Construction Contracts and COVID-19: Managing Risks During the Pandemic

In recent months, nearly every aspect of society has been affected by the COVID-19 pandemic. The construction industry has not been spared. Globally, businesses and economies have been brought to their knees and, in an ultra-globalized world, a tangled web of risks and challenges for employers, contractors and other stakeholders in the construction industry have emerged.

COVID-19 has not, broadly speaking, rendered construction projects impossible to complete, but it has drastically slowed them down and caused delay and disruption, even if only because supply chains have been severely disrupted. Depending on the region, many projects have even been stopped, usually however, with the intention to resume work at a later date.

In this article, we explore key considerations for contractors and employers alike, potential remedies under force majeure provisions (both in terms of national legislation and/or standard form contracts), and other factors to bear in mind as per the 1999 FIDIC Red Book, being one of the most prominently used standard forms of construction contract globally.

Key Considerations for Contractors and Employers

There are numerous ways in which COVID-19 has impacted, or still may impact, construction projects. At a high level, these impacts may be felt as delayed completion of projects and/or an increase in the cost of completing them. Some considerations are:

Global supply chain constraints

Almost 90% of goods sold in global trade are transported by sea.[1] With many countries in the world still labouring under total or partial lockdowns, including of their harbours, supply chains have been severely impacted. With closed borders, curtailed travel, quarantines, crew member limitations and other restrictions, the movement of goods and workers needed to keep critical global supply chains moving are being constrained. Additionally, the World Economic Forum has warned that global supply chains will continue to feel these effects, in one way or another, for quite some time, even after the pandemic has ended.[2]

Delays in lead-in times and increased costs of procuring critical resources for construction projects (which were expected to remain readily and constantly available when contracts were concluded in a pre-pandemic world) are consequently having a direct impact on both the contract value and the time required to complete a project.

Impact of social distancing

The requirement of social distancing could impact not just the number of workers that a contractor is permitted to have on site at any given time, but also the number of workers that the contractor or its subcontractors are allowed to transport to and from the site.  Increased health and safety checks are also expected to have a significant impact on both the time and cost involved in completing a project.

Curfews and other restrictive measures

Apart from so-called hard lockdown, which brought with it unavoidable delays, many countries, including South Africa, Egypt, Saudi Arabia and Spain, also imposed night-time curfews to curb the spread of the virus after the lifting or partial lifting of lockdown restrictions.[3] These curfews prevent contractors from endeavouring to accelerate progress at night to make up for lost time during lockdown periods. Additional night-time protocols and measures (such as the UAE National Sterilisation Programme which was implemented until the end of June 2020) may also lead to delayed progress of work and/or acceleration attempts.

Mitigating Risks

In light of these risks, it is important that both employers and contractors consider their respective positions under current and future construction projects and mitigate the risks that may arise in law and/or under the construction contract (and, in the case of contractors, in terms of third-party contracts entered into with subcontractors and suppliers).

We examine, below, some of the remedies that may be available to contractors and employers involved in international construction projects.

Force Majeure and Supervening Impossibility in Terms of National Legislation and Common Law

The principle of force majeure is a widely recognised legal concept and a common provision in contracts across the world.

Broadly speaking, force majeure refers to an unforeseeable event or circumstance beyond a party’s control which prevents (or renders impossible) the completion of its obligations under the contract. The extent of the relief available to an affected party depends on a number of factors, including the provisions of the relevant contract and overarching legal principles in the particular jurisdiction.

Force majeure is statutorily recognized in countries such as Argentina (Articles 512 and 513 of the Civil Code of Argentina), the People’s Republic of China (Article 180 of the PRC General Rules of the Civil Law and Article 117 of the PRC Contract Law) and the UAE  Article 273 of the UAE Civil Code). The effect of these statutory provisions, including the scope of their application due to COVID-19, would depend on the wording of the provision itself, whether the provision would trump contractual provisions providing otherwise, and ancillary legislative provisions, where applicable.[4]

In some civil law countries, such as the United States, and many common law countries, including the United Kingdom and South Africa, force majeure is not a codified principle. In fact, in the case of Sucden Middle-East v Yagci Denizcilik ve Ticaret Ltd Sirketi (The ‘Muammer Yagci’) – [2020] 1 Lloyd’s rep. 107, the UK court noted that the phrase “force majeure” is simply a phrase used in contracts to label a list that includes a mixture of matters. The list informs the meaning of the phrase, and not the other way around.

In common law jurisdictions, vis major and casus fortuitus are both established principles with many commonalities to the civil law principle of force majeure. Casus fortuitus applies in instances where an “overwhelming” or “superior” force, beyond the resistance and control of the parties, has an influence on their obligations and liabilities under a contract. Instances of vis major occur when the source of the event is caused by a natural phenomenon or an “act of God”, such as a fire, storm or earthquake. This can be distinguished from instances of casus fortuitus, where the disturbance is caused by human intervention or causation in instances such as war, arson, riots and sickness.

