You were constructing many great projects. Tunnels, schools, apartment blocks and more. The projects were on time and on budget.
All of sudden, COVID-19 hits. The wheels fall off. You can’t get your supplied items out of China. Interstate deliveries are delayed. You are met with restrictions on how to resource the sites. You are schooled on a new term: “social distancing”.
Your project outcome hopes slip. You scramble to recover, to get the jobs back on track.
You then turn your mind to the delays. The jobs may very well now be late. The dates for practical completion won’t be met. You could be exposed to significant liquidated damages.
You review the construction contract.
The “EOT events” (or “Qualifying Causes of Delay”) is a short list. There’s no chance of a successful delay claim.
What now?
Force Majeure is a Creature of Contract
Is COVID-19 a Force Majeure event?
Does it relieve you from your obligations to meet the Date for Practical Completion?
If so, are there steps you must take in order to preserve that entitlement?
Is Force Majeure Automatic?
In Australia, there is no common law or equitable doctrine of force majeure that applies to contracts.
This means that when something unexpected happens, contractors don’t automatically get relief for a “force majeure” event.
Thus, to get force majeure relief, it must be stated in your contract.
The only similar common law concept (that is, a right which is available whether your contract say so or not) is the doctrine of frustration. Whilst the concept of “frustration” is often thrown about, the circumstances in which it applies are incredibly rare. For more details on this, see our article here.
But let’s get back to force majeure.
Common features of a Force Majeure Clause
Start by looking at the specific words used for force majeure in your contract.
There are two fundamental issues to look for:
- How is “force majeure” defined?
- How does force majeure actually operate in your contract?
Most force majeure definitions will have these elements:
- the event must be outside of the parties’ control;
- relevant performance of contractual obligations must be prevented, hindered or delayed; and
- the effect of the event cannot be avoided or overcome by reasonable efforts to mitigate.
Like all contracts, the courts are going to look to the specific words used in the relevant clause to determine its meaning and applicability to your situation. Some definitions are far more restrictive than the elements set out above.
Then there is the question of how the concept of “force majeure” (if there is such a concept) actually applies in your contract.
In the construction industry, it is fairly common for force majeure to simply be one of the events giving rise to a “qualifying cause of delay” for the claiming of extensions of time.
However, it is equally common for there to be separate, detailed, additional provisions dealing with force majeure which are distinct from the EOT mechanism.
Most clauses will also require a contractor to promptly notify their client of the force majeure event and its estimated impact on the project.
Assuming a similar clause exists in the relevant contract, would COVID-19 meet the above test?
Event Outside The Parties’ Control?
Is COVID-19 outside the party’s control?
The event itself definitely is – nobody could argue that a contractor had control over the existence or spread of the virus.
But what about the consequential delay? Should a reasonable contractor have anticipated this type of event was possible, and made provision for it separately in the contract?
What about governmental directions and recommendations that are not embodied into laws? If a contractor follows an optional health recommendation that delays the project, is that genuinely the direct result of the virus or has the contractor’s decision intervened in the chain of events?
Has Performance of Contractual Obligations Been Affected?
Has COVID-19 impacted or delayed performance? Possibly.
But each project is different, so a contractor needs to prove this has occurred for the specific project. Are all the works impacted? Or could some work still continue, or at least continue in some capacity?
Are the affected works on the critical path for your project, and have they been as affected or delayed as other works?
Again, you need to ask: has COVID-19 delayed your project directly, or was it in fact the consequential directions of governments around the world?
An Obligation to Mitigate?
Some force majeure clauses also contain an express obligation for the contractor to use reasonable efforts to mitigate the impact of the force majeure event.
In the case of claiming EOTs for force majeure, your entitlement to any EOT might well depend on whether you took all reasonable steps to mitigate or prevent the delay.
Even without an express obligation, a party may argue that an obligation to mitigate is implied.
How far a party will need to go to ‘mitigate its loss’ will depend on the facts of the relevant case and surrounding circumstances.
For COVID-19 for example, if a contractor could not get product out of an overseas supplier, a court may find they had an obligation, where possible, to source a product from a local supplier of the same or equivalent product.
What next?
Whether a contractor can claim relief for “force majeure” will depend on the contract terms and the relevant project specific facts.
So, if you’re a contractor and concerned about potential exposure to liquidated damages or your client exercising other set offs, don’t just wait and hope for the best. Get ahead of the issue, ensure all notices have been submitted, and consider your dispute resolution strategy now.
If you do so, you may be able to set up a favourable commercial deal with your client, where each party takes some financial pain they can both live with. Ultimately communication is as important here as strict legal entitlements – having a plan for managing both is usually the best path.
On a worse case, you will have at least set yourself up for strong adjudication, litigation or arbitration proceedings if the matter cannot be resolved commercially.
