Headlines heralding the implications of rapid international proliferation of coronavirus are now commonplace:
- "COVID-19 / Coronavirus now a global pandemic"
- "Ports closed"
- "Italian provinces isolated"
- "Factories silent as COVID-19 hits"
- "Productivity on ports halved"
Very practical questions are rightly being asked by the construction industry trying to grapple with the implications of the global pandemic:
- "What do I do if my steel is stuck on a port in China?"
- "What if my South Korean supplier's factory has closed?"
- "What if I my subcontractor can't get its marble out of Italy?"
- "What will happen if the supply of diesel for my machines is disrupted?
It is inevitable that coronavirus will manifest in disruption and delay. How do you manage your existing contracts and what should you do before signing new contracts?
In days gone by, the old "force majeure" clause would be one of the first places to turn. Such clauses typically referred to natural disasters such as floods and hurricanes, as well as riots, invasion, war, terrorism, ionising radiation, radioactivity and "acts of God". However, such clauses have all but disappeared from current standard Australian construction contracts.
The issues typically being raised are whether the contract gives time and money when contractors’ work is interrupted because of interference with supply lines (labour and materials) or the site.
The answer of course depends on the contract but there are a few guiding principles. In this two-part series we will look separately at:
- Part 1: Existing contracts; and
- Part 2: Contracts being signed now and in the near future.
We will also illustrate typical scenarios and possible claims.
PART 1: EXISTING CONTRACTS
Existing Contracts: Guiding Principles
- Coronavirus is not the delay. It is a source from which delay may arise. The likely proximate causes will be:
- supply line delay (factory or port closed or working reduced load, a province isolated);
- workforce unavailable; or
- site unavailable (third party risk).
- Under head contracts, typically:
- The Contractor takes responsibility for its supply line (supplier/subcontractor delays) and is exposed to the Principal for such delays (e.g. liquidated damages).
- The Contractor takes responsibility for its workforce unavailability /low productivity.
- The Principal takes responsibility for site closure (unrelated to Contractor conduct).
Subcontracts mirror those typical responsibilities with the subcontractor responsible for its supply line and workforce. The Contractor is responsible for providing the site.
- Look at your contract for express provisions which provide a "hook" for a claim. Possible hooks are:
- EOT clause;
- Legislative requirements clause;
- Suspension clause; or
- Programming clause.
Let's look more specifically at the possible causes and hooks for existing contracts.
Existing Contracts: Port, Province or Factory Closure
The escalation of the pandemic and its fallout has been unprecedented. Ports and provinces have been closed or are subject to restricted movement by government order. (Delays due to low productivity are dealt with separately below.)
Hook 1: EOT clause
EOT clauses commonly have a shopping list of causes giving an EOT entitlement. Some to look for are:
- "delay not reasonably foreseeable";
- "delay beyond the reasonable control of the Contractor" ;
- "delay other than for a Contractor's breach of contract";
- "directions or delays by municipal, public or statutory authorities"; and
- "Industrial conditions".
For existing contracts, government orders are directions of a public authority (even non-Australian governments). Additionally, other than for recent contracts, such closures/orders are neither reasonably foreseeable nor within the control of the contractor and the delay is "other than a Contractor's breach".
However, unavailability of supplies from a usual supplier doesn't mean the clause entitles a Contractor to time. Other suppliers, if available (even if at a higher cost) means delay is not inevitable. If the Contractor is already committed and cannot cancel the order, then ordinarily time should be extended (but check the strength of any obligation to mitigate delay).
Industrial unrest causing a closure due to a particular contractor's failure to take adequate precautions will typically fall outside an entitlement (due to common exceptions that it not be within the control of the contractor or be site specific). For our Employment, Safety and Regulatory team's article on employer precautions click here. However, industry-wide industrial unrest will fall within the clause.
This would typically give time but not money for the period of the delay.
Hook 2: Legislative requirements
Typically, these are broadly defined but limited to Australia – look for words such as "orders and proclamations under Acts or Ordinances". This will apply to supply lines within Australia affected by government orders, but not orders of overseas governments.
