The impact of COVID-19 is being felt across projects of all sizes, with strain being placed on supply chains, availability of labour and the impacts of the already numerous Government driven restrictions and other directions across the globe.
Undoubtedly the recent disruptions caused by COVID-19 will have effects on the ability of projects to be completed on time and also the commercial aspects may leave impressions on project budgets. The industry is quickly becoming cognisant of these risks for new projects, and we are seeing many questions from those conducting tenders and those that are on the bid side.
In particular, with fixed price tenders for projects, we have seen the advent of caveats for COVID-19 impacts being included by tenderers. Project proponents equally need to have an understanding of these issues, and where necessary, undertake further due diligence around the contractor’s proposed methodology for project delivery. Many project proponents also need to ensure the contract going to market has enough flexibility to insulate them in such volatile times.
Risk allocation and frustration
For those already bound by contracts, the situation is now one of review and understanding. Most sophisticated construction and infrastructure contracts will have already assigned the risk of COVID-19 to one party or the other. This is usually done in a myriad of different ways, although often this will have occurred without a specific reference to ‘virus’ or ‘pandemic’. Clauses of broader import can assign the risk and it is always important the contract is understood and read as a whole.
To fully understand the risk allocation, it is often critical to review a number of provisions, such as force majeure, extension of time, variation, change in law, direction of Government and responsibility for subcontractors and suppliers, provision of labour, industrial relations, termination for fault, termination for convenience and suspension (including lifting thereof). Where the contract has not assigned the risk sufficiently (which will be a relatively rare occurrence in a detailed contract), then the possibility of ‘frustration’ at law remains.
However, traditionally the Courts in Australia have set quite a high threshold test for a party to establish its obligations ought to be discharged by application of the doctrine of ‘frustration’.
Interpreting relief provisions
One should be conscious of reoccurring themes that are often found in provisions designed to relieve a party of its obligations. For example, often these provisions require that an event or circumstance must be something that is ‘not reasonably foreseen’. With respect to COVID-19, this may now be different when comparing a contract entered into today and a contract which was entered into many months ago. In addition, clauses often require (whether expressly or implicitly) that certain events must be ‘beyond the party’s control’.
This raises particular questions as to the extent a contractor ought to be able to ‘control’ its own supply chain and labour resources to complete a project (e.g. if necessary, can it control this by sourcing materials or labour from elsewhere?).
Another aspect is whether or not a provision requires an impossibility to occur (e.g. performance needs to become impossible) or that there is a mere disruption or impact (e.g. performance need only become more difficult) as the trigger for a party seeking to rely on the provision. This warrants a more nuanced examination of both the contract and means of performance (often both the intended means of performance and other possible means of performance need to be reviewed).
Provisions may also provide specific obligations for notification (including time bars, if those periods are missed), as well as obligations for mitigation or overcoming events. As such, astute project management is vital in the circumstances. A detailed understanding of what any particular contract might say on these issues, and how it impacts the project, has become a high priority for many of our clients.
Contractual flexibility
Project proponents may also need to review the flexibility their contract provides to overcome operational issues arising out of COVID-19.
Typically unilateral rights of variation, suspension and termination will warrant particular analysis, along with the ability of the proponent to rely on any force majeure style provision to impose its own suspension or even ultimately terminate (e.g. should the force majeure persist for an extended period). When it comes to proponents seeking to rely on force majeure, the provision requires careful analysis, as drafting allowing relief if an event or circumstance impacts the proponent’s contractual obligations may be distinct from drafting which covers an event or circumstance impacting the proponent’s broader business operations.
This is in light of the fact that the contractual obligations of the proponent are often quite limited to issues such as making a site available, ensuring some approvals are in place and making payment, and it may be more difficult for COVID-19 to be directly impacting performance of those obligations. A link between COVID-19 and broader business operations of a proponent would be much easier to establish in most circumstances. Contractors ought to understand the implications of the exercise of these unilateral rights by project proponents, with their typical focus being ensuring they are kept whole in the circumstances and not left out of pocket.