15 March, 2020
Back to homepage

COVID-19 Outbreak: Construction projects

The COVID-19 outbreak is sure to give rise to issues between Employers and Contractors regarding construction contracts. Construction projects could be affected in several ways, such as (i) delay caused by disruption to public services e.g. delay in issuing permits or approving drawings; (ii) delay caused by temporary suspension of work on site e.g. workers being asked to self-quarantine; or (iii) a lack of construction worker numbers in Serbia as a result of quarantine imposed by Serbian Government or travel bans imposed by other countries (e.g. Chinese government).

The main issue here is the applicability of force majeure clauses in construction contracts, and who should bear the risk of the resulting loss and delay?

 

Applicability of force majeure clauses in construction contracts

Coronavirus COVID-19 is already affecting engineering and project contracts that rely on labor, services and goods from affected regions. Many international and national construction contracts contain force majeure clauses to give relief in these circumstances.

Force majeure is described as an unforeseeable event beyond the control of any of the parties to the contract, the effect of which is to release the parties from performing their remaining obligations under the contract.

If agreed, force majeure clauses allow a party to suspend the performance of contractual obligations when circumstances arise that are beyond their control. However, since the contracts vary, the operation of the force majeure clause may differ in each case. Having that in mind, specific legal advice should be sought.

 

FIDIC contracts

Force majeure is defined in the FIDIC contracts. Force majeure clauses are almost identical under the Red, Yellow, Silver and Gold forms of contract, so this is applicable to all of them.

For example, Sub-Clause 19.1 (Definition of Force Majeure) of the Red Book states that:

In this Clause, “Force Majeure” means an exceptional event or circumstance:

(a) which is beyond a Party’s control,

(b) which such Party could not reasonably have provided against before entering into the Contract,

(c) which, having arisen, such Party could not reasonably have avoided overcome, and

(d) which is not substantially attributable to the other Party.

To qualify as a Force Majeure event, conditions (a) to (d) must be satisfied.

The clause, however, goes on to offer further definitions as follows:

Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, so long as conditions (a) to (d) above are satisfied:

(i) war, hostilities (whether war be declared or not), invasion, act of foreign enemies,

(ii) rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war,

(iii) riot, commotion, disorder, strike or lockout by persons other than the Contractor’s Personnel and other employees of the Contractor and Subcontractors,

(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, and

(v) natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.

Bear in mind that Sub-Clause 19.1 (Definition of Force Majeure) does not specify any remedy or entitlement in the case that a Force Majeure event occurs. In this respect we refer to Sub-Clause 19.4 (Consequences of Force Majeure), which states that:

If the Contractor is prevented from performing any of his obligations under the Contract by Force Majeure of which notice has been given under Sub-Clause 19.2 [Notice of Force Majeure], and suffers delay and/or incurs Cost by reason of such Force Majeure, the Contractor shall be entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to:

(a) an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion], and

(b) if the event or circumstance is of the kind described in sub-paragraphs (i) to (iv) of Sub-Clause 19.1 [Definition of Force Majeure] and, in the case of subparagraphs (ii) to (iv), occurs in the Country, payment of any such Cost.

Consequently, the Contractor would be entitled to an extension of time if the event delayed the completion date. He would also be entitled to additional payment, but only under certain circumstances.

What about coronavirus COVID-19? The current coronavirus COVID-19 situation is likely to be considered such an event. Moreover, if the government introduces any emergency powers, for example to shut down entire cities, this may also be a relevant event. Referring to the effects of the unexpected events and force majeure, there are three different scenarios: (i) partial inability to perform the contract; (ii) temporary inability to perform the contract; and (iii) definitive and total inability to perform the contract. The most appropriate measure given the COVID-19 may be to give notice of temporary inability to perform the contract due to COVID-19.

In this respect, the fact that the contractor finds the works more expensive or time consuming to complete (e.g. manpower issues, disruption to supply chains, etc.) due to COVID-19, will not, of itself, allow for force majeure to be invoked. The contractor would have to demonstrate that it was prevented from performing its obligations under the contract, or that it incurred additional costs directly as a result of COVID-19.

 

Contracts under negotiation

Force majeure type provisions have no bearing on contracts currently at the negotiation stage because COVID-19 is a known entity. One approach, therefore, would be to agree specific COVID-19 relief provisions, which could cover disruption to supply chains and labor resources or the impact emergency powers being introduced by the government.

How these provisions are drafted depends on where you are seated at the negotiating table – employer or contractor.

Where an employer’s only obligation is to pay, it will want:

  • a narrow definition of force majeure;
  • possibly the right to step-in, take action to remove or relieve the force majeure and back charge any cost to the contractor; and
  • the option to terminate after a certain period of time.

Contractors may prefer:

  • a broad definition of force majeure, covering specifics and also elements outside the control of either party;
  • suspension rights; and
  • restricted rights of termination as a result.

 

Legal vs. commercial?

While there is likely to be a legal debate concerning cases about interpretation of force majeure clauses, commercial considerations may take priority. If suppliers, subcontractors and contractors want to continue working together in the future, in circumstances where no party is at fault, understanding on both sides will be required.  If the shared objective is the resumption of performance as soon as possible, collaboration, rather than confrontational legal battles, may be the way forward.

 

Some of the steps to be taken

For businesses likely to be affected by coronavirus COVID-19, practical steps could include:

  • contact the counterparty as soon as possible in order to try to mitigate the unforeseen events.
  • review any obligations in contracts in light of coronavirus COVID-19;
  • insert wording referring to epidemics/pandemics into any new contracts;
  • prepare IT systems for potential additional remote-access usage and capacity enhancement.

 

For more information, please contact us via covid19@geciclaw.com