Melbourne earthquake: how it should have been handled in an Australian standard building contract – real estate and construction

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Australia: Melbourne earthquake: how it should have been handled in an Australian standard construction contract

October 06, 2021

Vincent Young

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On September 22, 2021, a 5.9-magnitude earthquake struck Victoria. No doubt this has led many construction managers in Melbourne to review their contracts to assess who bears the risk of any damage.

Typically, contractors assume the risk of all losses or damages that occur in the course of the works in the course of their management of the site except for some specific risks. During contract negotiations, both parties seek to prove their contracts in the future by anticipating emerging events and allocating event risks, and these risks should include earthquake and flood risks.

force majeure clause

An example of such a provision is the force majeure clause. These clauses provide the parties with contractual relief for loss, damages, claims, delays, etc. arising from unforeseen events including environmental events, sometimes called “act of God”, which may be specified under the contract. These clauses often favor the contractor, as the performing party under the construction contract.

Floods and earthquakes are often included in the definition of the force majeure clause. In Commissioner of Railroads (WA) v. Stewart (1936) 56 CLR 520, Latham CJ assessed whether heavy rainfall constituted a flood, and thus an ‘act of God’, for the purposes of claiming negligence for the improper construction of a series of railroad embankments. Latham CJ stressed the importance of defining ‘God’s work’ for the purpose of clarifying whether contractual protection should be provided to a party under a contract.

Importantly, the unmodified AS4902-2000 does not contain a force majeure clause. Therefore, a party seeking relief in unforeseen events should insist on the inclusion of a force majeure clause. Otherwise, unlike frustration which is a matter of law, the parties will not have the right to protection against claims for loss or damage in connection with such unforeseen events.

excluded risks

Another way of dealing with risk in AS4902-2000 is through the ‘Excluded Risks’ listed in Clause 14.3 which defines those risks that are assumed by the manager. The Contractor is not obligated to include business insurance cover, under Clause 16 Alternative 1, loss or damage arising from the excluded risks. We have drawn an excerpt from clause 14.3 below:

14.3 Risks excluded

The excluded risks causing loss or damage, for which the principal is liable, are:

any act of negligence or omission by the Supervisor, Director, his advisors, agents, employees or other contractors (not employed by the Contractor); any risks specifically excluded elsewhere in the contract; war, conquest, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, rebellion, military or usurped force, martial law or expropriation by order of any government or public authority; ionizing radiation or contamination by radioactivity from any nuclear fuel or from any nuclear waste from nuclear fuel combustion not caused by the contractor, subcontractors, employees or agents of either; use or occupation of any part of WUC by Principal, its advisors, agents, or other contractors (not employed by the Contractor); Defects in this part of the WUC design, including the initial design submitted by the Director, are not guaranteed under Clause 2.

In accordance with Clause 14.2 of AS4902-2000, it will be the contractor’s responsibility to correct the loss or damage caused by the excluded risks. However, such correction shall be a significant discrepancy and in pricing this difference is required of the supervisor to assess the relative responsibility of the parties to correct the loss or damage accordingly.

Importantly, AS4902-2000 does not include earthquakes under the excluded hazard category. Managers and contractors should be aware of the role of the excluded risk clause in AS4902-2000 and ensure that insurance brokers of both parties review these clauses to ensure that they are adequately covered by their insurance.

Other considerations

The Brisbane floods in 2011 were the last significant event of this kind in Australia. Remember, when negotiating the next contract, don’t forget about floods and earthquakes because they happen. Adding a force majeure clause or amending Clause 14.3 of AS4902 will change the risk profile and the consequences may not become apparent to the Parties until a rare environmental event, such as the Melbourne earthquake or Brisbane floods.

It is also important to consider the frequency of these types of events. It appears that such “exotic” environmental disasters are becoming increasingly common and this trend is expected to continue due to climate change across global weather systems.

The content of this article is intended to provide a general guide to the topic. It is recommended to take the advice of specialists in such circumstances.

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