Coronavirus (COVID-19) and Construction Contracts: What are your options?
Coronavirus (COVID19) and the construction industry: What are your options?
We recently published an article about how construction contracts can incorporate concepts of force majeure events. A copy of our article can be found here.
As the disruptions of corona virus begin to become more extensive with government mandates coming into effect, we believe it’s important for those in the construction industry to have a quick reference guide as to their options or important things to think about.
| Pre-contract: Tendering, negotiating and drafting of contract | |
| Force Majeure clause | · Manages the relationship between the parties where there has been an ‘Act of God’ or other similar severely disrupting event
· Depends on the contractual definition of the term · Generally, suspends the obligations until the force majeure event has concludes · Important to consider when the parties’ obligations will resume – what will indicate the end of the force majeure event |
| Scope of Works and mitigation of supply chain risk | · Where possible, alternative supply or materials should be specified in the scope of works with pre-agreed variation prices |
| Extensions of Time | · Can include force majeure event as a qualifying cause of delay
· What circumstances can the contractor or subcontractor seek an EOT? · Generally appropriate for an EOT to be granted where there is suspension of works, variation, act, omission or breach of the other party, force majeure events and/or industrial action occurring across the relevant state or territory · Are there any duties to mitigate the delay which are a precondition to receiving an EOT |
| Delay Costs and/or damages | · Does the contract provide for any delay costs or damages?
· What are the circumstances that the contractor or subcontractor is entitled to costs and are there any relevant caps? |
| Legislative Provisions | · How are the change in legislative requirement provisions worded?
· Consider the definition of legislative requirement (and/or equivalent and related definitions) · Consider whether legislative provisions should include a carve out for where there is a change in the legislative requirements in relation to COVID19. Given the uncertainty around how the government will proceed, it is difficult to predict how the legislative regimes or executive orders will change as the response to COVID changes and adapts |
| Labour and Key Personnel | · Are there any key personnel of the contractor or the subcontractor that should be specifically identified?
· Are there specific measures the Principal/Contractor want to specifically implement? Examples may include split teams |
| Security | · Consider what types of security will protect against insolvency risk of contractors or subcontractors – Parent guarantee, retention monies, material security and/or bank guarantees
· Consider circumstances where there may be recourse to the security such as where a party becomes insolvent or there are defective works that require rectification · Consider Principal security for payment if there are any solvency concerns |
| Insurance | · Principals should consider whether there are suitable insurance policies to protect from any delays to the works or any consequences that the delays may have at the end of the project
· For example, Principals may wish to discuss delay in start-up insurance with their insurance broker |
| Warranty deeds and defects | · Principals may wish to require warranty deeds from the subcontractors to insure against any insolvency risk from contractors and to allow for any defects to be rectified independent of the contractor |
| Financial capacity of the tenders | · When assessing potential contractors, Principals should consider the financial capacity of contractors and whether there are any solvency concerns and if there are any parent companies that can provide guarantees |
| Project deadlines | · What deadlines are imposed by related contracts such as sale of land for off the plan properties
· How long are the deadlines and timeframes of the project? Can they be extended to account for coronavirus |
| Contract structures | · Profit/cost-saving sharing models of contract or guaranteed maximum price may be considered by Principals to minimise cost exposure of contracts that may be affected by coronavirus (such as supply chain risk) |
| Contract administration | |
| Extension of time | · Principals and Superintendents generally have the power to issue an EOT even when a claim may not be made by the Contractor. While they are not obliged to use this power for the benefit of the contractor, there may be practical and goodwill benefits in using these powers
· Contractors should seek legal advice in terms of the relevant EOT clause and whether they have a right to seek an EOT or what other options are available to them under the contract |
| Suspension | · Suspension is generally a grounds for an EOT
· Consider who bears the cost of suspension under the contract · Is there a right for the contractor to claim any suspension costs or costs associated |
| Change to legislative requirements | · In the event of government mandated shutdown, there is likely going to be claims for legislative changes. These will largely depend on the wording of the clauses, who bears the risk on legislative changes and the form of the government shut down
· Other considerations include whether construction work is considered an essential service and to what extent |
| Variations | · Where there is a supply chain breakdown due to closed borders, there may be claims for variations being made by Principals or Contractors to allow the project to continue
· Variations will be linked to the scope of work and whether there are alternatives that can be sourced |
| Payments | · Principals may wish to change payment terms to accommodate contractors or subcontractors
· As the effects of coronavirus move throughout the economy, there will undoubtedly be businesses that struggle and become insolvent. Where possible, Principals may want to consider changing milestone payments or frequency of payment claims to assist contractors’ cashflows · Any agreement between the Principal and relevant contractor should be evidenced in writing |
| Acceleration | · If there is relatively small amount of work left, Principals may consider giving directions to accelerate
· While this may increase the cost of the project, the Principal may be able to ensure the project is completed before shutdowns come into effect |
| Employment | · Employment law advice should be sought about how to manage employee relationships while projects are on hold by reason of coronavirus |
| Teams and social distancing | · Head contractors may wish to implement policies that flow down the contracting chain in relation to splitting teams and social distancing where possible |
| Other arrangements agreed between the parties | · Sometimes the best changes are those made between the parties and not from the lawyers
· However, even where this is the case, ensure that such agreements are evidenced in writing and you seek legal advice on the impacts of the agreement and whether there are any potential consequences that you may not have considered |
| Other issues | |
| Financiers | · In many developments, there may be a financier involved and different obligations that arise under these loans and security documents
· Principals should consider their obligations to notify their financier(s) where appropriate |
| Other stakeholders | · There may be a range of other stakeholders that may have an interest in the construction contracts
· It is important to manage these aspects of the development to reduce or eliminate any potential problems later on |
| Dispute resolution | |
| SOPA claims | · At the time of writing, there have been no changes to the strict deadlines imposed on submitting and responding to payment claims under the NSW Security of Payment legislation
· SOPA is a contractor friendly forum, allowing for money to flow down the contracting chain · SOPA claims can be challenged on jurisdictional grounds or can be settled at the end of the contract if there has been an overpayment |
| Alternative dispute resolutions | · Many alternative dispute resolution professionals are not taking new appointments. This can create a delay in parties complying with the relevant dispute resolution clauses
· Parties may consider teleconferences or videoconferences to resolve disputes, rather than physically meeting |
| Courts | · Many courts are operating via videoconferencing, with physical appearances limited
· The court process may have more delays than usual as judges and parties adjust to the temporary measures of case management · Where a party is seeking urgent injunctive or other relief, it is important to seek legal advice as soon as possible to ensure that an application can be made efficiently and protect your interests |
| Contract termination | · If you are seeking to terminate the contract it is important to terminate in accordance with the contractual provisions and to consider any common law rights or duties in relation to termination
· Those seeking to terminate where the counterparty has become insolvent will also need to be aware of the recent insolvency changes and the restrictions on terminating pursuant to insolvency |