31 March 2020

Contractors must document decisions taken in response to COVID-19

This article was first published in Construction Week.

Construction Week’s Ranju Warrier speaks to Joanne Strain, partner at King & Wood Mallesons (KWM), on legal implications of the novel coronavirus (COVID-19) on construction contracts and some of the most relevant provisions in an event of Force Majeure

The pandemic has left an incapacitating impact on stock markets and supply chain, as well as sectors including, manufacturing, F&B, retail, and, distribution.World Health Organisation (WHO) report revealed that on 15 March 2020, the total number of confirmed novel coronavirus (COVID-19) cases around the globe reached 153,517, with 5,735 fatalities.

The construction sector has also felt the pinch.

Speaking to Construction Week, partner at King & Wood Mallesons (KWM), Joanne Strain explains that for the construction industry to mitigate the risk that COVID-19 has caused, it is important for stakeholders “to evaluate the potential implications for their business, the supply chain, and the potential impact upon them to be able to perform their contractual obligations”.

“The rapid development of COVID-19 is causing disruption to supply chains globally, raising major concerns for all stakeholders in the construction industry,” Strain says.

“In the Middle East, the sector will witness significant impacts across all construction phases above and beyond travel restrictions preventing key personnel from returning to work and attending critical meetings and the repercussions of potential manpower shortages.”

As the risk of payment delays and cost overruns continues to loom, contractors are considering looking back to the contractual rights under such conditions caused by the virus’ outbreak.

Strain adds:“Key provisions of contractual documentation should be reviewed, including, extension of time (EOT) provisions, events of default, Force Majeure, and impossibility, suspension and termination provisions, insolvency risks, and material adverse change clause in lending documentation.”

Strain also outlines that “contractors must document decisions and steps taken in response to COVID-19” that extends to complying with legal or regulatory changes and steps taken to mitigate losses, which could become “crucial in any future litigation proceedings”.

Commenting on how contractors could manage Force Majeure risk, Strain says: “Notice provisions in contractual documentation for seeking an EOT or asserting Force Majeure should also be complied with.”

The EOT clauses in contractual documentation are applicable during any slow-down or cessation of works in construction projects.

This includes Clause 8.4 for EOT in the FIDIC Red Book (1999) that specifically refers to unforeseen shortages in the availability of personnel or goods caused by an epidemic or governmental action.

“It is common for contracts to include a Force Majeure clause, which may include exhaustive or non-exhaustive definitions of the scope of a Force Majeure event,” Strain explains.

“This could potentially extend to COVID-19 consequences, depending on how the particular clause has been drafted.”

Simultaneously, there are chances, where in order to reach a mutually beneficial result against the difficulties incurred by disruption to the supply chain, parties might also consider negotiation and variation of contracts to avoid cancellation.

Strain says this depends on the commercial will of all parties involved in the contract.

On facing a claim for Force Majeure from a supplier, Strain adds that contractors should consider both, the precise terms of the contractual clause asserted and whether the scope of the clause truly extends to Force Majeure; and the applicable law of the contract, which may, or may not, give the asserting party additional rights.

However, in the absence of contractual provisions for Force Majeure, there are several provisions in the UAE Civil Code, including Articles 273, 287, 249, as well as 893, all of which could prove helpful to the party against any disruption or impossibility caused by COVID-19.

Additionally, Article 82 of Dubai International Financial Centre (DIFC) Law No 6 of 2004 allows for non-performance of a contract — governed under DIFC — to be excused due to Force Majeure. “This article also allows for a temporary detriment to excuse the performance of a contract for as long as is reasonable,” Strain says.

Meanwhile, in Saudi Arabia, Article 51 of the procurement law is applicable for public sector contracts, where “a contract will be extended, and the penalty waived, if the delay is due to unforeseen circumstances or reasons beyond the contractor’s control”.

Strain calls for companies entering into construction contracts in the next few months to consider the risks of COVID-19.

She stresses: “Force Majeure clauses are unlikely to assist in future, given the outbreak has already been classified as a pandemic and the consequences are arguably foreseeable.”

“When making any legal or contractual decisions, parties should account for the impact of the virus to the timescales of a project and may wish to explicitly exclude the COVID-19 outbreak from any Force Majeure clauses.”

“On the other hand, contractors may wish to negotiate for rights, which deal with COVID-19, if they anticipate that it will significantly impact the project,” Strain concludes.

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In March 2019, King & Wood Mallesons (KWM) established the Belt & Road Center for International Cooperation and Facilitation (BRCICF).

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