In most of these common law jurisdictions, if a party is prevented from performing its contractual obligations by irresistible force (vis major) or unforeseeable accident (casus fortuitus), it is excused from performance and discharged from liability. The force or accident must have been objectively unforeseeable with reasonable foresight, and unavoidable with reasonable care. Performance of the obligations should furthermore have been possible at the conclusion of the contract, and must have subsequently became objectively impossible through no fault of the parties (i.e. as a result of a supervening impossibility). The fulfilment of the objectivity criterion requires a consequence of general application (to all circumstances), rather than one attaching to a specific occurrence or event.

In addition to local laws and common law principles, many standard form construction contracts also regulate force majeure in varying detail. Below, we briefly explore the position in terms of the 1999 FIDIC Red Book.

Force Majeure in Terms of Fidic[5]

Sub-Clause 19.1 [Definition of Force Majeure] of the 1999 FIDIC Red Book (being one of the most prominently used FIDIC forms of contract globally) details the general requirements for an event to be considered one of force majeure.

The event must comply with the following requirements:

  1. It must be an exceptional event or circumstance,
  2. that is beyond a party’s control;
  3. which such party could not reasonably have provided against before entering into the contract;
  4. which, having arisen, such party could not reasonably have avoided or overcome; and
  5. which is not substantially attributable to either party.

It can be argued that the COVID-19 pandemic satisfies these requirements and therefore may be considered a force majeure event for projects where the contract was entered into prior to the declaration of a pandemic. If the affected party was already aware of COVID-19 and its specific potential impact on the project at the time of contract conclusion, and had that party reasonably been able to take steps to provide against this impact before contracting, then the party’s ability to invoke force majeure may be restricted.

Where a force majeure event has been identified, Sub-Clauses 19.2 [Notice of Force Majeure] and 19.4 [Consequences of Force Majeure] stipulate that the party invoking these provisions must have been prevented, despite the adoption of mitigation measures, from performing its contractual obligations (by, for example, being unable to complete works due to the country/region being locked down) and, if applicable, must issue to the other party a notice of force majeure, detailing the event or circumstance that has arisen and the obligations that have or will be prevented as a result.

It is, however, important to note that force majeure under FIDIC would generally not extend to an employer’s payment obligations, which must continue to be met, notwithstanding the force majeure event. Should an employer therefore fail to comply with its payment obligations during this period, it may risk the contractor asserting its right to suspend or potentially terminate the contract in terms of Clause 16 [Suspension and Termination by Contractor].

Where the contractor is the affected party due to a force majeure event, its relief may (subject to compliance with the relevant provisions in Sub-Clauses 8.4 [Extension of Time for Completion] and 20.1 [Contractor’s Claims]) include an extension of time for delay where completion of the works is or will be delayed,[6] but the contractor would not per se be entitled to additional costs. In the latter regard, Sub-Clause 19.4 entitles contractors to only claim costs (which, notably, do not include reasonable profits) if the circumstances listed in (ii) – (iv) of Sub-Clause 19.1[7] occur in the country of the project.

It remains to be seen whether contractors intend claiming for additional costs in accordance with Sub-Clause 19.4 due to COVID-19 related events. In this regard, Sub-Clause 19.4 (b) interestingly states that contractors would be entitled to claim costs (without reasonable profits) if the force majeure event is “of the kind” described in (ii) – (iv) of Sub-Clause 19.1. This potentially leaves the door open for additional cost claims based on events linked to COVID-19 on the grounds of such events being “of the kind” listed in (ii) – (iv) of Sub-Clause 19.1, rather than being an event pertinently listed therein. Some events linked to COVID-19 may be comparable to the events of “disorder” and/or “lockout”, both listed in (ii) of Sub-Clause 19.1. Even if contractors can prove their entitlement to costs in these circumstances, it is noteworthy that the events must have occurred “in the country” of the project, thereby prohibiting any potential arguments linking claims for costs to global supply chain constraints.

A prolonged period of force majeure may, in certain circumstances, also render the contract capable of being terminated. This right is conferred under Sub-Clause 19.6 [Optional Termination, Payment and Release] where all or a substantial part of the works is prevented for a continuous period of 84 days or for multiple periods totalling 140 days.

