18 March 2020
The impact of the coronavirus (COVID-19) pandemic continues to dominate news headlines and agendas across all sectors around the world and stakeholders at all levels of government and the private sector are urgently directing their efforts towards formulating business continuity and contingency plans.
Like every other industry, COVID-19 is having a rapidly escalating impact on construction, development and infrastructure projects in Australia.
The construction sector is an enormous contributor to employment and the economy, and COVID-19 has serious implications for all of us – government, owners, principals, contractors and the entire supply chain – that need to be dealt with commercially, respectfully and pragmatically.
Although the full extent of these impacts remains to be seen, below is an overview of some of the issues participants should consider over different phases of their current and immediate projects.
Analysis of Impact
Tendering / contract drafting / pre-contract execution
1. Risk allocation
Principals should consider (or reconsider) the most appropriate risk allocation for the proposed project, noting that previously adopted positions may not be suitable in the ongoing climate of uncertainty. This may extend to reconsidering the delivery model proposed, country sourcing of key supply items or personnel, time frames for delivery of key milestones, delivery risk, and arrangements for advance payments.
2. Contractual terms
Principals and contractors may consider expressly addressing the impact of COVID-19 in contracts by:
3. Tender evaluation
Principals and head contractors should give increased focus to:
4. Supply risk mitigation
Principals and contractors should consider whether risk mitigation can be achieved by:
Principals may wish to explore whether there are suitable insurance products, such as delay in start-up (DSU) insurance, available which may mitigate time risks for a project to some extent.
As with all contracts executed in uncertain economic times, the way in which performance will be secured should be carefully considered.
Given the typical security provided by bank guarantees is unlikely to cover all of the costs incurred in respect of a major breach, significant delay or insolvency, other forms of security should be considered, including parent company guarantees.
7. Warranties and defects
Separate deeds of warranty for key items of work should be sought from subcontractors and suppliers to provide recourse in the event of head contractor insolvency.
8. Principal’s discretion
Where a contract is already on foot, or otherwise does not allow for adequate contractual remedies (including those referred to above), the Principal should consider whether it should exercise its discretion to:
With delays to the supply chain, suppliers and contractors may require a longer period to deliver supplies or complete their work. This in turn may impact their cash flow if payments are only made on completion or at particular milestones.
Principals may wish to consider increasing payment frequency to their contractors, or offering to pay subcontractors directly, to mitigate the risk of subcontractors and suppliers across the project supply chain becoming insolvent. Such changes to approach are often best dealt with formally.
If there is applicable insurance such as DSU insurance, parties should seek advice from their insurance broker in relation to policy requirements (as well as observe any applicable contractual requirements).
11. Arrangements with financiers
Projects which receive funding from external financiers are likely to be subject to further requirements. Parties need to be mindful of such contractual arrangements, including whether suspension of work may be default events or triggers under financing agreements / financier side deeds.
12. Insolvency and ipso facto
With a heightened risk of insolvency, all parties should be aware of the rights they can and cannot exercise in relation to insolvency events, in particular having regard to ipso facto laws and their impact on the right to terminate or exercise other rights in the event of insolvency.
13. Dispute resolution
The contract usually provides a starting point for the dispute resolution process parties need to follow in the event of a dispute.
Courts and tribunals may be closed as part of any broader shut-down and arbitrators or experts may have more limited availability which may cause further delays in seeking a resolution to disputes. Early engagement and preparedness to resolve issues early may be more critical than ever given things are not ’business as usual’.
This article is part of our insight series COVID-19: Navigating the implications for business in Australia and beyond. To get notified by email when new COVID-19 insights are released, please subscribe for updates here.
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.