A change in the law will give you time (if in the EOT clause). Ordinarily, for money, a variation (to the scope of work) is needed. Delay only won't give money. However, some contracts give money if a change in the method of work is shown. For example, if the delay means that other work is progressed and installation needs to be carried out differently (e.g. for access reasons).
Existing Contracts: Port/Factory Delays (low productivity)
In some cases, ports and factories remain open but productivity falls dramatically. The cause of productivity loss needs to be clarified.
Hook 1: EOT clause
Again, a government order restricting workforce movement reducing available employees is a likely green light to time, but not money. Again, however, alternative suppliers (even at a higher cost) need to be considered.
Workforce sickness reducing available employees is not as clear. Based on the scale of sickness, a case can be made under the wider clauses (e.g. causes other than a breach of contract; causes not reasonably foreseeable or beyond the Contractor's reasonable control).
However, if workers simply don't turn up whether at an overseas port/factory or domestic workplace because of risk of coronavirus exposure, and this results in delays due to declines in productivity, evidencing an entitlement will be fraught. As indicated, absent a hook, the Contractor/subcontractor bears the contractual risk of its workforce availability.
Hook 2: Legislative requirements
The principles mentioned above apply equally here.
Existing Contracts: Site Closure
Typically, contracts provide for the Principal to give the Contractor/subcontractor possession/ access to the site to carry out the work.
Maintenance, refurbishment and renovation contracts are high risk, particularly where the site is a workplace shared with the public (e.g. retail/shopping centres) or client employees (e.g. public utilities responsible for water or other essential services, mining/resources). The comments below are primarily directed at such contracts.
Hook 1: EOT clause
Refusing the Contractor access (without more) will be a breach of contract. EOT clauses will generally give time and money for that. If access is refused, the reason will be critical. In some limited cases, the Principal has the ability to suspend work (see below) (similarly for Contractor with subcontractors).
Hook 2: Suspension/Programming clauses
A Principal with a workplace shared with the public may wish to limit risk to persons by suspending work or by directing work to be programmed out of hours.
If the cause is without justification, the Principal will be exposed to a time and money claim. However, the landscape is changing quickly. What last week appeared unjustified could next week be warranted (e.g. employee returning from overseas even from an area of low risk).
If the cause of the suspension or direction is risk created by the contractor, typically the contractor will bear its costs. For example, a direction requiring a suspension/out of hours work given for the protection and safety of persons because an on-site employee had contracted coronavirus.
Hook 3: Downstream subcontracts
If a subcontractor's employee contracts coronavirus and the site is shut down, the Contractor's remedy is not readily apparent. Due to the subcontractor, the Contractor and other subcontractors are exposed. Remedies available against the responsible subcontractor are:
- the subcontractor will be late and liable for liquidated damages (but are they adequate if other subcontractors are entitled to both time and money?);
- damages for a failure to take measures to protect people (a clause often related to the insurance provisions), for example failure to take adequate precautions to identify and isolate at risk persons; and
- a possible breach of OH&S clauses, for example requiring the subcontractor to ensure that persons are not exposed to risks to their health or safety from the performance of the work (https://www.safeworkaustralia.gov.au/doc/coronavirus-covid-19-advice-pcbus).
Existing Contract: Documenting a claim
Claiming time or money is one thing, but proving it is another. Time bars will continue to apply. The simple message is to notify early.
Steps should be taken to verify the cause of delay. This can be as simple as requesting that suppliers provide written reasons or obtaining evidence from port authorities of reasons for port closures or productivity declines. Government websites are a useful source of information.
With all the will in the world, delay claims for time and money are often only resolved at the end of a project. That can be a world away from when the delay occurs. It will be critical to obtain and provide evidence of the cause of delay and any attempts at mitigation, such as sourcing from alternate suppliers. This should be done and is often more readily available if done contemporaneously as events unfold.
PART 2: FUTURE CONTRACTS
Part 2 of this article series will be available shortly and will look at what should be contemplated when entering into new contracts.
We would like to acknowledge the contribution of Stephen Kuhn to this article.