COVID-19 Strategies for the Construction Industry

Outmaneuvering the ripple effects of Covid-19

April 27, 2020

COVID-19 Strategies for the Construction Industry

By Gunaletchumi Alagan

Project owners and contractors are beginning to face significant challenges due to Covid-19 pandemic. In this article we will look at strategies to handle the impacts of Covid-19 on construction projects in order to minimize potential claims and disputes.

1. DELAYS AND EXTENSION OF TIME

How COVID-19 may delay a project?

reduction or unavailability of manpower (medical reasons or restrictions imposed by government;
interruption of operations of local authorities related to authorizations and required permits;
closure or restriction of access to construction sites;
interruption of supply chains; and
travel bans

An employer may be required to grant extensions of time to a contractor or a contractor may be required to pay damages to an employer for late completion of works.

Construction contracts generally stipulate circumstances that cause delay and on whom the obligation lies. Where delays arise from circumstances caused by COVID-19, in addition to clauses addressing pandemics or diseases (if any), parties should take into consideration the following:

amendments of law(preventive measures to combat COVID-19);
delays caused by public authorities;
delay in possession or access to the construction site;
force majeure;
suspension of works;
price escalation clauses; or
variations to the contract or the scope of works.

Factors to be considered in respect of request for an extension of time:

definitions of delay events in the contract;
whether the right to an extension of time is subject to compliance with formalities under the contract or law;
notification requirements (including time requirement of supporting documentation);
availability and quality of records to evidence the impact and cause of delay;
overriding concurrent delays(e.g. an unrelated default that started to delay the project prior to the occurrence of the force majeure event);
requirement of notice to third parties (e.g. lenders, subcontractors, etc); and
duty to mitigate delays.

2. FORCE MEJEURE

What is a force majeure clause?

A force majeure clause excuses a party from a contractual obligation following an unexpected event beyond its control in specified circumstances.

The effect of a force majeure clause depends on its wording, including excusing the affected party from performing the contract in whole or in part; it may give rise to the contractor’s right to an extension of time, to suspend works or otherwise alter the contract based on the impact suffered on project works.

Is Covid-19 a force majeure event?

Force majeure clauses will generally apply one of the following approaches in defining the type of event which may, depending on its impact, relieve a party from contractual liability:

Occurrence of specific events

For example war, terrorism, earthquakes, acts of government, or epidemics. Where the term epidemic or pandemic, has been used, that will evidently cover Covid-19.

An act of government deemed occurred where a government body has imposed travel restrictions, quarantines, or trade embargoes or has closed buildings or borders.

Where no relevant event is specifically stipulated, it is a question of interpretation of the clause whether the parties intended such an event to be covered.

Setting out broad criteria

Provision of contract refers to events or circumstances “beyond the parties’ reasonable control”. As to whether this amounts to issues arising from Covid-19 is a question of interpretation and facts.

Parties are required to show that their non-performance, or late performance, was beyond their control and could not have been prevented or mitigated.

The phrase “force majeure” itself is used

Where this term itself is used, its meaning will be a matter of contractual interpretation.

What other factors must be shown?

A party seeking to rely on a force majeure clause must also demonstrate that:

the force majeure event was the cause of the inability to perform or delayed performance;
their non-performance was due to circumstances beyond their control; and
there were no reasonable steps that they could have taken to avoid or mitigate the event or its consequences.

Consequently, where a party anticipates falling into difficulty with meeting its obligations, for example due to labour shortages or issues with the supply of materials, it is crucial to explore whether alternatives, such as alternative sources of labour or materials, are reasonably available – including at higher cost, unless this involves breaching existing contracts.

What is the procedure for relying on the clause?

The procedural requirements under the contract has to be complied, such as the requirement to give notice of its intention to rely on the clause to the other party within particular time frame. Some clauses may also require an express obligation to mitigate.

What is the effect of relying on the clause?

