Legal Insights

Construction in a year of unprecedented risks to public health

By Ben McLeod & Eloise Crompton

• 22 April 2020 • 7 min read

Remember the thick smoke that clouded major cities following the devastating bushfires in January? Air quality was assessed to be the worst in the world on some days. Advice from State Governments for those living in affected areas was to stay inside and avoid physical activity outdoors.

Fast-forward two months or so and the World Health Organisation had declared a global pandemic following the outbreak of the novel coronavirus (COVID-19). A new public health threat emerged and State and Federal Government advice was to stay home where possible to do so.

So how does the construction industry deal with unexpected and unprecedented risks to public health? In the absence of a mandated shut- down of construction sites, it can’t simply stay indoors or stay home. If there is delay on a construction project arising from air pollution caused by bushfire smoke, or from the varied impacts of COVID-19, who bears that risk?

The answer depends on the risk allocation under the contract in question. Most construction contracts contain an extension of time (EOT) regime, under which the contractor can claim an EOT (and thus relief from liquidated damages), and possibly delay costs for specified events. Some construction contracts will also have a force majeure provision that may entitle a contractor to an EOT.

Below we explore some of the common grounds for an EOT under construction contracts, in light of the different public health risks posed by bushfire smoke and COVID-19, and how the different Government responses to each of them impacts the claim.

Force majeure event?

Force majeure generally refers to ‘acts of God’ or other events beyond the control of the parties to a construction contract that may prevent performance of the contract by one or both parties. Commonly, the party affected by a force majeure event is able to suspend the performance of the affected obligations and, in the case of the contractor claim an EOT. Less commonly, delay damages may be payable. Such force majeure provisions may also entitle a party to terminate the contract due to a prolonged force majeure event. To assess the entitlements, the starting point is always the ‘force majeure’ clause.

Not every construction contract includes a force majeure clause. Standard forms AS2124 and AS 4000, for example, do not include such a provision.

Where a force majeure clause is included in a contract, the operation of a the clause depends on its particular drafting. This is because the common law does not recognise a doctrine of force majeure as a standalone concept separate from the contract.

Where the construction contract in question deals with the risk of force majeure events, the key question is whether the alleged delaying event (i.e. bushfire smoke and / or COVID-19) falls within the definition of a force majeure event.

It is common for force majeure to be defined to encompass war, flood, earthquake or cyclone – but not more generally for risks to public health. However, ‘force majeure’ might expressly include epidemics, pandemics or other widespread risks to public health. What level of risk to public health will fall within the meaning of a ‘force majeure event’? A ‘force majeure event’ might, for instance, be defined to refer simply to ‘fire’ – but does that encompass inability to perform work due to bushfire smoke? Arguably, a contractor would have a reasonable grounds for asserting that the current COVID-19 pandemic has affected its ability to perform the contract where epidemic or pandemic are within the definition of force majeure event and its effects have interrupted supply of materials or otherwise affected the contractor’s progress. The particular drafting of the clause would need to be considered to determine whether relief is available.

Change in law?

Construction contracts also often entitle the contractor to some form of time or cost relief where there has been a ‘change in law’. To determine whether government responses to the bushfires or COVID-19 constitute a change in law, careful consideration needs to be given to the particular drafting of the change in law clause, as these differ widely across the construction industry. Similarly, the relief provided under a change in law clause varies. A contractor may be entitled only to the additional costs necessary to comply with the change in law or may be entitled to a variation to the scope of work. Relief may also extend to an EOT and delay costs.

To assess whether there has been a ‘change in law’ it is usually necessary to look closely at the definition of ‘change in law’ to determine what laws or requirements are included. In some cases, the term will encompass statements by ‘authorities’ including, for example, the World Health Organisation, the Victorian Building Authority and WorkSafe. However, in other cases, the definition is more narrow and the bushfire and COVID-19 events may not trigger a ‘change in law’ under those contracts. For instance, for the bushfires, some government authorities provided advice on air quality that was of an advisory, rather than binding nature.

It is also important to consider other requirements of the change in law clause. For example, what impact does the change in law need to have to entitle the contractor to relief? Does the change in law have to necessitate a ‘change to the works’, or does it include a change to the method of working?

For COVID-19, the Victorian Minister for Health declared a State of Emergency under the Public Health and Wellbeing Act 2008 throughout the State of Victoria. The declaration enlivened emergency powers to be exercised as reasonably necessary to reduce the serious risk to public health. The directions made in exercise of those powers are many and varied – see for example, the Stay at Home Directions, Care Facilities Direction and Isolation (Diagnosis) Direction. Over and above the requirements of these directions, State and Federal Government policy is to practice social distancing.

Parties need to consider whether these directions and policies fall within the definition of change in law under the contract. Even if they do constitute a change in law, has the change had the required impact which gives rise to relief? Arguably, unless there is mandated shutdown of the site in question or a more wide-spread government mandated shut down of construction sites in Victoria, the contractor will find it difficult to establish an entitlement to relief under a change in law clause. However, this depends on a case by case assessment of the relevant change in law provision.

Latent condition?

A creative contractor may seek to characterise delays from these unexpected public health events as being caused by a ‘latent condition’. Again, whether a site condition is a ‘latent condition’ depends on the drafting of the latent conditions clause under the construction contract.

Demonstrating a latent condition typically involves demonstrating that the condition encountered differs materially from the physical conditions that should reasonably have been anticipated by the contractor, had the contractor undertaken all of the examinations and investigations required prior to the execution of the contract.

Bushfires are difficult to predict, let alone bushfire smoke impacting construction work hundreds of kilometres away. A contractor might reasonably argue that it could not have foreseen the smoky conditions it encountered. The assessor of the claim will need to consider evidence of the actual air quality experienced on site. Is the change in air quality so significant that there can be said to be a material difference in conditions? Again, this will depend on a number of factors including the distance of the site from the bushfire, the level of air pollution and the duration of the air pollution.

As to COVID-19, given it appears that the virus can survive on certain materials for at least a few days, if a worker on a construction site was found to have contracted COVID-19, leading to a partial or total shutdown of the site, there may be an argument that the delay was caused by a latent condition.

However, we envisage a potential threshold issue might be raised by principals. Many construction contracts will have been entered into prior to the bushfires and COVID-19 pandemic. A principal might assert that a physical condition cannot be ‘latent’ where it does not exist at the time when the assessment of what the contractor should reasonably have anticipated is to be undertaken. In other words, it is implicit in a latent conditions regime that the condition must exist prior to the contract being executed.

Contact us

The unexpected public health risks experienced in 2020 have raised interesting questions as to the risk allocation under construction contracts. Having acted for many developers in relation to delay claims caused by unexpected events, Maddocks is well placed to assist you on any projects where an unexpected delay has or may affect work on site, or lead to claims from contractors.

By Ben McLeod & Eloise Crompton

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