The impacts of the COVID-19 virus on supply chains, site shutdowns and labour shortages are already deeply affecting the construction sector. Builders and Contractors are now carrying substantial site risks and may be exposed to delay claims if they do not manage their contracts carefully.
In this article we look at 6 practical steps to take right now to avoid exposure to damages claims and manage contracts to maximise recovery of EOT’s and delay costs.
- Review all Head Contracts
You cannot assume that the virus will automatically trigger rights to EOT’s, delay costs or variations. These rights do not exist and common and are a function of the specific wording of contracts.
It is highly unlikely that any construction contract in place before the virus hit specifically deals with risks of a pandemic or the increased costs as a result of a medical emergency. However, many standard form contracts have relevant clauses that can be relied upon in this circumstance.
It is time to review all current contracts and identify all sections dealing with EOT’s, delays, variations and the circumstances in which the Contractor or the Principal might be able to make delay claims.
- Use ‘Force Majeure’ clauses where available
‘Force Majeure’ literally means ‘a superior force’, which negates the ability to perform a contract.
If your contract includes a Force Majeure clause, it could be particularly applicable in the context of a pandemic, and may be used to claim an EOT or even delay damages.
Unfortunately, most Force Majeure clauses use disturbingly loose and undefined terms like ‘Acts of God’, ‘civil unrest’ or ‘natural disasters’. Many contracts don’t even have Force Majeure clauses and virtually none include specific wording for pandemics or medical emergencies that might force a site shut down.
There is virtually no caselaw that directly resolves the applicability of a pandemic or medical emergency to Force Majeure clauses and it is not clear it would qualify as a ‘natural disaster’. However, even without specific pandemic wording it is worth submitting a claim under Force Majeure if the impacts are so great as to compromise the entire project for a period (such as a government imposed shut down).
If you are negotiating a contract now we recommend you insert our model Force Majeure clause that covers the impacts of pandemics or declared medical emergencies.
- Lodge claim notices now
Many builders and contractors tend to leave submission of contract notices until they know the extent of the impact on the project or even worse, until the final claim. This often occurs when the extent of the impact is uncertain, such as COVID-19.
Delaying submission of notices will probably mean that the contract requirements for notices have not been met and could result in an otherwise valid claim being denied. The best time for giving notices is usually when you first become aware of a potential issue. The original notice can be supplemented with further detail as the impacts on the project become clearer.
Most standard form contracts (including for example AS4000, GC21, MBA BC4) are reasonably generous in terms of a builder’s or contractor’s right to claim EOT. Some modified or in-house forms of contract will have very limited grounds for claiming EOT. In almost all cases, the owner will have the discretion to grant EOT.
For supply chain delays or site shutdowns – lodge your EOT claims immediately and, if applicable, any available delay damages claim notice. Not all EOT events qualify for delay damages – you must make a delay claim under the specific clause that allows for this. Remember many contracts have contractual time bars and it is not sufficient to claim an EOT only and later claim delay costs associated with that EOT.
Be aware that Principals may seek to raise a delay claim at the end of the project. The best way to offset Principal LD’s is to have your own concurrent EOT and delay claims in place.
Materials shortages, Principal or government-imposed site restrictions may qualify for variations, particularly if alternate materials, methodologies or work practices result in additional site cost. Those costs do not need to be known in order to lodge a variation notice
- Collect data to demonstrate the impact on the project
Claims for recovery of virus related EOT or delay costs will not go uncontested. Good record keeping will be critical to a successful claim, including:
- an up to date program showing critical path events that have been disrupted;
- productivity and utilisation records during the virus affected period;
- records to substantiate cost of production (at both non-impacted and impacted levels);
- notices from subcontractors and suppliers explaining any delay or shortages;
- quotes and invoices for substitute materials or labour or other basis for calculating costs for materials.
Remember, you still have a duty to ‘mitigate’ your losses by doings such things as sensible demobilisation and reducing site overheads. Keep a record of all mitigation measures, as they will also play a role in supporting your claims for time and cost recovery.
- Proactively manage suppliers, subcontractors and employees
Review subcontracts, purchase orders and supply agreements to see how they will deal with delay or failure to supply. There are already people and companies trying to take advantage of the situation, so although flexibility and understanding are important in these difficult times, you need to take the steps that will enable you to protect your contractual position if required.
If you suspect that there will be an issue, initiate communication to determine whether there are any alternatives. You may be able to renegotiate terms to give yourself the best possible chance of resolving site impacts.
Alternatively, if the impact is ongoing, you may have grounds to terminate the contract for ongoing non-performance.
As site shutdowns and delays occur you may need to look at reducing staff cost to meet your obligation to mitigate your losses and reduce business overhead generally in uncertain times. This may mean moving employees to part time or redundancies. It is important to review your employment contracts and manage these aspects carefully according to law. Expert employment advice is a must at this time.
It is imperative that contractors formulate policies to ensure that employees are safe and exposure to the virus is minimized whilst taking steps to keep the project running. But if workers were to become ill this may have an impact on your ability to meet site demands.
In such circumstances, it may be possible to renegotiate contracts – as all parties are experiencing the same difficulties and hopefully practical reality rather than contractual force is a better way to go. Any contract can be resolved and re-jigged by way of a simple Deed of Variation that moves the parties into a more workable solution for all concerned.
- Termination for ‘Frustration’ may apply in certain circumstances
Very much a last resort –all contracts can be terminated at Common Law under the doctrine of ‘Frustration’, regardless of whether or not such a clause exists in the contract.
Frustration occurs when one or both parties are unable or unwilling to perform the contract over an extended period of time. This can be due to an external cause, such as a Force Majeure, or simply because one party is persistently breaching the contract or refusing their end of the bargain.
This may be difficult to prove in the context of virus related delays but it is also possible that a party using the virus to avoid its obligations could end up ‘frustrating’ the contract through persistent intentional breaches and/or a lack of bona fides. If this could be proven, the doctrine of Frustration may be available to terminate a contract and recoup damages.
The Nexus Construction team has extensive experience in managing delay claims, dealing with contractual terminations and resolving damages claims. It is possible to renegotiate contract terms and Nexus has developed model clauses for EOT’s, Force Majeure and Terminations that help builders and contractors manage such issued effectively.
During this difficult period we are offering fixed fee, low cost contract reviews that will help clients determine where issues might lie in their contracts and where possible negotiate to fix them.
Don’t hesitate to contact the team on +61 2 4961 0002 or directly as outlined below:
Simon Fosterling firstname.lastname@example.org
Marcus McCarthy email@example.com
Kelvin Keane firstname.lastname@example.org
Nicholas Achurch email@example.com
This publication is © Nexus Law Group and is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.