Articles

By Lovegrove & Cotton – Construction and Planning Lawyers

On the 3rd of August 2020, the Victorian government announced new restrictions for industry in relation to the stage 4 lock down due to the COVID-19 SARS-Cov-2 pandemic. According to the Department of Health and Human Services and the Department of Jobs, Precincts and Regions, the restrictions extend to the construction industry and are as follows (see Business Victoria, Stage 4 Construction Sector Guidance):-

Open for Onsite Work COVID SAFE PLAN

• Construction of critical and essential infrastructure and services to support these projects
• Critical repairs to residential premises, are allowed, where required for emergency or safety.

Restricted Operations or Industry Specific Obligations

Large scale construction (Restricted Operation)

• Any building construction project of more than three storeys (excluding basement) or greater than 1500m2 total floorspace
• Maximum of 25 per cent of normal employees on site compared to normal operations (not including workers specifically dedicated to oversight of COVIDSafe functions in the workplace).
• Must have a High Risk COVID Safe Plan.
• Must demonstrate not blending shifts and workers can only work at one site during Stage 4
• Specialist contractors may move between no more than 3 different sites per week

Small scale construction (Restricted Operation)

• Any building construction project of three storeys or less (excluding basement) and less than 1500m2 floorspace (i.e. projects other than large-scale construction)
• Maximum of five workers (plus one supervisor) 
• Must have a High Risk COVID Safe Plan
• Must demonstrate not blending shifts and workers can only work at one site during stage 4

Important:

It is important to note that the Victorian government will continue to provide updates and clarifications regarding the restrictions, and that the restrictions outlined above are subject to the Victorian Chief Health Officer’s Directions, which may be subject to change as circumstances change. As the industry restrictions are issued in a dynamic environment, that which may be the law on a given day may change the following day. Hence, it is absolutely critical that the reader maintains the highest level of vigilance in ensuring that the restrictions they have regard to are relevant on the given day. Practitioners should have immediate and continuing access to their legal and OHS advisors at all times, lest a given law has changed.

These new restrictions will have clear direct effects on projects around Victoria. Some of these impacts on the building industry include the following:-

• Project schedules will be directly impacted
• There will be a downsize of the workforce
• Supply chains may be compromised (see earlier article on point HERE)

The flow-on effects of these are:-

• Some projects may need to be halted and suspended
• Extensions of time may need to be sought
• Variations to projects, particularly as regards project materials, may need to be sought
• Some contract deliverables are likely to be placed in jeopardy

It is therefore important that a number of contractual realities are kept in mind by those in the building industry, including domestic contract legislation, contractual termination, time extension and variation provisions, considerations as to the availability of contractual frustration and force majeure provisions.

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 the Stage 4 lock down 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. As noted above, one will need to bear in mind any statutory requirements such as those contained within the DBCA, and any variation procedures required by the contract itself.

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.

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 one step removed, 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

When lawyers refer to force majeure, they are ordinarily referring to a type of contractual provision that ‘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] In some circumstances, the restrictions as regards maximum onsite employees may drastically alter the circumstances under which construction occurs, whereby it has substantial ramifications for project deadlines, as projects are seldom undertaken without fundamental implied presumptions as to the availability of labour.

‘Radically different circumstances’ 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, or partial shutdown, 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. Such provisions may be more likely in contracts that were entered into post the emergence of the COVID-19 pandemic.

Allocation of risk can, again, be a very difficult aspect to determine. 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. The foreseeability hurdle could be an obstacle for parties desirous of invoking contractual frustration in circumstances where the contract was drafted and assented to after the outbreak of the COVID-19 pandemic.

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.  During these times it will be increasingly important for contractors to communicate with each other to avoid or limit disputation – the perennial Churchill quote “Jaw Jaw is better than War War” should be kept in mind, particularly where the financial impacts of this virus do not discriminate against any actor.

In any event, great care must be taken when making decisions and taking action when a contract is involved. The new stage 4 industry restrictions in Victoria have ratcheted up the contractual risk paradigm for building contractors in the state, and it therefore behoves one to be sure of one’s contractual position.

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.