Force Majeure, Contractual Frustration & Some Important Considerations to Note during the Coronavirus Pandemic

Force Majeure, Contractual Frustration & Some Important Considerations to Note during the Coronavirus Pandemic

26 Mar 2020

By Lovegrove & Cotton – Construction and Planning Lawyers

As the impacts of Coronavirus upon Australian life become more noticeable and tangible, there will be an increasing impact upon projects of many persuasions, and very notably, building projects. The clear direct effects of the impact this virus is having on the building industry include the following:-

  • Supply chains are becoming compromised (see earlier article on point HERE)
  • Social distancing recommendations need to be followed
  • Confusion within multiple industries is setting in

The flow-on effects of these are:-

  • Some projects are being halted and suspended
  • The ability to operate absent supply is being compromised
  • Contract deliverables are being placed in jeopardy
  • Panic is setting in, and when some actors panic, survival rather than altruism often becomes the key driver

It is therefore important that a number of realities are kept in mind by those in the building industry, and perhaps Australian society at large; they include:-

Constitutional Federalism

Australia is a Federation, so the laws that govern building come within the jurisdiction of the individual eight states and territories. Each State has its own legislation that regulates building. Importantly, the Federal Government is a government of limited powers, as outlined in section 51 of the Australian Constitution. The Federal Government’s powers insofar as they interact with the building industry are very limited as the States and Territories generate the key regulatory instruments. Even the National Construction Code that is produced by the ABCB only assumes statutory effect if it is called up by State and territory legislators.

The ‘National Cabinet’ of State and Territory leaders and the Federal Prime Minister is an unprecedented model reliant essentially on cooperation. When ‘push comes to shove’, in most circumstances, the Federal Government cannot encroach upon or fetter the legislative competencies of states, where the Federal Government does not have a relevant ‘head of power’ under Section 51 of the Constitution.

State-based Domestic Contract Legislation

Some state jurisdictions like NSW and Victoria have their own acts that govern residential contracting. Examples of such legislation include the Victorian Domestic Building Contracts Act and the NSW Home Building Act. Insofar as residential contracts are concerned, regard must be had to the state and territory acts of parliament that are bespoke to that jurisdiction. These acts regulate the formation and operation of domestic building contracts and if the provisions of domestic building contracts are at odds with these statutes, the conditions will be read down and overridden.

Absence of Contractual Consumer Protection Legislation in the Commercial Context

In the broader civil and commercial sector, legislation that regulates the contractual affairs of industry actors in this sector is far sparser and far less intrusive. By and large the building contract is the sole and seminal legal instrument.

National Coordination in a Time of Crisis

Despite the fact that the Australian Constitution ordinarily prohibits a national centralised approach to regulation, in this coronavirus pandemic the new centralised ‘National Cabinet’ spearheaded by the federal government is proclaiming policies on essential vs non-essential gatherings and activities.

The states and territories are proclaiming policies ranging from state border closure to social distancing compliance. Some of the proclamations, particularly those backed by legislative force, will assume precedence over conditions of contracting, in particular those that have OHS intrusiveness along the lines of the below:-

  • The imposition of social distancing protocols and compliance with same
  • The fluid evolving and dynamic definitions of Essential Industries

Local OHS regulations that are bespoke to particular jurisdictions may differ. As employers under many jurisdictions are vested with the responsibility of maintaining safe work sites, the definitions and boundaries of that which constitutes a safe site during the coronavirus pandemic are going to be tested and there is bound to be controversy.

The fact that not every jurisdiction is playing from the same play book may be confusing but reinforces the need to ensure that the actor has regard to local jurisdictional law on point and access to legal artisans that can help to demystify an increasingly convoluted are of the law.

So companies that transact cross jurisdictionally in like vein cannot apply a one size fits all approach. Get legal advice that is germane to your ‘backyard’ but also have regard to Federal announcements and ask your lawyers to marry or attempt to marry those announcements with jurisdictionally specific laws.

Some key considerations are:-

Time Extension Conditions 

Time Extension provisions within the contract are ordinarily the first things to navigate. Lodge your Extension of Time applications (EOTs) as soon as possible in the event it is clear you will likely require an extension of time.

If you are the recipient of an EOT, reply with alacrity lest the contract contain time related deeming provisions. Regardless of the actor, whether the extension claimant or the recipient, when deliberating over EOT considerations in the current context of a pandemic, get legal advice because it is an unprecedented situation and great care will need to be taken in the crafting of the EOTs and the analyses and drafting of any response. One reason great care will be required is that considerations such as force majeure (‘acts of god’) and contractual frustration may or may not be in play.

Contract Variations

Some events may entitle an actor to claim variations, again your lawyers should advise on point. A variation may be required for a promisor to meet a contractual promise under the contract. It is easy to see where this becomes relevant in circumstances where supply chains are substantially impacted.

Contract Suspension Conditions 

Most contracts allow for circumstances where contracts can be suspended.

These can be ‘sweating dynamite’ conditions  and need to be approached with great care as the grounds to suspend must provide clear entitlements and it is not a given that a CV interaction will be trigger an entitlement to suspend.

Termination Conditions 

Regard of course must be had to express default provisions of the contract. By and large, default provisions are framed to invoke remedies that are aimed at redress against the defaulting party. This may not always be helpful during the current pandemic, where the defaulting party may be considered to be somewhat more opaque, as the ‘villain’ is ultimately a third party actor, outside the control of the potentially defaulting party, namely the Coronavirus.

So again the highest levels of care must be taken when considering whether to issue termination notices as many contracts will not have contemplated Act of God intervention within termination provisions.  For fear of laboring the point, consult a lawyer.

