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Navigating the NSW Construction Shut Down – Immediate Considerations for Principals, Head Contractors, Subcontractors and Suppliers

The ongoing wave of the Delta strain of the COVID-19 virus has led to the urgent shutdown of construction sites across the Greater Sydney, Blue Mountains, Central Coast, Wollongong and Shellharbour Areas (Shut Down Area) from Monday 19 July until 30 July 2021.

From midnight tonight, staff that live in the local government areas of Fairfield, Canterbury-Bankstown and Liverpool will not be able to leave those areas for work.

This impacts all aspects of a project and all project participants – from principals, head contractors, subcontractors, suppliers, consultants, financiers and all employees.

The actions project participants take over the next 24 – 48 hours will have a significant bearing on the success or failure of their projects and may be the difference between surviving and going under.

Hamilton Locke works across the projects spectrum. We are on hand to assist project participants navigate the myriad of immediate issues in respect of construction projects which are impacted. This includes demobilisation and suspension, claims, employment issues as well as project finance and insolvency.

Key takeaways

  • From 12.01am on Monday July 19, all construction sites and construction work in the Shut Down Area must “pause”.
  • Arrangements should be immediately made between now and then to ensure construction sites in the Shut Down Area are made safe and secure, staff are informed and deliveries are redirected or stopped.
  • Directors and management of impacted businesses should consider seeking advice about how to manage their workforce. Options may include redeployment to alternate roles, paid or unpaid leave, negotiating reduced hours or stand down directions.  
  • Companies need to consider whether the restrictions and shutdown measures have any impact under their current finance arrangements, including disclosure obligations or potential breaches under their debt facilities. 
  • Directors who are concerned about the solvency of their business should consider options available to them including safe harbour. Safe harbour affords directors protection and time to develop a plan to see them through distress. At the very least, directors need to be monitoring closely their cash flow position and in particular payment terms for creditors.

Urgent issues on Site

From 12.01am on Monday July 19, all construction sites and construction work must cease.

Only emergency works are permitted (including works to secure the site). We are seeking clarity from the NSW Government as to what constitutes emergency works, however, we anticipate this will not be clearly defined and hence it will be left to site personnel to work out what is meant by “emergency works” and what work must be ‘paused’.

We are available to provide guidance and help you make this call. We anticipate a pragmatic and proportionate response will be adopted by the NSW Government in ensuring compliance. For example, works to ensure the avoidance of serious damage to the site or to mitigate environmental risks will clearly need to be accommodated.

It is clear however that all maintenance, cleaning and repair work must cease which will impact all construction projects - from civil and social infrastructure, energy and industrial projects through to residential and commercial buildings.

Arrangements should therefore be immediately made to:

  • ensure construction sites are made safe and secure;
  • deliveries are cancelled (or materials diverted and stored);
  • staff are notified – the sooner the better given larger sites will be more difficult to close quickly. The NSW Government has indicated it will take a pragmatic approach on Monday where sites are in the process of shutting down.

One immediate step we are advising all project participants who have such ‘emergency’ works beyond Sunday 18 July, is to have a clear email to all on site personnel which details the scope of emergency or demobilisation works and its duration. This will enable a clear response when managing regulatory authorities attending the site to verify compliance.

Contractual notices and claims

Immediate consideration needs to be given to contractual provisions relating to:

  • rights to extensions of time, delay and disruption;
  • suspension and demobilisation costs;
  • force majeure (which will depend on the terms of the agreement); and
  • developing protocols for communications during the shut down including for the remobilisation of workers on site on 31 July.

Understanding your position and strategy in relation to these matters now is critical. Notice and time bars will necessitate the urgent documentation of claims (both upstream and downstream). For this reason, in considering issues such as standing down of employees, it will be critical to ensure a skeletal contract administration capability during the shut down – as claims will continue during this period.

How these issues are managed at a project level is critical – as decisions need to be made and communicated to project teams ASAP. Many of the same issues will impact long lead supply items, increased storage costs, freight delays and delays in supply arrangements.

Employment issues

There are a myriad of potential employment issues arising from the shut down.

If a business cannot operate, or certain employee positions cannot be maintained, strategies include negotiating with an employee for a period of consensual leave (whether paid or unpaid) and standing down employees without pay. At the more extreme level, redundancies might be considered, where maintaining ongoing positions is not feasible for the business.

Some employees may be able to undertake useful work at home, potentially at reduced hours (eg contract administration as noted above). In this case, employees should be consulted to agree to reduced hours for a specific period. Care must be taken to ensure compliance with provisions of applicable modern awards, enterprise agreements and contracts of employment.

If an employee is able to work from home, an employer must not direct the employee to work away from home. From Wednesday, 21 July 2021, employers can be fined up to $10,000 for a breach of this requirement.

Subject to the caveats below, an employee can be stood down by an employer without pay where there is no useful work for the employee to do, and the stoppage of work is due to circumstances outside the employer’s control. 

It is very likely that most circumstances relating to the stoppage of work in the Shut Down Area would be due to circumstances outside the employer’s control – that is, as a result of the updated NSW health order. In some additional cases, for example, where supply chains are materially disrupted for projects outside the Shut Down Area, stand down of affected employees may also be an option.

