Under Stage 3 restrictions in Victoria, many domestic, industrial and commercial building and construction sites remain open. Provided workers are able to comply with the social distancing rules, builders and sub-contractors are not violating those restrictions. New home sites are easier places to enforce the social distancing rules. Domestic renovations and extensions are more difficult where the occupiers are in residence because of the effects of the Stage 3 shutdown restrictions. Extensions and renovations would be particularly difficult operations for builders, particularly with most school children effectively confined to home for the entirety of Term 2.
Irrespective of the reality of the effect of Stage 3 on the domestic building and construction industry, many builders and sub-contractors are simply refusing to continue operations due to understandable concerns about the spread of the virus; owners likewise, particularly in relation to extensions and renovations, are refusing access to builders due to similar concerns.
It is important for both domestic builders and owners to be aware of their rights and liabilities under Victorian domestic building contract laws during the current emergency. Simply assuming that COVID-19 gives an arbitrary excuse for builders to stop work or for owners to close sites and refuse to pay builders may well have expensive legal consequences. It is important for both to be aware of their rights and remedies in relation to the current shutdown.
Domestic builders and owners cannot act arbitrarily even in the current pandemic emergency. What are their respective contractual entitlements at this time of the Stage 3 shutdown?
Most domestic building contracts will not contain a pure force majeure clause. Such a clause operates as an express agreement in the domestic building contract as to how risk is to be allocated should part or total non-performance occur as a result of certain specified events like the Coronavirus crisis. The clause operates to exclude or excuse liability where one party’s failure to perform the domestic contract is caused by forces beyond that party’s control. Whether or not such a clause would include COVID-19 would depend upon the wording of the particular clause. What a domestic building contract does contain, however, are clauses relating to delays to the construction period, which entitle the domestic builder to claim an extension of time. Those clauses do not usually include wording relating to a pandemic but may include other causes which will assist with the impacts of such a pandemic, such as:
Lack of an ability to have building materials delivered to site;
Unavailability of labour, including sub-contract labour, necessary to carry out the project;
Unavailability of building materials necessary to carry out the project; or
Any other cause not reasonably foreseeable at the date of the formation of the domestic building contract.
If the builder experiences any one of the above grounds as a result of the COVID-19 crisis, the builder should closely follow the procedure set out in the contract by giving notice of the delay event as soon as it becomes apparent, together with all necessary supporting information, documents and evidence. It is not sufficient to simply stop work on the domestic building contract and assume that the owner will understand and appreciate why no further work is taking place. Likewise, it is not enough to simply write to the owner and justify the cessation of building work by reference to the particular clauses in the domestic building contract. It would be inappropriate for a builder to suspend the contract due to COVID-19. Suspension is a remedy for builders faced with delays or contract breaches for which the owner is responsible. It would be better to explain the reason for the delay: explain the lack of building materials, the inability to deliver the materials to site or the absence of critical sub-contractors.
The delay notification should be accompanied by a notification by the builder of an extension of time claim. If domestic building work is unable to be carried on, the builder should provide an estimate of time as to how long the delay will be, what extension of time will be needed, when work will be able to be resumed on site, and what the new completion date will be. Because the reason for the extension is beyond the control of either the builder or the owner, the builder will not be exposed to liquidated damages under the domestic building contract. The reason for the delay and the period of the extension must, however, be reasonable and must be supported by documentary evidence. If, for instance, the builder, electrician or plumber is ill because of the virus, a medical certificate to that effect should be provided. The builder will also need to take steps to see whether alternative sub-contractors could be hired, even at an additional cost to the builder.
If the delay event is approached in this way, the owner will not be able to claim that the builder has repudiated the contract or is in breach of the contract so that the owner could terminate the contract because of the delay. Indeed, such a termination would not be of great help to the owner. It is unlikely that there will be many builders anxious to take on additional work during the current Stage 3 shutdown. It would be better for the owner to work with the original builder and encourage the builder to resume work as quickly as possible.
