The construction industry still continues to undergo major disruptions to supply chains and accessibility to labour. This domino effect, as those in the industry will appreciate, impacts the costs of completing the project and whether the project can be completed on time.
In our update last month, we highlighted some of the issues being experienced by contractors in the aftermath of COVID-19 and some of the issues you should turn your mind to when entering into a construction contract. You may access the publication by clicking here.
Notwithstanding that it has been over two years since the WHO declared COVID-19 to be a pandemic, the construction industry still continues to undergo major disruptions to supply chains and accessibility to labour. This domino effect, as those in the industry will appreciate, impacts the costs of completing the project and whether the project can be completed on time.
In light of this, we have observed parties (particularly contractors) turning to rely on force majeure clauses in their construction contracts.
A ‘force majeure’ is not itself a term of any particular meaning.[1]
Typically, force majeure contractual provisions will provide that a force majeure event is an unforeseeable event beyond a party’s control that prevents that party from performing particular obligations under a contract. There will generally be two limbs to such a provision:
In the case of construction contracts, the contract may specify the events which are considered to be a force majeure event. Examples of this include (but are not limited to) natural disasters, pandemics, events relating to social unrest (such as wars, riots etc) and industrial actions.
In civil law jurisdictions such as certain parts of Europe and East Asia, a force majeure event may exist in its own right under the general law (quite separately to the contract). If a party intends to raise a claim that a force majeure event has occurred in Australia, it will need to do so within the bounds of the construction contract. In other words, the alleged event must be contained in the contractual definition of a force majeure event.
Australian Standard contracts such as the AS2124 and AS4902, do not contain provisions relating to force majeure events.
That said, such events may be captured (albeit in a limited capacity) under “Excepted Risks”[2] (which is the terminology adopted in the AS2124 and AS4902), but generally do not afford a contractor an express right to claim an extension of time or delay or disruption costs.
Where a force majeure event in a construction contract is defined to include a pandemic, the COVID-19 pandemic will most likely fall within this definition. However, as was highlighted in the recent case of Acciona Industrial Australia Pty ltd v Kwinana WTC Project Co Pty Ltd [2022] WASC 380, this is a matter of contract and what the parties have agreed.
However, if a party intends to invoke a force majeure claim under the contract for events such as shipping delays, price increases and labour shortages as a result of COVID-19, careful consideration will need to be made as to whether the event is a force majeure event arising as a result of COVID-19.
The party invoking the force majeure claim under the contract may often need to establish a causal link between the event (eg. delays in shipping) and COVID-19. Absent a causal connection, it may be unlikely that a party will be able to rely on a force majeure clause in its contract. It is uncertain whether the mere fact that COVID-19 has resulted in an uncommercial contract would in itself be considered a force majeure event. Again, this is a matter of contract and what the parties have agreed on this issue.
If you are a party to a contract or about to enter in a construction contract and want to protect yourself from the aftermath of COVID-19, you will need to consider:
Given the market challenges and the impact on supplies and labour that COVID-19 is continuing to have on the industry, parties should consider revising these contracts so that there is a fair allocation of risk between the parties.
If you want to find out more about your obligations under your construction contract or how you can best protect yourself from a contractual risk perspective, the Lavan team is here to help.
[1] Acciona Industrial Australia Pty Ltd v Kwinana WTC Project Co Pty Ltd [2022] WASC 380 at [7]
[2] See clause 16.3 (AS 2124) and clause 14.3 (AS4902)
[1] Acciona Industrial Australia Pty Ltd v Kwinana WTC Project Co Pty Ltd [2022] WASC 380 at [7]
[2] See clause 16.3 (AS 2124) and clause 14.3 (AS4902)
