Construction and Infrastructure update: Important contractual considerations for the construction industry during COVID-19

May 12, 2020

Since COVID-19 first presented in December 2019, the world has essentially gone into lock-down having an unprecedented impact upon individuals, businesses and governments, and their respective economies more broadly.

The Australian federal and state governments' response to COVID-19 was rapid with restrictions enforced early. Last week, some states begun to ease restrictions and the federal government also announced a three stage 'roadmap' for the lifting of Australia’s coronavirus restrictions, to be rolled out by each state and territory between now and July 2020.

While Australia’s construction industry has so far avoided being shut down, and looks likely not to be shut down, it has however had to navigate many challenges as a result of COVID-19.

This update looks at a few important contractual considerations in which KCL Law’s Construction and Infrastructure team have advised on during the course of COVID-19. We expect these considerations to still be relevant over the coming months as the Australian construction industry emerges into a post-lockdown economy.

Doctrine of frustration

A construction contract may become 'frustrated' if, without fault of either party, the contract becomes incapable of being performed due to an unforeseen event or events, such as COVID-19.

The doctrine of frustration will apply regardless of whether or not it is expressly written into a construction contract. However, generally speaking, a construction contract will not be frustrated due to an event which makes performance of the contract more costly or difficult, supply shortages, delays, a shortage of tradespeople or hardship.

In the event that a contract becomes frustrated, the doctrine states that a mutual discharge of the contract should occur. This means that the contract may be automatically terminated at the point of frustration, which results in future obligations under the contract being discharged, but not contractual obligations which arose prior to the point of frustration.

When assessing whether or not a contract has been frustrated, an assessment needs to be undertaken of the severity and impact on a party/parties ability to meet its contractual obligations. However, it is important not to cast a blanket over every contract when assessing whether or not a contract has been frustrated, as each contract needs to be assessed on a case-by-case basis.

Force majeure

In the event that a contract has not been frustrated, parties will often look to force majeure clauses in times of extraordinary circumstances beyond the control of the parties.

An effective force majeure clause is a way to either free both parties from liability or further obligation under a contract or suspend parties’ liability or further obligations for a period of time. Generally, for a force majeure clause to be effective the underlying event or circumstance upon which a party seeks to rely:

  • cannot have been reasonably foreseeable to the parties;
  • needs to be beyond the parties’ control; and
  • could not have been prevented by the parties.

When assessing whether or not liabilities and obligations under a construction contract can be suspended or stopped as a result of COVID-19, it is important to not assume that a force majeure clause will be effective or ineffective just because it has been written into the contract. In each instance, a force majeure clause needs to be carefully and closely examined to determine whether it is operative and its effect on the parties' contractual relationship.

Finally, given that some force majeure clauses create a right for parties to terminate a contract if the event or circumstance beyond the parties’ control is persistent or impacts the parties for a prolonged period of time, and given that the ripple effects of COVID-19 are likely to be felt in Australia and in the construction industry for the foreseeable future, both parties to a construction contract need to be mindful of the long-term severity and effect of COVID-19 on their contractual obligations, including what it will mean for the relaxing of COVID-19 related restrictions on supply chains.

Changes in law or policy

A 'change in law' or a 'change in policy' clause of a contract is often included to protect against any unforeseen legal change or requirement which affects the parties’ ability to perform its contractual obligations.

With continuing government intervention aimed at helping to stop the spread of COVID-19, both parties to a construction contract need to be mindful of whether a local, state, federal or, in rare cases, overseas government’s action will give rise to an entitlement under contract (often compensation, but also time). This will again depend on the specific drafting of each change in law and/or change in policy clause.

Solvency

While the Australian Construction industry appears to avoid an industry wide shut down, over the last month or so we have already seen many small-to-medium sized construction companies enter into liquidation.

Recently, KCL Law’s Construction and Infrastructure team has assisted several construction companies respond to demands from liquidators and, on the flip side, liquidators of building companies recover money owed to the companies in liquidation.

Although the full effect of an influx of construction companies entering into liquidation at a similar time is yet to be felt, the immediate impact we are seeing is an increase in project costs and programmes.

While it is difficult to prepare for the risk of a contracting party entering into liquidation, both parties need to be mindful of their rights and obligations to access security, to ensure that security is sufficient and to ensure that good and open lines of communication are maintained.

More information

For more information or advice, please contact Darren Cain, Principal Lawyer and Head of Construction and Infrastructure, on (03) 8600 8835 or dcain@kcllaw.com.au, or Dominic Brown, Associate, on (03) 8600 8851 or djbrown@kcllaw.com.au.

Authors

This Construction and Infrastructure update was authored by Dominic Brown, Associate.

Note: This update is a guide only and is not intended to constitute legal advice.

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