CORONA CAUSED DELAY – Three strategies to get PAID for the costs of the outbreak

If the ‘second wave’ hits Queensland, are you prepared so you’re not out of pocket for project delays?

Since the pandemic broke, many projects have been delayed or at the very least, had the flow of work disrupted.

These delays fall into three main categories:

1. Restricted supply – being delays for the supply of goods and materials (particularly from China) or subcontractors choosing to shut up shop for a period of time.
2. Restricted working conditions – being restrictions imposed on the number of persons allowed on a site at any one time, or limiting the way in which workers can actually work on site (social distancing etc.).
3. Site shutdowns – where all sites are shut down because of a principal direction or government mandate.

Most construction contracts contain an extension of time clauses which allow the time for completion to be adjusted.

In this article, we’ll explore who bears the costs of a delay under unamended Australian Standard 4000 and 4902 construction contracts in three common scenarios. Whilst each contract is unique, the same principles should apply across the board and generally assist you in recovering the costs of a ‘Corona caused delay’.

1.         Restricted supply

Following the outbreak, many suppliers (particularly from China) fell behind on their deliveries. Similarly, many smaller subcontractors have shut up shop and looked to ‘ride out’ the pandemic – rather than trying to trade through. In these circumstances, principal contractors are finding it difficult to keep pace with the project and are falling into delay.

In order to be entitled to an extension of time, a contractor must be delayed from achieving practical completion by a qualifying cause of delay. Under the AS4000 and AS4902 contracts, a qualifying cause of delay includes

“any act, default or omission of the Superintendent, the Principal or its consultants, agents or other contractors (not being employed by the Contractor); or

other than:

• a breach or omission by the Contractor;
• industrial conditions or inclement weather occurring after the date for practical completion; and
• stated in Item 23.”

On first reading, you may think that contractors bear 100% of the risk for supply related delays. However, on a closer reading the words ‘other than’ arguably imply that if a cause listed below is NOT excluded – then it is a qualifying cause of delay, so long as it delays contractor in reaching practical completion.

This interpretation is supported by the AS4000 – 1997 Administration Manual which states:

“All other causes of delay except those specifically stated in (b) of the definition also entitle the Contractor to an EOT, if the conditions for an EOT under subclauses 34.3 and 34.4 are satisfied.”

So, does this mean the contractor automatically gets an EOT every time there is a supply delay caused by COVID? Well, not exactly. Clause 34.3 and 34.4 still require the contractor to show that it “is or will be delayed in reaching practical completion” by the event. Causation is a difficult thing to prove in supply related disputes because the counterargument is that that the contractor could (should) have engaged a different subcontractor or supplier and paid a bit extra to have them make up the lost time.

Accordingly, to be entitled to an EOT, the contractor would need to establish at a minimum that it carried out all reasonable efforts to obtain different subcontractors and suppliers in order to mitigate the delay.

This argument can also be used to obtain EOTs for restricted working conditions and site shutdowns (discussed below).

Whilst obtaining an EOT is possible, what about recovering the costs?

Unfortunately, this is a more difficult battle under the AS4000 and AS4902 contracts. Under those contracts, delay costs are only payable for a “compensable cause” which is defined as follows:

“any act, default or omission of the Superintendent, the Principal or its consultants, agents or other contractors (not being employed by the Contractor); or

those listed in Item 26”.

Accordingly, unless your contract specifically contains something which allows the contractor to recover the costs of a pandemic or something to that effect, then it’s likely that whilst the contractor has a shot at recovering EOTs for supplier delays – it’s unlikely to recover the costs of any delays caused by COVID.

2.         Restricted working conditions

In some states, there have been restrictions to the number of persons allowed on construction sites at any one time. These restrictions are usually prescribed through the introduction of state legislation.

Most construction contracts allow the contractor to recover the costs of a legislative change. In AS4000 and AS4902 contracts, clause 11.2 provides that if a change in legislation causes the contractor to incur more or less cost than otherwise would have been incurred, then the difference shall be assessed by the Superintendent and added to or deducted from the contract sum.

Accordingly, if the contractor incurs more costs because of legislation introduced due to COVID, then those costs can be recovered by the contractor. This likely includes any delay costs (such as site costs and overhead) incurred because of restricted working conditions.

3.         Site shutdowns

Whilst we haven’t got there yet in Queensland, its foreseeable that sites may be shutdown entirely because of COVID restrictions. Should this occur, it will be impossible for construction to occur through no fault of either party.

In these circumstances, the contract is said to be ‘frustrated’. Once a contract is frustrated, the contract automatically comes to an end and the parties are released from all future obligations. This only leaves the parties with two options, either walk away from the project or renegotiate a deal about how to get back to work when the restrictions lift.

Establishing frustration is difficult as it’s necessary to establish that the contract cannot be performed or only performed in circumstances which are radically different to those contemplated at the time the contract was signed: Codelfa Construction Pty Limited v SRA of New South Wales (1982) 149 CLR 337. A bad bargain and mere inconveniences such as delayed deliveries and a lack of available subcontractors are unlikely on their own to establish that the contract has been frustrated.

Once a contract is frustrated, then the contract automatically comes to an end and both parties are released from any obligations including paying for any work. Should this occur, the contractor’s only option is to commence proceedings for restitution (i.e. suing for the value of the work provided).

Usually, the contractor hasn’t completed enough work to make the project worthwhile and the principal is left with incomplete work. Accordingly, a party should only assert that a contract has been frustrated as a last resort where there is no way to renegotiate. Usually, neither party wins from a contract being frustrated.

So long as there is light at the end of the tunnel, the better option is to usually negotiate a stand down until the restrictions lift.

*As a side note, if you have a force majeure clause – now is the time to use it. Force Majeure (FM), usually refers to an ‘extreme event’ or ‘act of god’ that is beyond the control of either party (e.g. floods). As FM clauses are not implied into contracts in Australia, nor contained in unamended AS Contracts, we’ll cover this in a separate update. 

Conclusion

There’s no need to be out of pocket during a shutdown. Whilst construction contracts are harsh, the default position is that the principal usually takes the risk of delays which are outside of the contractor’s control.

That being said, now is not the time for contractors to sit on their hands. Whilst there are ways for contractors to offset the costs of the pandemic, there will be no relief if the contractors don’t prepare their claims properly and in accordance with the terms of the contract.

As always, if all else fails – NEGOTIATE! After all, the construction industry is one based on relationships, even though they can be frustrating ??!

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I am currently providing a series of FREE seminars which explore the strategies to make sure you’re not out of pocket because of any COVID caused delay. Please send an email to [email protected] for a list of available dates and times and to reserve your spot.

If you found this article helpful, please like, share and leave your comments below about whether you’ve encountered any of the above issues on your projects.

*All my articles are drafted with references to case law and legislation. This is not to bore you with the intricacies of the law, but to allow you to rely on my material when resolving your own disputes – should it not be feasible to instruct a solicitor such as myself.

As a disclaimer, the content does not constitute legal advice and should not be relied upon as such. Appropriate legal advice should be obtained in actual situations. Feel free to contact me at [email protected] should you require any assistance in resolving a legal dispute.