The impact of the Coronavirus on the construction industry: what to do to avoid or mitigate delay costs copy

Posted on March 13, 2020

The Coronavirus (COVID-19) has spread from its epicentre in Wuhan, China at an alarming rate such that the World Health Organisation has declared it a Global Pandemic earlier this week. Multiple countries including South Korea, Iran, Italy and Japan are all recording elevated numbers of coronavirus infections. International efforts to stem the spread of the Coronavirus have included travel bans, quarantine restrictions (both mandatory and self-imposed), and restrictions of congregations of large numbers of people, including cancellation of national and international sporting events. Recent media commentary suggests that the declaration of a Pandemic will result in an exacerbation of the political and economic effects of the Coronavirus seen to date. On 12 March, Wall Street and the London Stock Exchange experienced their worst trading day since 1987, with markets falling by approximately 10%.

The Chinese Governments have implemented quarantine and travel restrictions, including to those persons who have travelled to affected areas over the Lunar New Year celebrations. Many workers have not been permitted to return to work for at least 14 days and many factories have been closed for extended periods. This has resulted in a severely depleted Chinese workforce. Shipping and transportation (both within China and exporting from China) have also been significantly affected. Similarly the Italian Government has recently imposed quarantine and travel restrictions with that country placed into ‘lock down’ in recent days. It does not appear, at least in the short term, that the impact of Coronavirus is going to pass us by.

The Coronavirus is not just a public health emergency, as alluded to above, it is also having a serious impact on the global economy, the Australian economy and the Australian construction industry where materials accounting for as much as 20% of total project costs are sourced from China. The latter is the focus of this article.

We have had several of our building and construction clients contact us in relation to delays in the manufacture, supply and shipment of materials from China. The key question asked is, “what can we do about delays due to the impact of the Coronavirus?”

Delays for builders, head contractors and subcontractors can be very costly. Increased costs can be incurred as a result of:

  • liquidated damages being applied as a result of delays;
  • acceleration of the works to make up for lost time; and
  • sourcing alternative materials (at a higher price) to keep up with the project programme.
  • tornadoes, floods, bushfires, earthquakes, tsunamis or other acts of God; or
  • war, terrorism, riots or civil uprising; or
  • workers’ strikes or a declared state of emergency.
  • the event fits within the contract definition of a force majeure event;
  • the event could not have reasonably been avoided; and
  • it has taken all reasonable steps to mitigate the effect of the event.
  • Seeking an Extension of Time;
  • Suspending works under the contract due to the a Force Majeure event; and/or
  • Complying with notification requirements under the contract.

Extension of Time

Most contracts will contain fairly rigid and explicit clauses which determine the circumstances where a subcontractor or contractor might be entitled to an extension of time to the date for practical completion.

Extension of time clauses will typically only allow a subcontractor to have an extension of time where the head contractor, principal, superintendent, or consultant, have caused the delay.

One of the issues that we are faced with in relation to the delays caused by the Coronavirus, is that it does not “fit” within the definition of an event that might give rise to an extension of time. No one has “breached” the contract and no act of any relevant person has caused the extension of time to be necessary.

So what other provisions in the contract might deal with such a situation?

Force Majeure

Most commercial contracts will contain what are known as “force majeure” clauses. Force majeure translates literally from French as “superior force”. It can be thought of as a clause to regulate the obligations of parties to a contract in circumstances where a party’s failure (or inability) to perform its obligations under the contract is caused by forces beyond the control of any of the parties to the contract.

Examples of force majeure events may be:

However, a force majeure clause in a contract must be read on its own. The wording is vital. For example if a force majeure clause was drafted broadly, it might include the phrase “or any other like event”. If it is drafted narrowly, it would only include the events specified in that clause or contract. Depending on the specific clause in question, the impact of the Coronavirus may fall within the definition of a force majeure event, or it may not. By way of example, if the definition included “pandemic”, then the Coronavirus would fall within the definition of a force majeure event.

The general position is that if a force majeure event has occurred, the relevant clause in the contract will suspend the works under the contract until the force majeure event has ceased. In the case that we are considering, this might be until the Coronavirus has stopped having an impact upon project works (i.e. until materials are able to be procured from affected areas such as China).

It is usually up to the party seeking to rely on the force majeure clause to prove that:

If the above can be proven, then the works under the contract will be suspended.

Force majeure clauses will also usually denote how long a suspension due to a force majeure event can last before either party is entitled to terminate the contract. For example, it might be that after 90 days of force majeure, either party has a right to terminate the contract because it is essentially no longer practical for the contract to be performed.

Who Has to Bear Any Additional Costs Incurred?

The short answer is, the contract decides.

When parties enter into a contract, they legally allocate which party (or parties) will bear the commercial risks involved in the project.

The clauses discussed in this article (including extension of time clauses and force majeure clauses) will offer some guidance as to which costs may be added to or removed from the contract sum and how those costs are to be calculated. The clause or clauses governing variations might also offer some guidance.

What About the Law Outside of the Contract?

In Australia, the Courts will not ‘imply’ a force majeure clause.

If a party to a contract is prevented from complying with its obligations under the contract by circumstances out of their control, then the common law doctrine of “frustration” may be invoked to terminate the contract at the point of frustration. Courts will rarely invoke the doctrine of frustration though, as for it to be invoked, it will have to be shown that the contract has become impossible to perform. If a contract was frustrated, any performance of obligations under the contract before the point in time when the contract is frustrated, will stand (the contract is not rendered void from its inception), but no future obligations under the contract would be required to be complied with.

What we are seeing in relation to the impact of the Coronavirus, is that it is causing a materials shortage and (relatively) short delays. This is unlikely to be considered sufficiently serious to be an event which can “frustrate” a contract as it does not completely prohibit the contract from being performed, though it is something to bear in mind as the Coronavirus continues to spread, delays begin to lengthen and as governments increasingly impose prohibitions.

What Can You Do?

If you are reading this article or are coming to Lynch Meyer for advice, the contract has most likely already been signed and you are seeking advice about how to use the contract to get the best outcome for you or your company. In that case, the terms of each contract will determine your options, which might include:

Most contracts will contain clauses which set out how each party is required to communicate with each other, particularly in relation to events which might cause delays. All builders, contractors, contract administrators and project managers should take care to comply with these clauses and the requirements of the contract as the consequences of non-compliance can often be quite serious (such as being completely barred from making a claim if notice of delays are not given within time).

Our advice to all of our construction clients is that if they are entering into a contract which they are unfamiliar with, or if they are negotiating the terms of a contract, they should speak with a member of our construction team before signing on the dotted line. It costs only a fraction of the price to have a contract reviewed before entry, as opposed to the potential costs involved in a dispute down the line because of a contract provision that unfairly allocates the risk (usually falling on the subcontractor).

A final note, even though this article specifically contemplates the impact of the Coronavirus, another example of a force majeure event (or perhaps even frustration) might be the recent bushfires which have ravaged Australia. Works which have been affected by the bushfires would give rise to similar considerations as those set out in this article.

This article is general in nature and is not intended to provide legal advice to your specific situation. If you have an issue or particular contract that you would like to discuss, please give us a call and we can tailor our legal advice to suit your needs.

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