Force Majeure and Contractual Frustration and Risks of Repudiation

There is a ‘cyber bombardment’ of legal writings on contract frustration and force majeure in the context of this current pandemic. As we are construction lawyers it behoves us to join this discussion.

Force Majeure

When lawyers refer to force majeure, they are ordinarily referring to a type of contractual provision that is ‘divvies up’ risk when an ‘act of God’ impacts upon a party’s performance under contract that is beyond their reasonable control.

Where parties have provided for the allocation of risk for a specified event, the party seeking to invoke a force majeure to excuse performance under a contract will have to follow the relevant contractual notice procedures outlined in the contract. Ordinarily the contract will dictate that the party impacted by the force majeure event will have to minimize the event’s impacts upon its performance.

Determining the appropriate action to take and whether a party can rely on force majeure requires detailed contractual interpretation. Often there will be a list of events in the force majeure clause such as:  “the outbreak of war”, “a natural disaster”, or perhaps even “an epidemic or pandemic”. The precise circumstances listed would have been a matter to which parties turned their mind to during the formation of contract and ordinarily would have been drafted in consideration of the surrounding circumstances under which parties were contracting (i.e. whether parties were contracting for a project in a seismically active region, for instance).

There may have been an attempt at the contractual formation stage to craft a ‘catch-all’ provision. Such a provision may provide generically for ‘acts of god’. However, such general provisions will be more likely to give rise to disputation when a party seeks to rely upon force majeure than if there was reliance upon a discrete force majeure event accounted for by the contract.

This of course means that certain unforeseen events may not fall within the ambit of a force majeure clause. This is where the doctrine of contractual frustration may come in use.

Contractual Frustration

Whilst contractual frustration may be of use where circumstances were unforeseen by the parties at contractual formation, it requires a more rigorous test before a party may rely upon it. Contractual frustration is not easy to establish – a party cannot point to mere hardship, financial loss or inconvenience. For instance, this occurred when the Suez Canal was closed in the 1960s, and numerous shipping companies attempted to rely on the doctrine of frustration to excuse their performance under shipping contracts, but failed in doing so.[1] This is because contractual frustration requires that the circumstances are radically different.

Radically Different Circumstances

Contracts are entered into with presumptions ordinarily made about the circumstances under which the contract will be completed. It is nigh on impossible for contracting parties to foresee and enunciate clearly under contract the enormous array of contingencies that may possibly impact upon contractual performance.

Radically different circumstances involve circumstances where the subject matter of the contract has been destroyed (i.e. by a fire), where the basis/premise under which both parties have contracted disappears, or where there has been a change in the state of affairs which were a necessary condition for the contract to be performed in the manner contemplated by the parties contracting.[2]

This can be a very complex feature of frustration to establish, so it follows that there must be careful legal analysis of the circumstances impacting upon the party who wishes to rely on the doctrine of frustration. It can be seen how supply chain disruption may not trigger contractual frustration where there are alternatives available on the market, even if at a higher price. In the event of a government forced shut down of essential services (i.e. including building sites), this may be sufficient for contractual frustration to precipitate, but to reiterate, the particular circumstances need to be carefully analysed by a construction lawyer.

No Contractual Allocation of Risk

As discussed above, if there is a relevant force majeure clause, it will be appropriate for the party to follow the procedure outlined in the contract in the event of force majeure. If the contract has allocated risk in the instance of a radically different circumstance, then frustration will not be made out.

In the case of Codelfa Constructions v State Rail Authority of NSW (1982) 149 CLR 337, despite the contract seemingly allocating all or most risk in a clause pertaining to noise pollution to the contractor, it was clear from extrinsic evidence regarding the circumstances of the contract that the parties were clearly contracting under the assumption that no injunction would be forthcoming from a Court in regards to noise pollution from drilling.

A Party Must not be at Fault

There is an inviolate legal principle that one cannot benefit from their own legal wrong. In the doctrine of frustration, the frustrating event must have occurred without the fault of the party seeking to rely on frustration.

Was the Frustrating Event Foreseeable?

The frustrating event must not have been foreseeable at the time of contracting. If it was foreseeable by the parties and parties chose not to include a provision allocating risk under the contract, the risk may lie where it falls. The test adopted by a court will be whether the event was foreseeable to extent that a reasonable person in the shoes of the contracting parties would have accounted for the possible frustrating event in the text of the contract.

Conclusion 

We live in a world where there are too many moving parts and the speed by which those parts are moving is gaining momentum. Great care must nevertheless be taken when making decisions and taking action when a contract is involved.

People are panicking and panic is understandable as it is a very determined human emotion, but bear in mind that ‘this too will pass’ and actions taken in desperation that have not been carefully thought through will, in the fullness of time, be judged dispassionately, clinically and not necessarily too kindly. So hasten with care.

 

This piece has an unusually high level of reiteration with regards to the critical imperative of seeking independent expert legal advice for circumstances that are very novel, to some degree unprecedented and most definitely out of the ordinary. To labour the point further, actors, be they building practitioners, subcontractors, owners or anyone caught up in this paradigm are strongly advised to seek advice from lawyers that have expertise. This piece seeks to raise issues rather than provide answers, and this cannot be stressed enough. There is a critical imperative of getting expert legal advice to assist with navigating these very challenging legal issues.

 

Footnotes:-

[1] See eg. Tsakiroglou & Co v Noblee Thorl [1962] AC 93; The Eugenia [1964] 2 QB 226.

[2] See Taylor v Caldwell (1863) 122 ER 309; Krell v Henry [1903] 2 KB 740; Codelfa Constructions v State Rail Authority of NSW (1982) 149 CLR 337.