Member Article

We are facing a Coronavirus (Covid-19) pandemic and, as a result, administrative solutions have been adopted and a state of emergency has been declared. All this has had an impact on the whole of the economy and it has also had serious adverse effects on works contracts in progress.

The allegation of force majeure and a change circumstances in works contracts

We are facing the growing and exponential spread of COVID-19 and the Portuguese President has recently declared a state of emergency throughout Portugal. As a result, it is important to assess what impact this situation may have on the ability of parties to meet the obligations they have assumed under contracts in progress.Indeed, the current situation may lead to tensions between developers and contractors. Thisis especially so regarding the consequences of any limitations or restrictions on performing the contract that this situation creates, when the parties have opposing views on the measures necessary to mitigate any negative effects or to allocate the risks of the contract.In this context, stakeholders in the construction sector have raised a number of questions. These include: (i) Should (or must) the works be suspended? (ii) Can the contractor request (or impose) an extension of the period originally established to complete the project? (iii) Can the contractor request (or impose) a revision of the prices agreed. As a result, there is a pressing need to consider the legal rules applicable to these matters. Besides the legal rules, it is always necessary to look first at the contract itself, as this could provide solutions that should be taken into consideration. Therefore, it is essential to analyse the terms and the nature and form of performance of each contract on a case-by-case basis. However, as many works contracts have similar provisions, we will also address the most common contractual solutions.

Can the COVID-19 pandemic be classified as an event of force majeure?

It is very common for works contracts to contain clauses that contain an illustrative or exhaustive list of the facts or circumstances which can be qualified as an “event of force majeure”.In those clauses, it is also customary for the parties to set out the consequences associated with the confirmation of an event of force majeure. These could include the suspension of the deadline to perform the contract while the event of force majeure lasts, the possibility of a price revision, or termination of the contract if the event of force majeure event lasts for longer than a certain period of time.

Force majeure clauses in works contracts often set out damage containment mechanisms in which the affected party undertakes to use its best endeavours to mitigate the impacts of the event of force majeure on the performance of the contract. This could oblige that party, in good faith, to remain bound by the contract and to comply with the obligations that can be complied with. For example, to do works not directly affected by the event of force majeure. It could also oblige that party to take steps to mitigate the effects of the force majeure event, for example, to adjust the work plan to bring forward tasks not affected by the event).

It is also common for works contracts to establish deadlines and procedures that must be complied with by the affected party if an event of force majeure is confirmed.

Therefore, the first step is to consult the contract signed between the parties, check whether there is a force majeure clause and analyse its terms, because, if this clause exists, it will prevail over the law that only applies where the contract is silent.

Can the COVID-19 pandemic amount to a situation, albeit temporary, of impossibility to perform the contract and thus lead to its suspension?

This question must be analysed on a case-by-case basis and the conclusions on this topic may vary, but, in principle, impossibility to perform requires that performance be actually and objectively impossible. As a rule, situations in which performance has simply become more difficult or costly cannot, as a rule, be classified as “cases of impossibility to perform”. However, even though impossibility should not be confused with greater difficulty in performing, in certain cases, one could also consider whether the excessive burden of performance should be equated with impossibility.

Thus, if the contractor can demonstrate that it is in a situation of real and temporary impossibility to perform, it will be released from the obligation to perform while the impossibility lasts. In this situation, the contractor will not be liable for any delays in performing the contract, but the developer is under no obligation to pay the price.

Works contracts are complex and the obligations assumed by the parties do not usually consist in a single act, but in doing a multiplicity of secondary or ancillary acts, all of which contribute to fulfilling the principal obligation.

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