Force majeure and COVID-19

By Marcus Beveridge and Tina Hwang from Queen City Law

In law, a force majeure isoften referred to as an “act ofGod”, an event that no partiesto a contract would normallyhave anticipated. Many contracts include standardforce majeure clauses, but theNZS 3910 has no default forcemajeure clause.

The COVID-19 pandemic, the declaration of a state of national emergency on 25 March 2020 (which was renewed every seven days thereafter), the various Alert Levels, and the lockdown can all safely be assumed to have been a force majeure. However, what does this mean for your construction contract? And what are the consequences for you?

First, you need to check the specific construction contract for each project as some may have special force majeure clauses which may prevail. If absent, express clauses on the extension of time, suspension, and variations will apply. This may require the parties to act in a proactive manner to save the project in these unusual times.

Extension of time

Clauses 10.3.1(a) and (f) of the NZS 3910:2013 terms provides the only arguable basis for a contractor to apply for an extension of time for COVID-19. 10.3.1.(a) could result from a variation while clause 10.3.1.(f) “circumstances not reasonably foreseeable… at the time of tendering” could cover the current pandemic.

However, contractors who tendered during or after the critical chronological times of COVID-19 may not be covered. Any extension of time request needs to be made within 20 working days from the time the circumstances arise (unless special conditions state otherwise).

There could be multiple extension of time applications by the contractor as the situation unfolds and the contractor does not need to have quantified the exact time when making the application. Given the degree of uncertainty for all parties, this may be understandable.

Suspension

Standard clause 6.7.1 in the NZS 3910:2013 terms requires a Principal (or engineer) to suspend “the whole or part of the Contract Works” where it “becomes necessary.” One would assume that the lockdown at Alert Level 4 would have made it “necessary” to suspend construction works, but the term “necessary” is not otherwise defined in the NZS 3910 terms and may therefore leave some ambiguity. Alert Level 3 and lower stages could create more uncertainty.

Despite being case-specific, it would seem that most projects can recommence from Alert Level 3 which would mean that contractors would not have powers to cancel or suspend portions of the contract works under clause 6.7.4 (for cases involving suspensions for three months or more).

Variations

A suspension may be treated as a variation. Furthermore, clause 5.11.10 states that if after the tender, the Government passes a law which increases “the Cost to the Contractor” this should be “treated as a Variation.”

The state of national emergency and Alert Level 4 lockdown can fall squarely under this clause. Contractors should be aware that Variation claims need to be made within one month of becoming aware of the situation.

Parties are free to enter variations and make amendments to their construction contracts at any time, and good communication is critical during this time.

Doctrine of frustration

There is also an alternative view that the common law doctrine of frustration could have some applicability.

COVID-19 and the lockdown(s) were not foreseeable by any parties that signed a construction contract before January 2020 (any contracts after this date would be challenged), and therefore a party could argue that the effects have frustrated, or prevented one’s ability to perform.

However, it is insufficient to argue that performance will be merely delayed, or that costs have increased. It requires one to prove that a party can no longer perform.

Parties must have tried to do everything possible to meet their contractual obligations but be prevented from doing so due to the frustrating event. This is a high standard.

If successful, the law of frustration could suspend any contractual obligations. One must be careful with this doctrine as it could also be construed as an unjustified repudiation of the contract.

There are of course many complicated issues, and a drop to Level 2 does not simply result in “business as usual” as the aftermath of the lockdown unfolds.

Who will bear the costs? As foreshadowed, it seems that if the contractor takes proactive action, it would largely be the principal.

Given most insurance policies exclude pandemics, the cost of construction would have increased dramatically for the principal, which would result in further complications to funding the project.

It is important that parties remain mindful of their rights and obligations, while taking reasonable and pragmatic steps so that the parties’ relationships do not quickly deteriorate into traditional entrenched positions. Alternatively, parties may elect to adopt a more holistic partnership approach in order to complete desperately needed projects.

Construction is one of Aotearoa’s largest GDP contributors. We are in unparalleled times, and it is highly probable that there will be more economic turmoil and insolvency.

In such unprecedented circumstances, it is not so simple to keep everybody rowing the waka in the same direction, with laser-like precision. The allocation of risk and blame is an uncertain science and problematic.

Determining what is fair and reasonable in this sort of environment will not be simple.

For project outcomes to remain successful, parties will need to have learned some of the lessons history teaches us, be pragmatic and agile, and try to find solutions that work for all stakeholders.

If you have any construction, employment or litigation queries, please feel free to contact Tina Hwang or Marcus Beveridge at Queen City Law.

We have taken care to ensure that the information given is accurate; however, it is intended for general guidance only and should not be relied upon in individual cases. Professional advice should be always be sought before any decision or action is taken.