How Will Construction Contracts be Affected by the COVID-19
News    ·   20-03-2020
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AUTHOR: Marisa Vella; Rya Gatt; Amy Busuttil

Now that the World Health Organization has declared the COVID-19 to be a pandemic, and Governments are implementing stringent measures to prevent the spread of the COVID-19, those involved in the construction industry may be concerned as to what the COVID-19 will mean for ongoing and future construction projects.

As the situation surrounding the COVID-19 advances daily, one can only anticipate what the impact of the COVID-19  will be on construction projects. Looking at the measures imposed by Governments so far, such as lockdowns, quarantines, social distancing, increased inspections of shipments arriving at ports and other like measures, one can foresee that there may be interferences with supply chains, lack of personnel, delays, closure of sites, prolonged suspensions and perhaps even the eventual termination of contracts. This makes it important for parties involved in a construction contract to understand what the COVID-19 means in relation to their respective rights and obligations, and this must be done by assessing the terms of the contract governing the construction project.

In this note, we will briefly discuss the rights and obligations of Employers and Contractors vis-à-vis situations which may arise as a result of the coronavirus. Given that a number of local construction contracts are based on the FIDIC Red Book 1999, the relevant clauses therefrom will be used for reference purposes, however, it is crucial for parties to refer to their own contracts as the terms set out therein may differ to what is being referred to herein.

Delays and Force Majeure

Construction projects are dependent on a Contractor’s strict adherence to project timelines, with the consequence of severe delay penalties being imposed for failure to do so. If, as a result of the COVID-19 , supply chains are inhibited due to lockdowns in countries of manufacture and personnel are prevented from attending sites due to social-distancing and quarantine measures, delays in the construction works are likely to occur. The allocation of risk for such delays will depend on the contractual arrangements in place between the parties.

One possible contractual arrangement is a force majeure clause. Generally, a force majeure clause caters for situations beyond the parties’ control and which render the performance of obligations impossible. If the contract does contain such a clause, the first issue would be determining whether the coronavirus falls within the definition of force majeure.

For instance, the FIDIC Red book 1999 defines “Force Majeure” as:

(i)       an event or circumstance which is exceptional;

(ii)      which is beyond a party’s control;

(iii)     which such party could not reasonably have provided against before entering into the contract;

(iv)     which could not reasonably be avoided or overcome once it had arisen, and

(v)      which is not substantially the fault of the other party.

In terms of FIDIC, all of the above would need to be satisfied for a successful claim of force majeure, and therefore, parties must examine these carefully in view of the COVID-19  and the particular circumstances surrounding the parties.

Notice of Force Majeure

Most contracts containing force majeure clauses require the affected party to give notice of the event within a specified time frame and setting out certain details.

For example, FIDIC provides that, the party affected by the force majeure should give notice within 14 days of becoming aware thereof, specifying the event or circumstance and the obligations which the contractor is, or anticipates he will be, prevented from performing. If such a notice is not sent, then the affected Party will not be entitled to the benefits brought about by a force majeure event.

Consequences of Force Majeure

The consequences of a force majeure event will depend on the wording of the force majeure clause. Generally, the affected party may be:

(i)                 excused from failing to perform its obligations,

(ii)                entitled to an extension of time, and

(iii)               freed from delay penalties which would have otherwise been incurred.

For example, under FIDIC contracts the following consequences will arise:

  1. The affected party will be excused from performing any obligations which it is prevented from performing as a result of the coronavirus for as long as the COVID-19 prevents it from doing so;
  2. The employer will have to grant the contractor an extension of time if the contractor is delayed in executing the works as a result of the COVID-19 and this in turn delays the completion of the Works;
  3. Any delay penalties which would have been applicable will not be incurred by the contractor;
  4. The contractor will, however, have a duty to use all reasonable endeavours to minimise delays and to notify the employer when it ceases to be affected by the COVID-19 .
  5. Force majeure will not excuse the employer from making payments to the contractor;
  6. Optional termination: If the COVID-19 prevents progress of substantially all the Works for a continuous period of 84 days, or for multiple periods totalling more than 140 days, then either party will be entitled to give a notice of termination, which will be effective within 7 days, and the engineer will then issue the performance certificate, which will include the amounts payable to the contractor.

Delays and Government Action/ Legislation

Delays may also be caused by local Government action and the enactment of emergency legislation, for example, the Government may, by way of legislation or order, place Malta on a total lockdown, and place all persons on mandatory quarantine save for essential trips to supermarkets, pharmacies, etc. This may not only bring about delays in the works, but also closure of sites, prolonged suspension and termination.  Again, one would need to refer to the terms of their contract to assess who will bear responsibility for such a situation.

For example, FIDIC grants Contractors an extension of time where:

  1. the Contractor has diligently followed the procedures laid down by local authorities,
  2. the local authorities delay or disrupt the Contractor’s work, and
  3. the delay or disruption was Unforeseeable (at date of tender submission).

Moreover, FIDIC grants the parties the possibility to discharge themselves from further performance of their obligations (by sending a notice) where events or circumstances which are outside the control of the parties occur (including, but not limited to, Force Majeure) and which make it impossible or unlawful for either or both parties to fulfil its or their contractual obligations. Such discharge will be without prejudice to the rights of either party in respect of any previous breach of the contract. The sums payable by the employer to the contractor will be the same as in the case of termination due to Force Majeure.

Therefore, if for example, the Government orders a nation-wide mandatory quarantine and lockdown and this makes it impossible and even unlawful for the execution of the works to continue, then either party can use the above clause to discharge itself from the performance of its obligations.

Delays caused by Epidemic

Contracts may also contain “epidemic” clauses, FIDIC for example contains a clause which entitles the Contractor to an extension of time if works are delayed by unforeseeable shortages in the availability of personnel or goods caused by epidemic.  

Conclusions

While construction works seem to be ongoing in Malta, it is likely that the COVID-19 pandemic will lead to disruptions in construction contracts, and therefore it is essential that the terms of the contract are reviewed and that the circumstances surrounding the parties are assessed in view of these contractual terms. In particular, it will be essential to review contractual terms concerning notices, force majeure, government action, termination rights where the force majeure event persists, obligations to use best endeavours and so on. Where contracts do not provide for such situations, it may be necessary for parties to enter into negotiations to achieve the best way forward.

 

Kindly note that the above is not a substitute for legal advice and only sets out our generic views, which are likely to change when assessing specific circumstances.

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