On a proper construction – Issue 3 (Coronavirus outbreak – The impact on Modular Construction)

17 March 2020

Modular Construction and the novel Coronavirus, COVID-19

The recent outbreak of the novel Coronavirus, COVID-19, (recently declared a pandemic by the World Health Organisation) has emerged as a significant risk for business both here in Australia and around the world. The situation is evolving rapidly. In terms of the construction industry we see particular impacts on projects involving a modular construction component as outlined below.

A modular construction philosophy involves prefabricating aspects of the built form in several self-supporting components (modules). The modules are usually constructed in fabrication yards or factories distant from the work site, often in a foreign jurisdiction, and then delivered to the main site for installation.

The Iron Ore and LNG Projects capex projects in WA usually adopt a modular approach because of the increased efficiencies (and decreased costs) associated with:

  1. Reducing the high cost, but lower productivity, of onsite labour (especially in remote locations in WA); and
  2. Being able to conduct preparatory site works concurrently with module fabrication.

More often than not the modules destined for sites in WA are being fabricated in the high risk countries for COVID-19 including China and the Republic of Korea.

The travel bans that have been implemented as part of the range of measures designed to contain COVID-19 in Australia have the potential to create issues for those projects depending on modular construction techniques because it is not just the modules that need to be moved. It is usual for project personnel to travel to the fabrication yards to ensure quality assurance or carry out pre-commissioning checks prior to transportation.

Our thoughts on how to address those risks for current and planned modular projects are set out below.

Force majeure

The obvious starting point is to consider whether COVID-19 triggers consideration of whether to seek relief from force majeure regimes.

Force majeure events may be broadly defined as events beyond the reasonable control of parties to the contract that affect or prevent the performance of contractual obligations or may be more narrowly defined by a limited list of specific events.

On 30 January 2020, the China Council for The Promotion of International Trade (CCPIT) announced that CCPIT would issue force majeure certificates in respect of COVID-19 for international contracts between Chinese and foreign entities. CCPIT has since commenced issuing these certificates and as of 14 February 2020, more than 1,600 force majeure certificates have been issued in an effort to protect companies from the effects of COVID-19.

However, the extent of contracting parties’ reliance on the certificates remains uncertain and depends on the context, clause interpretation and whether the certificate is recognised in the particular jurisdiction and/or your particular contract.

Force majeure clauses in construction contracts usually excuse the non-performance of contractual obligations upon the occurrence of certain supervening events. It is common for force majeure clauses to permit the suspension of works in uncertain periods of time.

There is no common law concept of force majeure in Australia so parties must look to their contracts to determine whether there is a force majeure regime and, if so, what it applies to.

Parties wishing to rely on their contractual force majeure regime will ideally (although unlikely) have a force majeure clause that deals specifically with events such as epidemics/pandemics, cross-border restrictions and governmental actions, although broader categories may also cover COVID-19.

The construction contract will also address the remedy (i.e. time and/or cost) where a force majeure event occurs. Continuation of a force majeure event after a certain period may also allow termination of the contract. However, the effectiveness of calling on the force majeure regime will, of course, depend on the interpretation of existing contractual terms. A close inspection of the language of the clause will usually be required to understand the impact it will have on the contracting parties.

Delay & suspension

Shortages in the availability of labour and resources may also cause delay to the progress of the fabrication of modules in distant fabrication yards. In turn that will have an impact on the fabricator’s ability to meet existing shipping schedules and, in turn, works on site.

Contract managers should review their extension of time and suspension regimes to see whether these sorts of delays can give rise to extension of time entitlements and, if so, that they are submitting the required notices in time.

Change in laws

The increasing number of COVID-19 cases globally has prompted the proposal of new laws aimed at containing the outbreak or the issue of orders by the executive arms of government.

Where these laws impact on project requirements, parties may seek to rely on existing clauses that allow variations to the contract sum (to account for the difference in costs incurred). The contract may require that the laws have come into effect after a certain period from the date of the contract and could not be reasonably anticipated prior to entering into the contract. A close inspection of the language in your contract will be required.

Termination

For convenience

Contracts may expressly give one or more parties the right to terminate the contract without providing reasons and at its discretion (providing an opportunity to exit a contract in tough economic times). However, this relies on clearly drafted rights and may be subject to limitations. Exercising the right to terminate for convenience is usually accompanied by compensation for, amongst others, any foregone profit on the balance of the project. This option should be used carefully.

By frustration

Contracts may also be terminated by frustration. Effectively, where an unforeseen event (that neither party has contributed to) has made performance of the contract substantially different or impossible. Frustration results in the relevant contract being automatically terminated and the parties obligations being discharged from the time of frustration (not ab initio (“from the beginning”)). Termination by frustration is a complicated situation. It is often the case that one party to the contract will assert the contract is frustrated while the other asserts that it has not. The situation is compounded in the modular context particularly if the modules are partially constructed or constructed but can’t be shipped. Questions that will likely arise are: What happens to partially built modules?Who owns the modules?How does the principal get them? If the relevant contract outlines what happens if it is terminated by frustration, the answer will be a matter of interpretation of the contract. If not, parties may wish to consider entering into a “fresh” agreement to deal with those issues specifically. Such agreements are often cast as “settlement” agreements but have a forward looking aspect to them so do need to be considered carefully.

What steps can you take to mitigate risk?

The current uncertain developments surrounding COVID-19 warrant practical and legal solutions in risk allocation of contracts for current and future projects. In doing so, parties may wish to consider:

Existing contracts

  1. Whether the above contractual mechanisms help to identify the proper risk allocation consequent upon COVID-19 impacts on your project; and
  2. Utilising alternative technological measures to mitigate the effects of COVID-19 (or any other similar outbreak) in current or future projects for quality assurance and coordination in project management. Simple solutions such as video conferencing can remove the need for much personnel travel. More advanced technologies such as 3D scanning of modules or virtual reality imaging might assist for pre-commissioning activities such as trial fit-ups or quality assurance inspections.

Future contracts

  1. Including bespoke warranties acknowledging that the price takes into consideration COVID-19 and recognises project specific measures the parties may adopt to mitigate risk;
  2. Carefully reviewing the force majeure regime and address COVID-19 specifically;
  3. Incorporating protective mechanisms against lengthy suspension periods and lock-in clauses in contracts for future projects;
  4. Minimising risk by including precise terms in contracts that address the delivery of modules and specify the consequences if delivery obligations are not met (e.g. contingency planning involving alternate delivery routes and prolongation costs); and
  5. The development of new solutions such as blockchain technologies for materials provenance quality assurance purposes.

If you would like assistance on current or upcoming projects, please contact the authors of this article or any member of the HWL Ebsworth Construction team.

This article was written by David Ulbrick, Partner, Michael Harris, Associate and Vania Fung, Solicitor.

Kate Morrow

Special Counsel | Perth

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