COVID-19: Rights and remedies in construction contracts

Friday, March 20, 2020

The World Health Organisation has declared the COVID-19 a global epidemic. The impact of this on the construction industry calls for an assessment of contractual obligations and liabilities of principals, contractors and subcontractors alike.  

Most contracts will include provisions that look to protect the parties from events beyond their control, more commonly referred to as the “Force Majeure Clause”. It is important to note that there can be variances to the wording of these clauses and it will be important to be aware of the precise wording of the relevant contractual provision.

In the majority of cases the force majeure provisions will apply to the obligations and liabilities of the contractor as opposed to the principal and so although they provide a mechanism for the contractor to avoid or delay performance of their obligations, they do not provide a direct termination right for the principal. However there may be an ability for either party to terminate in the event that a force majeure event lasts for more than a specified period of time, usually 6 months or more.

In essence, the purpose of force majeure provisions are to excuse failure to perform or delay contractual obligations and liabilities of a party if they are prevented from acting due to circumstances beyond their control. Most contracts will list the specific circumstances that can be relied upon although there is usually a sweeper provision to cover any circumstances beyond the contractor’s reasonable control.

The most commonly used commercial building contracts (NZS3910:2013, NZS3916:2013 and NZS3915:2005 (Standard Contracts)) allow for the contractor to apply for an extension of time if the works are impacted by a force majeure event. Clause 10.3.1 in the Standard Contracts lists the specified force majeure events and includes “any circumstances not reasonably foreseeable by an experienced contractor at the time of tendering…”. The reference to “the time of tendering” is important to consider as it will be when the tender was submitted that will be relevant in terms of deciding what was foreseeable as opposed to the date of the occurrence of the force majeure event.

The lack of reference to “epidemic” in clause 10.3.1 is therefore not fatal to the ability for a contractor to apply for an extension of time. The force majeure provisions may still allow the contractor in the current circumstances. However it is prudent that the parties turn their mind to all the contractual terms. An extension will only be granted if the contractor is “fairly entitled” to one and there has in fact been a delay to the works. Consideration must therefore be given to obligations to invoke preventative measures and mitigate the risks and consequences of a disruptive event. These could include sourcing materials from other suppliers, engaging alternative subcontractors or reconfiguring the programme to allow certain works to be performed at a future date. A rise in cost due to a delay in the supply chain will not, in itself, be a ground to rely on.

Where a force majeure clause cannot be relied upon or either party wishes to terminate the contract as opposed to simply delay performance, there may be the ability to rely on the Doctrine of Frustration. The NZ2013:3910 and NZS3916:2013 also allow for the right to a party to notify the other if it considers the contract has been frustrated. It is important to note that either option will trigger a process of review in order to determine whether frustration has actually occurred, which generally has a very high threshold.

The Doctrine of Frustration is a complex legal principle and requires a party to prove that the contract can no longer be performed in the manner intended. The fact that performance will be delayed or be more costly is not enough.

The impact COVID-19 will have on the construction industry in the coming months is starting to become evident which will lead to inevitable disputes over delay and termination. The rights of the parties will come down to the scope of the contract.

If you are currently engaged in a construction project or tender process or are contemplating embarking on a new project, you will need to contemplate and provide for the impact COVID-19. We are already assisting a number of contractors and principals in relation to this and our team is well placed to assist with any queries or advice you may have.

If you have any questions about COVID-19 and its impact on force majeure clauses in construction contracts, please contact Jonathan Forsey or Julia Flattery.

 

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.‚Äč