In the absence of a force majeure clause, and where a period of delay is going to be lengthy or indefinite, both parties may need to look at the common law doctrine of frustration. This is a doctrine which will apply to domestic building contracts. It is not a specific clause like the force majeure clause. It adds additional rights by implication. Like force majeure, frustration occurs when a contractual obligation of either party is incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. There are three factors to bear in mind in relation to frustration:
Frustration will not occur when one of the parties to the contract is at fault. In other words, if an owner has not paid progress claims, he or she will not be able to rely upon the doctrine unless the builder consented, even where COVID-19 is affecting the performance of the contract;
The event which caused the frustration needs to be truly unforeseeable and uncontrollable for the parties; and
The parties must be prevented from fulfilling their obligations under the contract. It is not sufficient for the obligation to be merely more costly or difficult. In other words, if a builder could hire additional sub-contractors because the project subbies were ill as a result of the virus, but the new labour was more expensive, the builder could not claim that the contract was frustrated and would have to wear the additional expense. Likewise, if alternative building materials can be sourced to replace those originally ordered by the builder, the builder may have to wear the additional expense. It is unlawful for the builder to attempt to pass that expense onto the owner. Likewise, the additional expense is not a frustrating event within the rules set out above. The builder may well have cover for such increased costs for labour and materials under a contractor’s all risk policy wording.
It is important to understand the operative limitations and consequences of force majeure and frustration. Builders should consider carefully implementing either before temporarily delaying contractual obligations or terminating them altogether. The builder in those circumstances may well be left with enforceable contracts with subbies or with materials suppliers which continue in full force because those contracts lack the ability to be terminated because of COVID-19. The builders would then lack the ability to pay for those services. Likewise, builders and owners must understand that force majeure clauses will generally suspend rather than completely terminate a party’s obligations under a building contract. The underlying contract is still enforceable albeit for a different price or over a longer time frame. Frustration, on the other hand, ends a contract where the supervening or unanticipated event occurs, whether or not both parties wanted such a result. In the context of domestic building, such an abrupt holt always creates legally messy clean-up operations.
Owners, too, will not be immune from the effects of the pandemic. Many will have difficulty in paying progress claims where building operations under domestic building contracts do continue.
Where domestic builders face additional expenses as a result of the pandemic and where owners face liquidity problems paying progress claims, it is wise for early communication to take place. Builders will find it easer to negotiate extensions of time and so avoid claims for liquidated damages if documented explanations are provided to owners in a timely manner.
Likewise, owners would be well advised to be proactive with their builders and negotiate extended payments under the domestic building contract provided they still comply with Section 40 of the Domestic Building Contracts Act. In the current economic climate, the builder may be prepared to accept smaller but more frequent payments or payments over an extended period of time together with reasonable interest in order to assist an owner with cashflow difficulties. What should be avoided on both parts is unilateral action which could be interpreted as repudiation and which would enable the other party to regard the contract as breached, to walk away from the contract and to sue for resulting loss and damage. Likewise, builders and owners should act proactively rather than openly admitting that the reason why building sites had closed for weeks or why progress claims remained unpaid for weeks was due to financial difficulties caused by the Stage 3 shutdown. By that stage, the commercial relationship has already been damaged. The builder’s or the owner’s admissions could be used as a weapon regardless of COVID-19.
Builders and owners should also be aware that the path to obtaining damages for breach of a domestic building contract is long and tortuous in Victoria. Neither party may go immediately to VCAT in the vast bulk of circumstances. Domestic Building Dispute Resolution of Victoria is currently experiencing exceptional delays with waiting periods in excess of three months between the lodgment of a claim and on-site conciliation conference. VCAT is also not conducting face-to-face hearings but via telephone or Zoom, which will not commence until mid-May 2020. In the light of that reality, builders and owners would be well advised to identify COVID-19 problems and negotiate ways around the pandemic’s effects. Both may have more options than are immediately apparent: bankruptcy rules have been relaxed, the main banks are offering relief to borrowers and retail/residential renters may be able to reduce or defray their rentals.
If any of our clients require further information in relation to this article, they are requested to contact Michael Pickering. Mr Pickering is not only the Managing Principal of De Marco Lawyers but is also a chartered building professional, qualified building designer, former registered builder and certified insurance professional.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from De Marco Lawyers and other relevant experts.