COVID-19 Considerations for Contracting – Today and Tomorrow

22 April 2020

Publications

The extent and duration of the COVID-19 crisis remains unknown – and the construction, engineering and infrastructure industry is not immune.  Continuing on from our recent COVID-19 related publications, this  Alert provides some (non-exhaustive) points for contracting parties to consider in relation to existing and proposed projects.

  1. Project GO/NO GO

Parties should consider how the continuing uncertainty may impact projects that are currently being negotiated.  The industry has continued to operate vigorously during the crisis to date – and is an “essential” industry.  However, parties should undertake careful assessment with counter-parties and stakeholders as to how they will manage this uncertain and rapidly changing climate. Perhaps a ‘pause’ is justified? Perhaps – not needed and you are “good to go”!

  1. Time & Cost

Time and cost – are two of the “big three” pillars of any project (quality being the third in the trilogy).  Whether the effects of COVID-19 entitle a party to time relief as a qualifying cause of delay (or equivalent) and whether or not delay and/or disruption costs are, or should be, recoverable for COVID-19 caused delays is a critical area for assessment and consideration.  For existing projects, a thorough review and analysis of the contract is warranted.  And for “shovel ready “projects – negotiation of the preferred contractual risk allocation may determine the success or failure of a project.

  1. Suspension

Typically, standard form contracts will entitle both the Principal and the Contractor to suspend works in order to protect the health and safety of any person.  Parties should assess the suspension regimes in their contracts and determine how the risks of COVID-19 can best be managed – if at all.  The prospect of a mandatory site shut-down by public authority intervention is perhaps receding as this Alert is published – but should also be considered (likely as a change in “legislative requirements”). The requirement for, and possible duration of, any COVID-19 related suspension/shut-down is, at this stage, unknown.  Therefore, a “COVID-19 suspension” differs conceptually from typical types of suspension – which are usually temporary and of reasonably short duration.  How long should a COVID-19 suspension be until a party is entitled to either terminate the contract or re-price the works?

  1. Force Majeure and Excepted Risk

Force majeure, as a matter of Australian law, is purely a creature of contract.  In modern contracting, the popularity of Force Majeure provisions has dwindled and they are no longer a feature of standard-to-market contracting.  Regardless, many contracts contain Force Majeure provisions – and parties should be aware of any Force Majeure provisions and carefully assess their effect.  Similarly, if negotiating, parties should determine if a Force Majeure regime is desirable or necessary given the nature of the works.  Parties should also consider the “excepted risks” regime in this same context.  For further insight regarding Force Majeure and COVID-19 considerations see our previous blog entitled ‘COVID-19 and force majeure…are you feeling frustrated yet?’

  1. Frustration

Unlike force majeure, frustration is a general law concept (although frustration provisions are often be found in standard-to-market contracts).  In short, frustration occurs where performance of contractual obligations has become “impossible” or has been changed to the point where it is “fundamentally different” from what the parties bargained for.  At this stage, it seems unlikely that COVID-19 will justify a claim of “frustration”.  Parties should consider this doctrine carefully before claiming a contract has been “frustrated” (for fear of failing into the “repudiation trap”).  For further insight regarding frustration and COVID-19 see our previous blog entitled ‘COVID-19 and force majeure…are you feeling frustrated yet?’

  1. Managing service providers and the supply chain (procurement)

Parties should review the current status and requirements for deliverables from service providers to ensure they are content for service providers (eg consultants) to continue work if there is uncertainty surrounding project “go/no go” issues.  Similarly, procurement of plant, equipment and materials – immediately and for long lead items – requires careful and rigorous analysis.  Typically, delays in procurement do not provide a strong basis for claiming relief – either for time or cost.  Can items be procured from alternative markets?  What are the quality and cost implications?  Procurement will be one of the most severely impacted project activities – and an area for contention.

  1. Insolvency Issues

COVID-19 will exacerbate the recent surge in insolvencies for participants within the industry. And participants need to exercise a high degree of vigilance and caution when dealing with ‘insolvency events’ under contractual default regimes in light of the dramatic and remarkable reforms in insolvency law over the last 18 months. The “ipso facto” insolvency reforms, which came into effect in July 2018, are significant and prohibit parties exercising a range of ‘typical’ contractual remedies – including to terminate and/or novate for insolvency alone. While there are a number of exemptions, many of the prohibitions will apply to standard contracting within the industry. The March 2020 reforms introduced by the Coronavirus Economic Response Package Omnibus Act are remarkable and provide significant relief to directors and businesses from the trading while insolvent provisions and the Statutory Demand regimes under the Corporations Act.   The minimum threshold for a valid Statutory Demand has been raised from $2,000 to $20,000 and he period within which to answer a Statutory Demand has been extended from 21 days to 6 months.

  1. Insurance

We recommend that parties discuss with their insurance brokers the availability of ‘special’ insurance cover for delay or failure to complete as a result of COVID-19.  However, we anticipate that such cover would be highly constrained and very (prohibitively?) expensive given the insurance cycle and the number of recent events ‘draining capacity’ in the insurance market (i.e. bushfires and cladding).

There are a wide range of issues for parties to consider in light of the COVID-19 crisis.  The above is a snapshot of some of those issues.  Below are a number of other updates we have published providing further detail on several of the points above:

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

COVID-19: is a standstill beneficial to your project?

Managing your contractual obligations during the COVID-19 pandemic

Insolvency risk management in light of COVID-19

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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.

Authors

St John Frawley | Partner | +61 3 9641 8782 | sfrawley@tglaw.com.au

Roderick Reynolds | Law Graduate