Before standing the employee down, the employer must assess whether there is other useful work that the employee can do during the proposed standdown period. If there is no such work, the employee can be stood down without pay for the relevant period.

However, if an employee is covered by an enterprise agreement, the standdown rules may be different under that instrument, and there may also be terms in contracts of employment that limit the employer’s ability to stand down.

Any stand down notice should be done in writing, with the reasons for the decision clearly articulated.

Common employment queries

 

Question Response

Is your business restricted from operating in part or in full by the restrictions in the NSW Public Health Orders?

This might include stoppages due to interruptions in the supply chain where an employee is unable to continue their work (but will generally not include a mere downturn in business).

Can the employee undertake some or all of their duties from home? If so, provide directions to do so and consider what resources and support can be provided to the employee to undertake those duties.

 

Can the employee undertake different meaningful work within the scope of their skill and experience?  If so, consideration should be given to whether this is a workable option. Care must be taken around compliance with awards, enterprise agreements, and contracts of employment, including consultation.

 

Consider negotiating reduced hours for the extent of the lockdown period. If agreed, this should be recorded in writing.

 

Consider negotiating with employees for a period of paid or unpaid leave (or a combination of both).

 

Consider whether you can legally stand down employees without pay (see below).

 

Where relevant and appropriate, urgent consultation with unions should be considered in the process of implementing any of the above options.

Are any of your employees unable to attend work due to the restrictions in the NSW Public Health Orders? (This currently impacts employees residing in the Fairfield, Canterbury-Bankstown and Liverpool LGAs).

 

Note employees residing in the Greater Sydney Region (including Blue Mountains, Central Coast, Wollongong and Shellharbour) can still travel for work.

 

For employees who work more than 50 kms from the Greater Sydney Area, they must be tested for Covid-19 every 7 days.

Can they undertake some or all of their duties from home or within a location within their specific LGA?  If so, provide directions to do so. Be cognisant of any additional WHS risks that may arise from the changed work location.

 

Consider negotiating with employees for a period of paid or unpaid leave (or a combination of both).

Is there no useful work for an employee to do as a result of NSW Public Health Orders (including other useful work that may not be within their usual duties?)

Consider negotiating with employees for a period of paid or unpaid leave (or a combination of both).

 

If the above cannot be achieved, consider standing down the employee for the period in which there is no useful work to be done.

 

If an employee is covered by an enterprise agreement, check if there are specific stand down provisions that apply. You should also check any written employment agreements to see if any provisions impact the ability to stand down. Otherwise, the Fair Work Act stand down provisions apply.

 

Stand down directions should be made in writing, and the reasons for the decision to stand down should be clearly articulated.

Project finance and other debt facilities

Participants in the construction industry with any financing arrangements need to consider whether the restrictions and shutdown measures trigger disclosure obligations and potential breaches under their debt facilities. 

It is a standard term of a debt facility that cessation of business, even on a temporary basis, is a breach of an undertaking and sometimes even an immediate event of default. Force majeure and material adverse effect provisions need to also be considered. Additionally, there are normally positive obligations on a borrower to promptly and proactively notify the financier of actual but also potential breaches.

While it is unlikely that a financier will enforce solely by reasons of the shutdown, some financiers may use the current situations as a justification to stop funding progress payments or pull the availability of revolving credit lines. Breaches of any undertaking are likely to also entitle a financier to charge default interest on the entire facility. The rate of default interest, particularly in non-bank lender facilities, can be high and lead to large additional amounts accruing on the debt. 

It is therefore important for borrowers to proactively engage with financiers and, if possible, seek waivers of potential current breaches and any breaches that are foreseeable over the forthcoming period in order to provide comfort should a prolonged lockdown lead to further defaults. Potential breaches of financial covenant, undertakings around compliance with budgets and project milestones need to be carefully monitored as such breaches may be considered more serious by financiers.

Safe harbour and solvency concerns

In light of the ongoing restrictions, particularly in relation to the stop work orders, directors and businesses need to be conscious of their solvency position and need to monitor their cash flow position, creditors and debtors. 

Businesses that are experiencing distress, whether as a result of the construction shutdown or otherwise, should consider entering (or re-entering) the formal safe harbour regime as prescribed by section 588GA of the Corporations Act 2001 (Cth). Importantly, unlike 2020, there is no moratorium on insolvent trading liability for directors, so directors concerned about solvency should actively consider the choices available to them.

From a high level, the safe harbour regime affords directors protection from insolvent trading when they proactively engage a qualified professional to help develop a course of action or plan developed to achieve a better outcome. The ‘better outcome’ test is assessed against the immediate administration or liquidation of the company. Further details on the safe harbour process can be found here.

Way forward

This is a difficult time for the industry – construction is the lifeblood of the economy and this weighs heavily on the state government in taking this major step in the interests of mitigating the long term impact of the pandemic.

Hamilton Locke has expertise across the projects spectrum. We are actively advising project participants on the immediate impact of today’s announcement and assisting them to take steps today to ensure they survive for tomorrow and in the long term.

We will continue to provide further updates on many of the issues raised by the shutdown in the coming days.

Stay safe.


For more information please contact Veno Panicker (Construction & Infrastructure), James Simpson (Workplace and Employment) Matt Baumgurtel (New Energy), Nick Edwards (Insolvency and Restructuring) and Zina Edwards (Finance)