COVID-19 risks and contract options

This guidance does not discuss the public health or medical aspects of the COVID-19 pandemic. Please continue to refer to and follow the guidance published by Australian health authorities and the directions of state and federal government.

At the time of publication, most state, territory and federal governments continue to acknowledge construction services as 'essential' which can continue, subject to some limitations and public health guidance. The general advice provided in this note may no longer apply if federal or state governments declared construction services as 'non-essential'. FAQs specific to the Victorian Stage 3 and 4 Restrictions can be found here. We recommend that the parties seek legal advice on the complexities of navigating the uncertainties of construction in the pandemic environment. 

If accessing the publicly available version of this note please also refer to the  Acumen Disclaimer

In the current pandemic, an architect’s projects may be at various stages. The considerations, risks and options for the parties differ significantly at different stages and will also vary from project to project. The uncertainty of the current and evolving pandemic environment presents more questions than answers and more risks to navigate than clear solutions.

Project stages – considerations

The summary table below should give you a brief appreciation of some of the relevant considerations for the parties and for the architect administering the contract but is not an exhaustive list. You may wish to raise these with your client.

 

Design stage, construction contract not signed Construction contract signed and project commenced

General

Is there enough certainty of supply, available labour force, timelines or funding for the project proceed in the current environment? Are there risks and factors in the pandemic environment that might affect progress of the works? Are there risks and factors that might affect the financial position or viability of one or both parties?
Finance Has the owner secured finance? Is the evolving pandemic or economic environment a risk to the financing arrangements? Is the financier imposing additional conditions related to the pandemic environment on the construction contract as a condition of finance? If the project is financed, is the owner aware whether the finance arrangements and contractual conditions could be triggered by the pandemic environment? For example, financing agreements will give rights to terminate for ‘default’. Such default events may include: abandoning or suspending construction works; failing to achieve construction milestones or to progress the works; where there is a material adverse change to the circumstances, project or the owner.
Causes of Delay Should the pandemic environment be factored in as a known cause of delay for the purpose of extensions of time? Which causes of delay are reasonable in the circumstances? Should these accepted causes of delay entitle the builder to claim for time only, or time and costs?Should the causes of delay be limited in time, or require a minimum allowance of days before the builder is entitled to an extension of time claim? The pandemic environment may give rise to different types of causes of delay (supply chain, labour force, ‘frustration’ events). How do the contract mechanisms allocate the risks and costs of delay and relevant events? Is the pandemic-related delay the only delay, or are there concurrently delays that are contributing? How does the contract deal with administering concurrent delays?
Termination Have the parties considered whether they have adequate rights to terminate the contract in the context of the specific project? Does the contract have a Force Majeure or frustration clause? If so, what rights does that clause give the parties? Are there conditions, qualifications or limits (time or costs) on the exercise of those rights?
Special Conditions Have the parties considered whether to negotiate specific clauses into the contract to address the pandemic environment, risk allocations, likely causes of delay or Force Majeure events? Do the parties want additional rights in the event of pandemic-related events or impacts? Have the parties considered any appropriate conditions, qualifications or limits (time or costs) on the exercise of those rights? Are the parties prepared to consider amending the contract conditions to address the pandemic environment, likely causes of delay, or Force Majeure events?
Insurance Have the parties considered what type and level of insurance coverage they will require for the project? Including whether they need or can get coverage for pandemics? Have the parties reviewed their insurance policies and whether direct risks or project-related risks in connection with pandemics are covered?
Administering contract provisions

It is an impossible task to capture and summarise all the various risks, costs, delays consequences, disputes and other challenges that running a construction project in a fast-changing pandemic environment can produce.

The relevant provisions in the ABIC contracts to administer claims for delays (time or cost) are in Sections H and L. ABIC allocates the risk and costs of supply chain delays to the party who is best placed to manage and bear that risk. This is consistent with the Abrahamson risk allocation principles that underpin all ABIC contracts. At the heart of the Abrahamson principles is the notion of fairness and the key principle that the party who is best placed to accommodate, manage or mitigate a risk, should have that risk, liability or cost allocated to them by the contract.

For contracts that are currently being prepared and not yet signed, the parties may want to consider whether to make allowances for foreseeable causes of delay related to the COVID-19 pandemic. The contract variables in schedule 1, item 22 of MW, allows the parties to agree in advance the rates for delay costs, per working day (see clause H5 and the User Guide). In the context of delays in a pandemic-related environment, it may be difficult for the parties to estimate in advance rates for such delays.

There is more detail in the User Guide for your contract on section H and section L, to assist in administering claims for delays (either time costs or only time).

Modifying contracts for pandemic risks

If you are preparing the construction contract and documentation after a pandemic was declared, the parties should turn their minds to whether to make allowance from the outset of the project, for specific delays caused or related to the current pandemic. The ABIC contracts provide for foreseeable delays to be specified in the contract, include pre-agreed rates for delays (per day) and reasonable allowances for other delay circumstances.

See: Major Works clauses L1.1m and L2.1b, clauses H1 to H5 and the items 18, 24 and 26 in schedule 1.

See: Simple Works clauses L2.1b, clause H5 and item 21 of schedule 1.

Even if the contract is signed and the project is underway, it always remains open to the parties to negotiate and agree on modifications to the contract they consider necessary. However, both parties need to agree to the modifications and they should be guided by legal advice. The parties may wish to consider the parameters of those new or amended clauses as mentioned above (See table above under Special Conditions). It’s best practice to document the intended modifications to the contract in writing (for example, in a ‘Variation Agreement’) and the parties should ask experienced lawyers to draft any new or amending clauses. The contract might have formal requirements on how modifications are to be achieved, so parties should seek legal advice rather than attempt to modify the contract by informal means (like email) that may not comply with the contract requirements.

Construction projects and the contractual arrangements are complex. As a general recommendation, if any party is unsure about their rights, obligations and options, they should promptly seek legal advice.