The usual remedy if a force majeure clause is invoked is for one or more of the parties to be excused from its obligations and/or liability under the contract, without any damages being payable. Force majeure clauses also sometimes provide for extension of time, suspension of time, or termination in the event of continued delay or non-performance. A right of termination could be commercially important, as it may provide leverage to renegotiate contractual terms.

What if there is no force majeure clause?

If there is no force majeure clause, an affected party will have to look to other provisions of the contract. If the contract does not provide any such routes, it may in certain circumstances be possible to rely on the doctrine of frustration of contract.

Careful consideration is to be given to the following issues:

whether and to what extent the force majeure event, is affecting a project (eg while it may affect the availability of the workforce, it does not necessarily have an impact on the trade of goods and availability of materials);
whether it is unforeseeable (commonly ascertained with reference to the dates when the force majeure event discovered and when the parties entered into the contract) – caution is advised with tenders and contracts entered on or about when COVID-19 was declared a pandemic;
whether there are any overriding concurrent delays;
whether the parties could have overcome the consequences of the force majeure event;
under what circumstances the contractor may recover costs consequential from the force majeure, in addition to the extension of time; and
Explore alternative means of performing, reducing delay, or minimising any loss to the other party. This may require considering alternative suppliers, or alternative methods of delivery, even if at higher cost.
Serve any notices as required under the contract, as soon as possible and in compliance with the notice provisions.
whether other contractual variation may result from the application of the force majeure clause, including the potential termination or suspension of the contract.
Do not attempt to rely on increased costs to excuse non‑performance or delay, as this will not usually be adequate.
Keep a documentary record, predominantly of why performance was impossible, hindered or delayed as the case may be; the steps taken to find alternatives and mitigate loss; and the service of any notices.

3. DOCTRINE OF FRUSTRATION

This depends on the terms of the contract and relevant circumstances of the case. The frustrating event must have severe consequences and there must be a “radical” change where it causes further performance to become something substantially different to what was contracted.

There must be a supervening event that is not the fault of either party and it is not sufficient if the event makes it more expensive or onerous or impracticable to perform the contract.

4. CONCLUSION

Contracting parties must ensure that all relevant requirements under the contract is complied with, this includes not limited to issuing of notice, ascertaining and documenting the beginning and end dates of the force majeure or other impeding event.

It is crucial to carefully analyze any notices issued and to substantiate with contemporaneous records any ongoing impact of a force majeure event (e.g. attempts to contact suppliers or to employ workers).

For further enquiries email us at info@sandoshanandan.com

Outmaneuvering the ripple effects of Covid-19

COVID-19 Strategies for the Construction Industry

By Gunaletchumi Alagan

Project owners and contractors are beginning to face significant challenges due to Covid-19 pandemic. In this article we will look at strategies to handle the impacts of Covid-19 on construction projects in order to minimize potential claims and disputes.

1. DELAYS AND EXTENSION OF TIME

How COVID-19 may delay a project?

reduction or unavailability of manpower (medical reasons or restrictions imposed by government;

interruption of operations of local authorities related to authorizations and required permits;

closure or restriction of access to construction sites;

interruption of supply chains; and

travel bans

An employer may be required to grant extensions of time to a contractor or a contractor may be required to pay damages to an employer for late completion of works.

Construction contracts generally stipulate circumstances that cause delay and on whom the obligation lies. Where delays arise from circumstances caused by COVID-19, in addition to clauses addressing pandemics or diseases (if any), parties should take into consideration the following:

amendments of law(preventive measures to combat COVID-19);

delays caused by public authorities;

delay in possession or access to the construction site;

force majeure;

suspension of works;

price escalation clauses; or

variations to the contract or the scope of works.

Factors to be considered in respect of request for an extension of time:

definitions of delay events in the contract;

whether the right to an extension of time is subject to compliance with formalities under the contract or law;

notification requirements (including time requirement of supporting documentation);

availability and quality of records to evidence the impact and cause of delay;

overriding concurrent delays(e.g. an unrelated default that started to delay the project prior to the occurrence of the force majeure event);

requirement of notice to third parties (e.g. lenders, subcontractors, etc); and

duty to mitigate delays.

