requires you to apply the care and skill of an ordinary skilled consultant, would probably be breached if you specified a product that a reasonable consultant ought to have known would not be reasonably obtainable within the project program. However, if an available product became unavailable subsequently, through reasons you could not foresee, then you ought not to be liable, unless you have agreed to some very onerous provisions in your consultancy agreement.

However, you will probably still be affected in the sense of being called on to help resolve the problem. Assess any substitution requests rigorously, if that forms part of your role, and remember that COVID-19-generated pressures are not a valid reason for failing to comply with the National Construction Code.

How do I protect myself generally?

Document, document, document. Whatever project problems or delays you face, keep records of the delay or problem and of the steps you took to try to overcome it.  Keep your client and the project team advised in writing of these matters. Sometimes, sending an email to your client and copying other parties who need to know can accomplish all these objectives in one step. These records will be vital if there are ongoing disputes.

In contracts you are negotiating today, pay particular attention to completion dates, extensions of time, and force majeure clauses.

And finally, keep investing in relationships, work towards solutions, collaboratively agree a way forward (recorded in writing), and keep projects running wherever you can. The losses from a failed project can be prohibitively large such that, regardless of where the legal liability lies, no party can afford to cover the losses. A project that keeps running, even with compromises and delays, is in the best interests of all the stakeholders.

Wendy Poulton is the Principal of informed Lawyers Pty Ltd.

A law practice owned by IBL Ltd, informed Lawyers Pty Ltd provides legal advice that can help with review, negotiation and drafting of consultancy agreements, though it does not advise on existing contractual entitlements. Its liability is limited by a scheme approved under Professional Standards Legislation. Planned Cover and informed by Planned Cover provide insurance broking and risk management services, and cannot provide legal advice.

This article is only general advice in respect of risk management. It is not tailored to your individual needs or those of your business, nor is it intended to be relied upon as legal or insurance advice. For such assistance you should approach your legal and/or insurance advisors.