Contractors’ Further Entitlement to Extensions of Time

In terms of the 1999 FIDIC Red Book, contractors are furthermore entitled to claim extensions of time in accordance with Sub-Clause 8.4(d) in cases of unforeseeable shortages of personnel or “Goods” (or Employer-Supplied Materials, if any) caused by “epidemic” or “governmental actions”. Personnel fearing for their own safety and therefore staying away from site may fall under the former category (i.e. shortage of personnel caused by epidemic), while governmental restrictions regarding the number of personnel allowed on site may fall under the latter category (i.e. shortage of personnel caused by governmental actions). The latter scenario might also be covered by Sub-Clause 8.5 [Delays Caused by Authorities] and/or qualify as changes in legislation, as expanded on below.

Delays caused by circumstances under Sub-Clauses 8.4(d) and/or 8.5 will only entitle the contractor to extension of time claims, unless (and then only to the extent that) the contractor can establish an entitlement to financial compensation elsewhere under the contract or at law.

Potential Change in the Laws of the Country

A further relevant  consideration is whether a particular change in public health requirements during declared States of Disaster constitutes a change in the “Laws of the Country” (including the introduction of new laws and the repeal or amendment of existing laws) as provided for under Sub-Clause 13.7 [Adjustments for Changes in Legislation]. Temporary laws, by-laws, regulations or decrees that are issued across the world in different jurisdictions are likely to be treated as a change in laws in terms of FIDIC.[8]

Due to the broad definition of “Laws” in FIDIC contracts, legislative changes even at local level, such as municipal orders, may be regarded as a change to laws. If it is established that actions by local authorities or governments are indeed changes in “Laws of the Country”, then the contractor may seek an extension of time and/or additional costs under Sub-Clause 13.7. This is on account  of the contractor’s obligation to comply with applicable laws as set out under Sub-Clause 1.13 [Compliance with Laws].

Changes in laws that impose specific COVID-19 health and safety measures on construction activities could include requirements relating to social distancing, limitations on number of personnel allowed on site, supply of face masks and sanitizers, alternative arrangements for transportation, facilities, and working hours for staff and labour, to name but a few. In terms of Sub-Clause 13.7, these changes may entitle the contractor to an extension of time and additional costs.

As a closing remark, and as with all contractors’ claims, it is of critical importance that where claims for extensions of time and/or additional costs are raised, whether as pro-active or retrospective claims, especially on behalf of contractors, consideration must be given to strict compliance with time bar provisions.

Conclusion

COVID-19 has undoubtedly had a considerable impact on construction projects locally and internationally. As the outbreak and its impact continues to develop, contractors and employers will need to take steps to address their positions and mitigate their risks in the short, medium and long term.

In the long term, it is expected that parties will cautiously consider their respective positions as regulated by the contract, while lessons learnt from the pandemic will no doubt continue to inform procurement processes around the world. In the short and medium term, however, the dispute resolution arena and, perhaps now more than ever, the Dispute Adjudication Board mechanism, can be utilised to  decipher and resolve issues and disputes brought to the industry by the COVID-19 pandemic.

Reference List

[1] https://www.weforum.org/agenda/2020/05/global-supply-chains-are-under-imminent-threat-from-the-covid-19-pandemic/

[2] https://www.weforum.org/agenda/2020/05/this-is-what-global-supply-chains-will-look-like-after-covid-19/

[3] Other countries which imposed, or are still imposing, night-time curfews for extended periods include Italy, Greece, Serbia, Sri Lanka, Italy, Myanmar, India, Turkey, and Austria.

[4] In the UAE, for example, Article 273 of the UAE Civil Code is to be read with Articles 249 (which regulates the effect of “exceptional circumstances of a public nature”), 287 (providing for exemption to make good losses resulting from force majeure events) and 893 and 894 (regulating circumstances under which a muqawala contract [being a contract to make a thing or perform a task such as works] can be terminated due to prevention or incapability of performance).

[5] In this article, where reference is made to a specific Clause or Sub-Clause, and unless stated otherwise, such reference is to a Clause or Sub-Clause in the 1999 Red Book.

[6] In accordance with the entitlement in Sub-Clause 19.4 (a).

[7] These events include (ii) rebellion, terrorism, revolution, insurrection, military or usurped power; (iii) riot, commotion, disorder, strike or lockout by persons other than the contractor’s personnel and other employees of the contractor and subcontractor, (iv) munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as may be attributable to the contractor’s use of such munitions, explosives, radiation or radio-activity.

[8] “Laws” are defined in the 1999 Red Book as “all national (or state) legislation, statutes, ordinances and other laws, and regulations and by-laws of any legally constituted public authority”. In the 2017 FIDIC Red Book, this definition has been extended even further to include “all national (or state or provincial) legislation, statutes, acts, decrees, rules, ordinances, orders, treaties, international law and other laws, and regulations and by-laws of any legally constituted public authority”.

Wihan Meintjes
Associate | Commercial Attorney
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