The Impact of Coronavirus on the Building Industry: Supply Chains, Building Contracts and Dispute Resolution
By Lovegrove & Cotton – Construction and Planning Lawyers
Coronavirus (or COVID-19) is beginning to have a major impact upon supply chains in many industries across the globe.
Anecdotally, a person familiar to the writer, who works for an established retail import business, procures the majority of stock from an afflicted country. With only three months’ worth of stock left, there is a risk that, in 3 months’ time, there will be nothing left to sell. Another example that comes to mind that illustrates the rapidly changing situation was that when recently visiting the local supermarket it was hard not to observe that long-life tinned food supplies on the supermarket shelves had been decimated as supplies were being hoarded. People are positioning themselves for the unfamiliar.
Supply chain disruptions will impact upon the viability of businesses, there will be redundancies and shop closures if some of the predictions concerning the disease’s tenure play out. Different versions of this story are rolling out in many guises in light of the spread of the disease internationally and the failure to confine it.
The same scenario is starting to play out in building industry supply chains. Product coming from abroad is beginning to diminish, which will impact upon critical path and contract deliverables and ultimately, in some cases, building project viability.
The impact is likely to hit sub-contractors first as the supply of manufactured product wanes. If sub-contractors cannot obtain and install building materials, then they will not be able to deliver. Further up the line, if head contractors cannot construct installed product, then they too will not make good their contractual obligations. This is all rather self-evident and yet the simplistic self-evidence is so very disquieting and has the potential to pose considerable logistical challenges.
If neither sub-contractors nor head-contractors can secure supply then projects will meander and may even be indefinitely suspended. Meanwhile, money flows will falter as milestones will not be met, whilst unrelenting and unforgiving holding costs will remain as unsentimental constants. Within earshot the other day, a developer said if supply breaks down, the contractor will bear all the risks. One would have been entitled to think that is ‘big talk’ as a number of contractual variables may come into play.
Contracts Cannot Account for All Possible Contingencies
A famous boxer once quipped “everyone’s got a plan until they get hit”. No-one saw Coronavirus coming; a mere two months ago, the press narrative was climate change, and now it is about a pandemic. The most carefully thought through contracts, which are often the products of carefully manicured and protracted negotiations, are typically framed on the basis of conventional contracting scenarios and that which is foreseeable or likely to occur. Even the most creative and visionary of legal artisans are unlikely to have incorporated contractual provisions allocating risk and explaining how to deal with broken supply chains as a result of an unheralded ‘wrecking ball’ virus.
Disrupted Supply Chains: Things to Consider
If confronted with a disrupted supply chain, firstly turn to the building contract and invest focused quality time in fathoming the intricacies of any variation or time extension provisions. Consult a construction lawyer and seek advice on whether there are contractual grounds to claim time extensions and/or variations. A failure to do this could culminate in exposure to liquidated damages or, even worse, the risks of contractual repudiation for non-contractual performance.
If no such grounds exist then again seek advice from one’s lawyers to determine whether there is any ability to negotiate contractual variations occasioned by the impacts of major unforeseen events. Force majeure clauses (which are essentially clauses to account for ‘acts of god’ or unforeseen circumstances), which may or may not exist within the contract, all need to be given careful consideration.
Is Coronavirus (COVID-19) a Contractual Frustration Event?
Contract frustration occurs “when a contract is ended because of an unexpected event such as war or sickness which makes it impossible to do what was stated in the contract”. The impact of a virus in terms of its potential to paralyse supply chains could, in certain circumstances, be construed as giving rise contractual frustration, but that will be a matter for one’s construction lawyers to consider along with the ticklish and complex issue of how best to manage a contract frustration event.
Stay Ahead of the Story
A ‘head in the sands’ approach will not bode well; those businesses best able to navigate these uncharted waters will stay ahead of the story’. The survivors will be those that can preempt, adjust and implement those adjustments.
Novel Scenarios and Novel Times Sometimes Require a New Way of Thinking
In many Western jurisdictions a culture has emerged where building disputes are resolved by adversarial methods, fault is alleged, umbrage and then counter issue is taken. The underlying driver in this dispute resolution paradigm is where one party believes that the other is at fault.
Adversarial ways of dealing with resolving COVID-19 contractual impacts are not likely to work if contracting parties continue to deploy traditional adversarial dispute resolution methods, as the flow on could compound the disruptive impacts of COVID-19 fallout. In times such as these, key stakeholders have to work together rather than work against one another.
To reiterate, if sub-contractors and installers cannot get supply, they will not be able to install. If the sub-contractors cannot install, they will not be able to deliver, and the head contractor will not be able to deliver. The developer will not be able to finish, and therefore the developer will not be able to sell the as-built product. That is “game over” through no fault of any of the actors! For fear of labouring the point, an event such as the Coronavirus is neither about parties being at fault nor their culpability. Yes there is adversity but solutions will not be found via an adversarial approach.
“To ‘Jaw Jaw’ is better than to ‘War War’” – Winston Churchill
All project actors through their lawyers and or negotiators would be well advised to get on the front foot and converse with other parties involved. A much higher degree of reciprocal largess than has been the fashion in recent times may be necessary.
There will need to be negotiations; compromises may be unavoidable as contract deliverables in many instances are going to be direly tested. In these most unusual of times, ‘soft skills’, or a bit more ‘water’ than ‘rock’, may save the day because those involved directly and indirectly in the project may be compelled to deploy unprecedented levels of cooperation regardless of whether they are union representatives, building practitioners, developers, financiers, sub-contractors or legal practitioners. In many projects, all actors will be affected and the ability to survive will require a collective resolve.
Once negotiated get it in writing
As a final point, if compromised and negotiated outcomes are devised they need to be carefully documented. As Confucius once said “this too will pass”. When it passes it is important to have a very well documented paper trail of that which was negotiated and agreed upon. Absent such agreement, the effluxion of time may severely test the memories of those that orchestrated the agreement, particularly when bottom line bottoms out.
 This definition was extracted from the Longman Business Dictionary.
Lovegrove & Cotton Lawyers to the Building Industry
For over thirty years, Lovegrove & Cotton have represented builders, building surveyors and building practitioners in Victoria, the ACT, New South Wales and Queensland. Justin Cotton is a leading Australian construction lawyer and widely respected in the building fraternity. Likewise, Doyles Guide ranks Kim Lovegrove as one of the leading construction lawyers in Australia. Lovegrove & Cotton can help practitioners resolve any type of building dispute and are preeminent in the area of building practitioner advocacy. If you wish to engage the firm, feel free to contact us via our website or by emailing email@example.com.