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HG Alert: Principals face flood of claims as Queensland’s big wet affects building and construction - 25 Jan 2011

Record-breaking floods in Queensland are having a domino effect on our local construction, mining and insurance industries, washing away profits and hampering progress. Principals need to be prepared for a potential raft of claims as the aftermath prompts doubts and delays for construction in affected areas.

Principals and contractors on sites damaged by flooding need to first consider whether their construction contract specifically provides for flooding as an 'excepted risk'. If not, then contractors will be responsible for rectifying the loss or damage at their own cost. However, the contract may declare that flooding is an event of force majeure, and free the parties from certain obligations.

HopgoodGanim's recommendations

Parties to construction contracts for sites affected by flooding should urgently examine their contractual arrangement and consider the following:

  • Does the contract have a force majeure clause outlining the consequences of floods or delays?
    A contractor seeking to rely on such a clause bears the onus of proving its application and adhering to any notice requirements.
  • If floods are not specified as a force majeure event, how are extensions for delay granted?
    Contractors must claim an extension of time within the timeframes required, and principals should carefully monitor the completion date as adjusted.
  • Can the contractor claim the costs of delay?
    Standard form contracts usually only entitle contractors to claim costs for delays caused by the principal, 'excepted risks', or risks provided for elsewhere in the contract.
  • Upon recommencing work, can the contractor claim costs for reinstatement of the works?
    Standard form contracts generally require the contractor to reinstate the works at its own expense, unless the cause of damage is specified as an 'excepted risk' or a risk otherwise provided for by the parties.
  • Which party is responsible for insuring the works under contract?
    That party should closely examine whether the policy genuinely excludes the type of flooding responsible for any damage.

The renewed significance of force majeure clauses

Frustration

When a contract has become impossible to perform, or radically different to what the parties contemplated, there are grounds that the contract has been frustrated. However, it is important to note that the test for frustration is applied strictly, and delay does not usually render performance as 'radically different'.

On the other hand, force majeure clauses may prove to be a lifeboat for parties looking to avoid or allocate liability for damage on flood-stricken sites. According to The Australian Financial Review, mining companies such as Peabody Energy, Rio Tinto and BHP Billiton have all declared force majeure to break supply contracts in the wake of the floods. The typical requirements are that the event was not reasonably foreseeable and was completely beyond the parties' control. If triggered, such clauses can establish the event of force majeure as a neutral risk borne by both parties.

What constitutes a force majeure event?

Force majeure is not a common law concept. Consequently, whether principals find themselves caught by force majeure will depend on how the clause has been negotiated in each contract. An exhaustive list of predicaments may be set out, ranging from invasion and national strikes to the kind of natural disaster that has affected much of the State. Comprehensive or exclusive clauses are advantageous, as they provide certainty for both parties. If provided for, contractors can still be deemed responsible for reinstating any damage. This saves the principal from having to recontract for the construction of the damaged section of the works. Instead, reconstruction can be treated as a variation to the existing contract.

Inclusive definitions that are non-exhaustive and leave scope for a wide range of events will no doubt be drawn on by contractors seeking non-performance. Contractors may view their obligations as 'discounted' by an event of force majeure. However, such clauses should not be considered a right to non-performance, but rather protection against failure to perform an obligation as long as certain circumstances exist. Alternatively, the consequences of the force majeure event can expand on suspension and include return of payments, cancellation or termination rights.

Seeking extensions of time

The absence of clauses related to flooding in a contract may not render a contractor helpless. Most standard form contracts provide for inclement weather as a valid or 'qualifying' cause of delay. Before claiming an extension of time, a builder must have exhausted the allowances under Section 32 of the Domestic Building Contracts Act 2000 (Qld) for wet days.

Procedure must be adhered to strictly. For example, the standard form Construct contract AS2124-1992 requires that a claim be made within 28 days of the delay occurring. A principal maintains its right to liquidated damages should the reviewed date for practical completion not be met.

Insuring the contract works

Generally, either the contractor or principal is responsible for insuring the contract works. A policy may or may not provide coverage for flooding, and insurance companies will be quick to rely on the relevant exclusion clause. However, there may be scope to dispute a rejected claim where there is evidence that the flooding is not within the conditions defined in the exclusion clause.

Flooding from a 'natural watercourse' is generally excluded, whereas localised or flash flooding caused by rainfall may be covered. Liability may be excluded where riverine flooding is the sole cause of damage, but a claim may be upheld where it was a contributing factor. Careful inspection of policy detail, in particular the definition of 'flooding', is essential for any insured party.

Entitlement to delay costs

The Queensland floods will inevitably affect the earnings of contractors and principals alike. However, as a general rule, contractors are only entitled to prolongation costs (costs caused by the delay) where they stem from a breach by the principal.

Standard form contracts AS2124-1992 (Construct) and AS4300-1995 (Design and Construct) provide that the delay must be caused by the principal for the contractor to recover costs. However, Clause 36 allows parties to agree on additional events where the contractor can recover delay costs.

Similarly, standard form contracts AS4000-1997 (Construct), AS4902-2000 (Design and Construct) and AS4910-2002 (Supply - with installation) provide in Clause 34.9 that a contractor may claim for delay damages only if the extension of time results from a 'compensable cause', namely the fault of the principal.

For more information about the effect of Queensland's floods on construction contracts, please contact HopgoodGanim's Construction, Infrastructure and Major Projects practice.