As the total number of confirmed cases of the Coronavirus disease (‘COVID-19’) continue to grow, it is clear that the pandemic is having a significant impact on the construction industry.
In our recent blog COVID-19 and force majeure… are you feeling frustrated yet?, we discussed how the impact of COVID-19 might be managed as a force majeure under the contract or by the common law doctrine of frustration.
If relief from force majeure or by frustration is not available to contracting parties, a standstill agreement might be an appropriate response to COVID-19.
What is a standstill agreement?
A standstill agreement is an agreement between the parties to an existing contract to suspend the obligations under the contract for a particular time or until a particular event occurs.
A standstill agreement can be a beneficial option to both Principals and Contractors to deal with any resourcing shortages or health and safety concerns amidst the COVID-19 pandemic, while enabling the recommencement of obligations by the same parties once resources have stabilised and the effects of COVID-19 have lifted.
What are the risks?
There are risks involved in a party proposing negotiation of a standstill arrangement, or in responding to a request to renegotiate. Requesting a standstill arrangement may be considered repudiation of the contract if one party is indicating an intention not to be bound by the existing contract.
Further, a standstill agreement must be properly documented to ensure it is enforceable.
It is also important to avoid using economic pressure to force a renegotiation as this may affect the enforceability of any agreement reached.
What aspects should be considered?
When thinking about a standstill agreement, these aspects need to be considered:
- Should design and supply of long lead items obligations be suspended or allowed to continue to mitigate delay when the parties recommence obligations? What payment or other obligations are required in that regard?
- Who bears the costs of demobilisation and how are those costs determined? Similarly, when the parties recommence, who bears the costs of remobilisation and how are those costs determined?
- To what extent will the Principal be relieved from its obligation to provide site access?
- What is the arrangement for any price adjustment of the contract sum on recommencement? Consider that prices may have changed over the significant predicted timeframe of COVID-19 including due to extreme movements in exchange rates. Further, what is the effect of the contract sum adjustment on general liability caps and liquidated damages caps as these are typically a percentage of the contract sum? Will the caps be calculated based on the contract sum before or after any price adjustment?
- Who has care of the works risk and responsibility for site security? While usually the Contractor bears this risk before completion, the Contractor may be unable to manage that risk in the contemplated circumstances. Should the risk revert back to the Principal for the standstill period?
- Who is responsible for continuing to maintain insurances and what payment is required? How does this align with any changes in the care of the works risk allocation?
- What happens with current claims (particularly extension of time claims) that are not yet determined or may be time barred if a standstill is in force?
- What is the mechanism to extend the Date for Completion on recommencement?
- What if the delay continues for an extended period of time? Consider if a sunset date should apply to allow the parties to terminate if the delay continues beyond an acceptable time for the parties to maintain the standstill agreement.
- What are the arrangements for the return of security? If there is no site performance, consider whether the Principal returns some or all security then held and the Contractor reissues the relevant security as a precondition to recommencement.
- What happens to unfixed plant and materials? Consider how unfixed plant and materials will be packaged, labelled, insured, stored and maintained during the standstill period.
- Consider the impact of the standstill period on any supplier or subcontractor contracts and warranties and what effect that will have on achieving completion on recommencement.
- Should any current dispute processes be suspended during the standstill period?
- What happens if a party becomes insolvent during the standstill period? Consider the implications for the standstill agreement and the contract.
As the uncertainty of the COVID-19 pandemic continues, a well drafted standstill agreement may be a practical commercial strategy in the best interest of both parties and provide greater certainty and progress once the effects of COVID-19 lift.
If you have any further questions about how COVID-19 may affect your project or to discuss a potential standstill agreement, please contact a member of our national Construction team to obtain legal advice.
Simon Ralton | Partner | +61 2 8248 3426 | [email protected]
Adam Wallwork | Partner | +61 2 8248 5825 | [email protected]
Luke Aiken | Partner | +61 2 9020 5706 | [email protected]
Acknowledgements – Lucy Aylward | Lawyer