Construction sector mitigation measures in the face of COVID-19
Some construction companies are just weeks away from collapse – including private principal developers and contractors. As parties battle out what contractual relief looks like for the Alert Level 4 lockdown, it is encouraging to see a focus on mitigation measures. This focus spans across all levels: mitigation as an industry; collaborative mitigation steps by parties for projects; and the requirement on contractors to mitigate their loss. But what does mitigation look like in these extremely limiting circumstances?
The unparalleled Level 4 lockdown has affected all facets of New Zealand’s construction industry and every level of the construction hierarchy, with most projects now shut down as they are not classified as an “essential service”. From a legal perspective, arguments are being run on whether COVID-19 is a suspension, a variation, an extension of time or a force majeure. However, regardless of how COVID-19 should be legally classified, the same question remains – what can the industry do now to recover?
There is grave concern that the already distressed construction industry will become an economic wasteland under COVID-19 if the Level 4 lockdown continues well beyond the initial four-week period.
Paul Blair’s recommendation on behalf of Infrastructure New Zealand, and arguably on behalf of industry generally, is that the Government should adopt a sector specific COVID-19 alert system. The proposal is based on the assumption that appropriate health and safety measures can be put in place to protect workers and follows a similar approach to countries like Singapore. It seeks to strike a balance between protecting New Zealand from COVID-19 (a fundamental health and safety concern) and the country’s short and long term economic health and wellbeing (of which construction makes up 8%). We await with interest developments on this front.
We are sure most construction lawyers have been approached to identify the status of the Alert Level 4 shut down under construction contracts. However, the answer is not straightforward, and caution should be paid to statements of legal position that do not strike a balance and consider all angles.
There has been a strong industry and Government call to keep cash flowing. However, the ability of principals to take approaches that facilitate this, regardless of their contractual position, is very much dependant on their own balance sheet and access to cashflow where projects have come to a grinding holt.
Whatever the legal position, it has been encouraging to see some parties adopt collaborative approaches by seeking to understand cost impact for both parties and agree to address these once the picture becomes clearer.
A key concern across the board is that even once Alert Level 4 lifts, we will move back to Alert Level 4 if the virus continues to spread, and this could shut projects down again – or keep them closed down indefinitely. Principals and contractors need to be alive to this. We hope this will be addressed in the Government’s response to the proposed sector specific alert system.
Obligation of contractors to mitigate
A contractor or consultant wishing to recover for its loss caused by COVID-19 must take mitigation measures, regardless of how COVID-19 is legally defined. The principle of mitigation is wide-reaching. It is well-established that a party that suffers loss or damage must take reasonable steps to mitigate its loss or damage, and a party cannot recover damages for loss or damage which could have been mitigated.
But what does this look like? It is difficult to draw conclusive answers as to what mitigation steps are appropriate, and this will depend on the project and the parties. It is on the opposing party to prove the contractor has not mitigated its loss. It cannot rely on hindsight to show more effective steps could have been taken. This means, even if a contractor or a consultant could have acted prior to the Level 4 lockdown announcement to mitigate its own loss, it will not be a requirement if that consultant or contractor could not reasonably have known the lockdown would commence.
Some points for consideration:
- The principle of mitigation applies regardless of whether the contractor is entitled to an extension of time or a variation.
- Steps that contractors can take to mitigate are more limited in the present circumstances – this is not a typical variation and/or extension of time event where labour and materials can be reallocated to other projects.
- There are however relevant points:
(a) Did the contractor shut down the site in a manner that allows for speedy remobilisation, and did the principal facilitate this? The time allowed in notice given by Government before the Level 4 lockdown will be relevant to this point;
(b) What steps is the contractor taking during the lockdown to re-programme – have they considered how to re-programme to mitigate the delay impact? While difficult as the duration of Level 4 and whether it will restart is unknown, consideration of the programme will be essential;
(c) Can the programme accommodate a lift of Level 4 and then another lockdown – have contractors considered how this will impact on projects? Equally, have principals considered this? Neither party carries all the load in respect of mitigation;
(d) Has the contractor carefully considered the relevance of, and applied for, Government relief?
(e) Has the contractor considered what steps can be taken off site in addition to re-programming?
(f) Have the principal and contractor considered varying the contract to implement separable portions – to enable safer working environments and more effective programming in current circumstances?
(g) Has the contractor prepared a health and safety plan that can be readily mobilised should Level 4 lift?
(h) Have both parties considered whether the project is now, or could become, essential?
These points are not exhaustive and may not apply in all circumstances but are intended to encourage consideration of mitigation measures.
We await with interest the progress of Infrastructure New Zealand’s proposal of a sector specific alert system, and the ongoing consideration and definition of “essential services” (and what this will mean for the remobilisation and ultimate viability of construction projects and parties).
Janine Stewart is a partner and Katie Karpik a solicitor at MinterEllisonRuddWatts.