COVID-19’s impact on the economy is profound. The building and construction industry has been and will continue to be particularly impacted by the economic turmoil and uncertainty that it has created.
At the date of writing, no industry-wide shutdowns of union or non-union worksites have occurred. However, there is a growing sense that the construction industry will be shutdown in the coming days or weeks.We have advised clients in the building and construction industry(at multiple levels) on a wide range of COVID-19 issues, including:
1. How to address COVID-19 in Construction contracts
Existing construction contracts differ in how they address public health crises such as the coronavirus and its resulting disease(COVID-19). Some construction contracts are silent on the issue(because the concept of industry and country-wide shutdowns is a black-swan event; ie not anticipated in recent times), and this may create uncertainty and dispute. Other contracts include some mechanisms to address this risk and provide relief to contractors and subcontractors, such as extensions of time (and these mechanisms may or may not be appropriate). If you are about to enter into a construction contract, whether you are a principal or a contractor (or further down the chain), seek legal advice on how this issue should be addressed in the contract. Failing to do so may result in you suffering prejudice and/or creating uncertainty –which may increase the prospect of dispute and, in extreme cases, litigation.
2. The cash-flow squeeze – Security of payment claims
Many companies and individuals are now facing cash-flow problems due to COVID-19 and the associated shutdown of large sections of the economy. This may result in insolvencies and bankruptcies, and creditors suffering prejudice. In the building and construction industry, contractors and subcontractors facing cash-flow problems should seek legal advice on their options surrounding the enforcement of their payment claims and obtaining payment for the value of their construction-related services and works. Fortunately, contractors and subcontractors have legislation at their disposal to seek payment: the security of payment legislation, which exists in each Australian state and territory. Various technical and practical issues must be addressed when proceeding with a security of payment claim. Please seek legal advice on these issues to increase the prospect of a successful outcome (and to avoid prejudicing your ability to be paid in the future).
3. Extension of time claims
If you are a party to a construction contract and you are or expect to be negatively impacted by COVID-19, you should carefully review the terms of the relevant contract to determine:
- how COVID-19 is addressed in the contract (if at all);
- what rights you may have to claim an extension of time(EOT);
- the procedure for submitting an EOT claim (such as time bars, requirements as to content of the claim etc);
- what rights you may have to claim compensation in addition to time as a remedy for the impact of COVID-19; and
- in addition to the above, whether you may be entitled to claim that the contract has been frustrated or subject to a force majeure event (particular consequences may flow).
If in doubt or if your claim is significant to you, we recommend that you obtain legal advice. Particular care must be taken to avoid saying anything in correspondence that might be grounds for the other side to argue amounts to a breach or repudiation of the contract. Again, seek advice on how to exit from a construction contract or how to request an EOT and/or other benefits from the other party to the contract.
4. Advice about Frustration and Force Majeure, and COVID-19’s impact on Construction contracts
In certain circumstances it may be arguable that, if COVID-19renders the performance of the works impossible (or so radically different from what was intended by the parties when they entered into the contract), the construction contract has been ‘frustrated’. If so, the contract may be terminated. There is some uncertainty at law about whether the occurrence of COVID-19 will be regarded as amounting to a ‘frustrating event’. In many instances, the issue will turn on what the construction contract says about such matters(ie, what did the parties intend?).
There may also be an argument that the impact of COVID-19amounts to a force majeure event under the construction contract. Generally speaking, there is no doctrine in the common law of Australia to the effect that COVID-19 (or any other causes) may constitute a force majeure event giving rise to rights to claim EOTs or other relief. A force majeure provision will only exist if itis expressly incorporated into a provision or clause of a construction contract. Seek legal advice if you are unsure about whether there is a force majeure clause in your contract and, if so:
• whether it may cover COVID-19; and
• if so, what are the consequences (for example an EOT claim may be submitted by the contractor).
5. Heads of agreement and letters of intent
In the current economic climate, many principals will have second thoughts about whether to commence or continue with construction projects for commercial reasons. It is common for principals to award early works packages such as limited civil works and/or design works to a contractor prior to entering into a formal construction contract. This is often done under ‘Letters of Intent’, ‘Heads of Agreement’, ‘Early Works Agreements’ and letters or correspondence with other titles but a similar effect. In such situations, there may be some uncertainty and potential for dispute about whether the principal has entered into a binding construction contract with a contractor. If so, there may also be debate about the terms and scope of that contract. Given the quantum of money and risk involved in such disputes, please seek legal advice on how to address these situations and achieve your desired commercial aim – whether you are the principal or contractor, or another party to the agreement.
6. Milestone payments
Some construction contracts, typically for domestic works, have milestone payment provisions which provide that the contactor will be paid when the works for each stage have been completed(eg base/slab, frame, lock-up and fixing stages). Contractors may incur significant costs (for labour and material) before the works for the relevant stage are completed, and before they are entitled to be paid by the principal. This may cause significant hardship to contractors, if and when COVID-19 causes a complete or significant shutdown of the construction industry, and the contractor has not yet achieved completion of the works necessary to claim for a particular stage or stages of work/s (and cannot complete the works for an indefinite period of time). In such circumstances, payment claims made by contractors under the security of payment legislation may not be available as options for you to seek payment (for example, if the principal is a mum & dad and/or if a right to make a payment claim has not yet arisen and any such claim may be premature). You should seek legal advice on how to address these issues. This may involve consideration of frustration and other legal avenues, such as seeking payment on a quantum meruit basis for the value of work done (following termination of the construction contract).
7. Tripartite and funding arrangements
Principals often enter into funding agreements with financiers to fund construction works. These funding agreements often require that each of the financier, the principal and the builder enter into a tripartite deed (ie, a deed between all three parties). Parties should carefully review the terms of funding agreements and tripartite deeds, to consider whether COVID-19 and related EOTs or suspensions of the construction contract may amount to a default or breach under the funding agreement or tripartite deed. If so, the financier may have certain rights including, for example, to step in and take over the construction contract or to terminate that contact. You should seek legal advice on how to address these issues and avoid unintended and commercially prejudicial consequences. This may involve negotiations with financiers and/or side deeds or deeds amending and clarifying the terms of funding agreements and tripartite deeds.
If you have any questions about this article please get in touch with the author or a member of our Building & Construction team.
This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.
The Building and Construction team has extensive experience in dealing with the regulatory regime confronting the building industry. Our presence in Brisbane, Sydney and Melbourne means that we have detailed, ‘on the ground’ knowledge of the regulatory environment in the areas where we practice, and the ‘boots on the ground’ to deal with your matter in a timely and efficient manner. If you have a regulatory issue, we have probably seen it before, and can provide you with strategic advice to assist you in achieving outstanding outcomes.