2. FORCE MEJEURE

What is a force majeure clause?

A force majeure clause excuses a party from a contractual obligation following an unexpected event beyond its control in specified circumstances.

Is Covid-19 a force majeure event?

Force majeure clauses will generally apply one of the following approaches in defining the type of event which may, depending on its impact, relieve a party from contractual liability:

Occurrence of specific events

For example war, terrorism, earthquakes, acts of government, or epidemics. Where the term epidemic or pandemic, has been used, that will evidently cover Covid-19.

An act of government deemed occurred where a government body has imposed travel restrictions, quarantines, or trade embargoes or has closed buildings or borders.

Where no relevant event is specifically stipulated, it is a question of interpretation of the clause whether the parties intended such an event to be covered.

Setting out broad criteria

Provision of contract refers to events or circumstances “beyond the parties’ reasonable control”. As to whether this amounts to issues arising from Covid-19 is a question of interpretation and facts.

Parties are required to show that their non-performance, or late performance, was beyond their control and could not have been prevented or mitigated.

The phrase “force majeure” itself is used

Where this term itself is used, its meaning will be a matter of contractual interpretation.

What other factors must be shown?

A party seeking to rely on a force majeure clause must also demonstrate that:

the force majeure event was the cause of the inability to perform or delayed performance;

their non-performance was due to circumstances beyond their control; and

there were no reasonable steps that they could have taken to avoid or mitigate the event or its consequences.

What is the procedure for relying on the clause?

The procedural requirements under the contract has to be complied, such as the requirement to give notice of its intention to rely on the clause to the other party within particular time frame. Some clauses may also require an express obligation to mitigate.

What is the effect of relying on the clause?

What if there is no force majeure clause?

If there is no force majeure clause, an affected party will have to look to other provisions of the contract. If the contract does not provide any such routes, it may in certain circumstances be possible to rely on the doctrine of frustration of contract.

Careful consideration is to be given to the following issues:

whether and to what extent the force majeure event, is affecting a project (eg while it may affect the availability of the workforce, it does not necessarily have an impact on the trade of goods and availability of materials);

whether it is unforeseeable (commonly ascertained with reference to the dates when the force majeure event discovered and when the parties entered into the contract) – caution is advised with tenders and contracts entered on or about when COVID-19 was declared a pandemic;

whether there are any overriding concurrent delays;

whether the parties could have overcome the consequences of the force majeure event;

under what circumstances the contractor may recover costs consequential from the force majeure, in addition to the extension of time; and

Explore alternative means of performing, reducing delay, or minimising any loss to the other party. This may require considering alternative suppliers, or alternative methods of delivery, even if at higher cost.

Serve any notices as required under the contract, as soon as possible and in compliance with the notice provisions.

whether other contractual variation may result from the application of the force majeure clause, including the potential termination or suspension of the contract.

Do not attempt to rely on increased costs to excuse non‑performance or delay, as this will not usually be adequate.

Keep a documentary record, predominantly of why performance was impossible, hindered or delayed as the case may be; the steps taken to find alternatives and mitigate loss; and the service of any notices.

3. DOCTRINE OF FRUSTRATION

This depends on the terms of the contract and relevant circumstances of the case. The frustrating event must have severe consequences and there must be a “radical” change where it causes further performance to become something substantially different to what was contracted.

There must be a supervening event that is not the fault of either party and it is not sufficient if the event makes it more expensive or onerous or impracticable to perform the contract.

4. CONCLUSION

Contracting parties must ensure that all relevant requirements under the contract is complied with, this includes not limited to issuing of notice, ascertaining and documenting the beginning and end dates of the force majeure or other impeding event.

It is crucial to carefully analyze any notices issued and to substantiate with contemporaneous records any ongoing impact of a force majeure event (e.g. attempts to contact suppliers or to employ workers).

For further enquiries email us at info@sandoshanandan.com