On 30 January 2020, the World Health Organisation declared the coronavirus (scientifically labelled 2019-nCoV) a Public Health Emergency of International Concern. The future trajectory and full impact of the outbreak remain uncertain, however, it has already impacted the manufacture and export of goods and materials from affected countries.

This article will discuss coronavirus in the context of the Australian construction industry, focusing on whether it may qualify as force majeure under contracts for the supply of goods or materials intended to be sourced from affected countries.

As you read below, note that the common law doctrine of frustration and contractual extension of time regimes should be considered if a party is prevented or delayed from performing its obligations. These aspects will be explored in future articles.

Coronavirus and the Australian Construction Industry

At present, the Australian workforce remains relatively unaffected by coronavirus, however, the impacts of coronavirus on the Australian construction industry are already being felt. Delays to the supply of goods and materials from affected countries, including as a result of impacts on manufacturing (particularly with factory closures in China extending beyond the Lunar New Year break), travel restrictions and delays at borders and checkpoints (including quarantines), have all had implications for the local industry.

Almost 20% of Australia’s total imports are sourced from China, including over $10b worth of machinery, reactors and boilers and another $2.5b worth of articles of iron and steel. Of particular relevance to the construction industry, machinery and equipment, joinery and façade materials and structural steel are all heavily sourced from China. It has been estimated that 20% of the total construction costs on high rise residential projects are sourced, directly or indirectly, from China.[1]

In this context, Australian suppliers of goods or materials intended to be sourced from affected countries may be considering what relief they are entitled to under their contracts.

What is force majeure?

Force majeure is a common means by which parties to a contract exclude liability for failures to perform obligations due to events beyond their control.

It is a creature of contract rather than statute or the common law, so its application and scope will depend upon the drafting of the specific contract, nevertheless, some broad themes are common:

  • the concept of “force majeure” is defined: it may include any event beyond the control (or reasonable control) of the affected party. However, it is common to define the concept by exhaustively listing all qualifying events;
  • the affected party must not have caused or contributed to the force majeure event and must take all possible or reasonable steps to overcome or mitigate its effects;
  • the force majeure event must prevent the performance of the affected party’s obligations; and
  • if the above conditions are satisfied, the affected party’s liability to perform its obligations will be suspended for the duration of the event.

It is relatively common for force majeure clauses to include acts of god and natural disaster. It is also not unknown for force majeure regimes to specifically include infectious disease outbreaks, epidemic or pandemic or quarantines, embargoes and other similar governmental action.

Could the coronavirus qualify as an event of force majeure?

Whether coronavirus and its effects (including governmental responses) will qualify as an event of force majeure will depend upon the drafting of the specific contract.

There is potential for it to apply in a range of circumstances, particularly where force majeure is defined in broad terms to mean any event beyond the affected party’s control, or where disease or governmental action such as quarantines or restrictions affecting the supply chain are specifically listed. It is also arguable coronavirus could be captured by broader concepts such as act of god or natural disaster.

However, in many cases the hurdle for suppliers is likely to be demonstrating that the coronavirus and its effects actually prevent performance and that they have taken the required steps to overcome or mitigate any performance failure. Case law suggests the courts will not interpret a force majeure clause to relieve a supplier from its obligations merely due to the unavailability of the relevant goods or materials from its intended third-party supplier. Rather, it will need to demonstrate that it could not fulfil its contract by another source of supply.[2] Kiefel J held in Hyundai Merchant Marine Co Ltd v Dartbrook Coal (Sales) Pty Ltd[3] that “impracticability of performance is not generally recognised as a ground of discharge of a contracting party’s obligations.” The fact that a contract has become less profitable or even uneconomical will not necessarily entitle the supplier to relief.

While the position will depend upon the drafting and the specific circumstances of each contract (including lead times), suppliers whose ability to meet their contractual obligations has been hindered by the unavailability of goods or materials from their intended third party supplier in a coronavirus affected country should carefully assess their other options. They might not be entitled to relief for force majeure unless:

  • the contract specifies that the relevant goods or materials are to be sourced from that particular third party supplier;
  • the contract specifies that the relevant goods or materials are to be sourced from a particular region, and those goods or materials cannot be sourced from any supplier in that region; or
  • there is no other available source of supply anywhere else.[4]

Takeaway

If the performance of a supplier’s contractual obligations is hindered by coronavirus or its effects, it may be entitled to claim relief for force majeure. The drafting of the applicable regime will determine the extent of the supplier’s entitlement and the steps it must take to overcome or mitigate its failure to perform.

Before relying upon a force majeure clause, suppliers should carefully consider what alternative sources of supply are available within the required timeframes and whether they are truly prevented from delivering on their contractual commitments by the unavailability of goods or materials from countries affected by coronavirus.

In drafting contracts for future supply, given the ongoing uncertainty around the trajectory of the coronavirus outbreak, it is prudent to consider issues including whether the coronavirus and its effects will be an event of force majeure, the extent of relief to which the parties are entitled, the level of commercial impracticality the supplier will be required to suffer and how any volume shortfalls will be allocated between existing customers.

If you would like advice on your existing contracts or assistance drafting a regime ensuring the desired balance, Morrissey Law + Advisory is available to assist.


[1] Michael Bleby, ‘Construction supply chains at risk from coronavirus’ (online, 11 February 2020) Financial Review URL: https://www.afr.com/property/commercial/construction-supply-chains-at-risk-from-coronavirus-20200210-p53zaw
[2] See PJ van der Zijden Wildhandel NV v Tucker & Cross Ltd [1975] 2 Lloyd’s Rep 240; Hoecheong Products Co Ltd v Cargill Hong Kong Ltd [1995] 1 WLR 404; Hyundai Merchant Marine Co. Ltd v Dartbrook Coal (Sales) Pty Ltd (2006) 236 ALR 115; and Yara Nipro Pty Ltd v Interfert Australia Pty Ltd [2009] QSC 314.
[3] (2006) 236 ALR 115 at 130.
[4] See European Bank Ltd v Citibank Ltd [2004] NSWCA 76; Yara Nipro Pty Ltd v Interfert Australia Pty Ltd [2009] QSC 314.

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.