Clifford Chance

Challenges of advancing COVID-19 supply chain delay and disruption claims under contractual force majeure provisions

Many construction projects operating under lump-sum contracts are experiencing severe cost escalations due to COVID-19 delays. With limited alternatives, contractors may seek to recover those costs under force majeure provisions.

The Singapore High Court (Appellate Division) has recently provided guidance on whether COVID-19 related events may constitute force majeure events. In Ser Kim Koi v GTMS Construction Pte Ltd & ors [2022] SGHC(A) 34, the court noted that "the essence of a force majeure event is a radical event that prevents the performance of the relevant obligation (and not merely making it more onerous), and which is due to circumstances beyond the parties’ control."¹

While the events giving rise to this case occurred well before the COVID-19 pandemic, the court articulated examples of factors that it considered could render the performance of contractual obligations beyond a party's control, including: "[…] the COVID-19 pandemic and the 'lock down' that followed over much of 2020 and 2021, the shortage of labour and materials due to the COVID-19 pandemic lock-downs, the prohibition of travel between countries and the ensuing disruption of supplies and manufacture of goods and material".²

However, in a notable contrast to the Singapore court's approach, in November 2022 in Acciona Industrial Australia Pty Ltd v Kwinana WTE Project Co Pty Ltd [2022] WASC 380 (Acciona v Kwinana), the WA Supreme Court took the view that it was inappropriate to categorise a COVID-19 event as being of itself as a force majeure event.

In Acciona v Kwinana, while the Court acknowledged that "it may well also be that the consequences and impacts of the COVID-19 pandemic do indeed provide for a range of claims under different clauses, in respect of evolving circumstances over different time periods",³ the Court held that a "force majeure" event is not of itself a term of any particular meaning.

Accordingly, the Australian courts are still likely to view force majeure clauses as creatures of contract and therefore apply standard principles of contractual interpretation, with no particular predisposition as to whether a COVID-19 event constitutes a force majeure event. As Solomon J noted, a force majeure clause "means what the EPC Contract says it means."⁴

The Australian Court's approach to force majeure claims

The Australian courts may take a strict procedural approach to force majeure claims, including in relation to notice requirements, and Solomon J further emphasised that for any relief sought the plaintiff must ensure that the rights asserted and claims advanced are clear.⁵ Merely seeking a declaration that COVID-19 is a force majeure event is not enough.⁶

Acciona v Kwinana involved a dispute over a force majeure clause in an EPC Contract between Acciona Industrial Australia Pty Ltd (Acciona), Kwinana WTE Project Co Pty Ltd (ProjectCo) and BTA Institutional Services Australia Ltd, to develop a large waste to energy project in Kwinana, Western Australia.

In October 2021, Acciona notified ProjectCo that several force majeure events had occurred, alleging that those events rendered it unable to comply with a material part of its obligations, giving rise to an option to terminate the EPC Contract. ProjectCo responded that (i) no force majeure event had occurred; (ii) the delays were caused by Acciona's own conduct; (iii) Acciona's failure to disclose the true cause of the delays constituted misleading and deceptive conduct, and (iv) ProjectCo was entitled to liquidated damages in excess of $27 million from Acciona.⁷

Acciona sought a declaration that COVID-19 fell within the definition of force majeure, on the basis that it constituted "[a] 'declared national emergency', 'blockade or embargo' and 'biological contamination'" under the EPC Contract. ProjectCo countered that the court should not grant such "hypothetical" relief and that this was a request for an "advisory opinion", and that in any event the facts did not meet the terms of the definition on their proper construction.

Solomon J reviewed the definition of force majeure event in the EPC Contract⁸ and explained that a two-limbed test needed to be satisfied to establish a force majeure event: first, the event itself must be a force majeure event such as a flood, a cyclone, or an industrial strike, and second, the relevant event must cause a party to be unable to comply with all or a material part of its obligations.⁹

Solomon J stated that Acciona was seeking the court's clarification as to "whether certain aspects of a definition have been met before it asserts its rights in a curial proceeding" which amounted to a request for an "advisory opinion" in relation to the first limb only.¹⁰

On that basis, Solomon J dismissed the case, holding that granting such relief was an inappropriate exercise of the court's jurisdiction for the following reasons:¹¹

• first, Acciona only sought a declaration as to whether certain events were force majeure events (based on the first limb) without asserting any right to related contractual relief in the form of time or money (based on the second limb);¹²
• second, the declaration was only pursued in relation to Acciona's termination right, and not any other right and such a declaration might not be appropriate for the circumstances prevailing when the termination right was exercised;¹³
• third, in many cases it would be "almost inevitable" that further proceedings seeking relief concerning the second limb would require revisiting the same factual matrix considered in the first limb proceedings;¹⁴ and
• fourth, the "hypothetical nature" of, (and ambiguity in), the declaration sought by Acciona for a right to terminate, lacked the necessary maturity for declaratory relief.¹⁵

This judgment illustrates some of the challenges Australian contractors may face when seeking to recover COVID-19 driven delay and disruption costs by advancing claims under contractual force majeure provisions. In particular, force majeure clauses will not always offer a remedy, so contractors and owners should pay close attention to the scope and operation of the contractual force majeure provisions when assessing COVID-19 driven delay and disruption costs. Looking forward, the Australian construction industry awaits how parties to large construction projects will address these challenges, and what additional strategies may be adopted where force majeure claims do not result in recovery of COVID-19 driven delay and disruption costs.

¹Ser Kim Koi v GTMS Construction Pte Ltd & ors [2022] SGHC(A) 34 at [77].
²Ibid [81].
³Acciona Industrial Australia Pty Ltd v Kwinana WTE Project Co Pty Ltd [2022] WASC 380 at [97].
⁴Ibid [7].
⁵Ibid [146].
⁶Ibid [138]-[159].
⁷Ibid [58], [80]-[81].
⁸Ibid [7], [20].
⁹Ibid [20], [27]-[28].
¹⁰Ibid [141].
¹¹Ibid [138]-[159] for Solomon J's considerations.
¹²Ibid [139]-[146].
¹³Ibid [147]-[153].
¹⁴Ibid [154]-[158].
¹⁵Ibid [159].