Andrew Kelly and Josh Marchant

COVID-19 and force majeure… are you feeling frustrated yet?

Andrew Kelly and Josh Marchant

23 March, 2020

Building and construction contracts Legislation & Regulatory Updates

The Coronavirus disease (‘COVID-19’) is causing unprecedented global concern with the World Health Organisation declaring the disease a global pandemic. The effects of COVID-19 are visible for all to see. This blog considers how COVID-19 may be relevant to the law of frustration, force majeure and other relevant relief provisions.

Relief for Change of Law or Directions of an Authority

A key source of relief may lie in any “change of law” clause, or other provision providing relief for a direction of a government authority. Many contracts provide a mechanism for time and cost adjustment as a consequence of a change in law (which may include regulatory changes or government action).

For example, clause 11.2 of the AS 4902-2000 Design and Construct contract commonly states:

11.2 Changes

If a legislative requirement:

  1. necessitates a change:
    1. to the Principal’s project requirements;
    2. to the Works;
    3. to so much of WUC as identified in Item 22(b);
    4. being the provision of services by a municipal, public or other statutory authority in connection with the WUC; or
    5. in a fee or charge or payment of a new fee or charge;
  2. comes into effect after the 14th day before the closing of tenders but could not reasonably then have been anticipated by a competent contractor; and
  3. causes the Contractor to incur more or less cost than otherwise would have been incurred,

the different shall be assessed by the Superintendent and added to or deducted from the contract sum.

At the time of writing, governments have already started introducing new legislation to deal with the COVID-19 outbreak. For example, on 18 March 2020, the Queensland Parliament passed the Public Health and Other Legislation (Public Health Emergency) Amendment Bill 2020 (Queensland Bill). The Queensland Bill, among other things, empowers the chief health officer, emergency officers and public health officers to direct individuals to say at home or another place (hospital, isolation location) for up to 14 days and imposes strict penalties for non-compliance.

Legislative changes of this nature will undoubtedly and adversely affect personnel availability in all levels of the supply chain, and it is difficult to imagine that every construction project will not be affected at some level.

We recommend that contracting parties who consider such provisions review their current contractual obligations in light of the evolving COVID-19 crisis.

Force Majeure

Unlike some countries, Australian common law does not recognise force majeure as an independent legal concept. Rather, it is a provision that parties may include by way of express agreement in their contractual arrangements.

Force majeure clauses operate to excuse parties from contractual obligations and liability while they are prevented from performance due to circumstances understood to be outside the parties’ reasonable control. There are differing approaches to drafting such clauses (whether they be inclusive or exclusive) however, common force majeure events include an act of God, fire or flood, or more drastic events such as war, invasion or acts of terror etc. If an ‘epidemic‘ or ‘pandemic‘ is expressly included in the definition, it is likely that COVID-19 will be considered a ‘force majeure event‘ since it was declared a pandemic by the World Health Organisation on 11 March 2020.

We recommend that contracting parties review their agreements to consider any force majeure provisions, and what, if any, relief may be available due to the effects of COVID-19.

Frustration

In the absence of other contractual relief, parties might consider the doctrine of frustration. Frustration provides an excuse for the non-performance of contractual obligations in the event that the contract has been disrupted, post formation, by an event that has occurred through no fault of either party which could not have been reasonably foreseen, which:

  • makes a contractual obligation impossible to perform; or
  • transforms a contractual obligation into something fundamentally different than what was bargained for.

In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 the High Court endorsed the general test for frustration previously accepted by English courts, stating that:

“Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.”

This doctrine is difficult to establish and is construed narrowly. Additionally, if performance has merely become more difficult or expensive, this will not constitute impossibility. The disrupting event must lead to serious consequences not mere changes in circumstance. For example, if a supplier can still import materials elsewhere other than from an affected location, a supply contract will not be frustrated merely because the supplier faces increased costs.

Further, any event of frustration cannot be temporary. During the SARS epidemic, the Hong Kong District Court in Li Ching Wing v Xuan Yi Xiong held a 24-month lease could not be broken due to a 10-day isolation order for it was only a short duration relative to the lease. The contract must be read as a whole and it is possible that suspension provisions may be more appropriate to the (potentially) short-term nature of the COVID-19 outbreak.

If a contract is frustrated it is automatically terminated upon the occurrence of the frustrating event and all parties are discharged from fulfilling their obligations. Common law dictates that the losses will lie where they fall, and damages cannot be claimed as neither party is at fault. Given the terminal nature of this remedy – it may not be preferred outcome for either party.

Conclusion

The COVID-19 crisis is still unfolding and at this stage the scope of its impact remains unclear. Principals and Contractors must continue to assess the risk posed by the virus and take active steps to avoid loss.

For impacted parties, these unforeseen events are a stark reminder of the importance of being adequately protected under contract.

If you have any further questions about how COVID-19 may affect your project, please contact a member of our national Construction team to obtain legal advice.

Andrew Kelly | Partner | +61 7 3338 7550 | akelly@tglaw.com.au

Josh Marchant | Partner | +61 3 9641 8863 | jmarchant@tglaw.com.au

Tom McKillop | Senior Associate | +61 7 3338 7530 | tmckillop@tglaw.com.au