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How Contractors Can Deal with Delays and Disruptions of Construction Projects Caused by the Covid-19 Pandemic 

by Osinachi Nwandem

Published: May, 2020

Submission: May, 2020

 



The implementation of travel restrictions, lock-downs, stay-at-home orders, and curfews, in an attempt to curtail the spread of the COVID-19 virus, has led to delays in the completion of construction projects. Contractors are thus faced with worrying about the potential implications of such delays.

In this article, our Osinachi Nwandem (Associate) discusses force majeure as an excuse for delay or non-performance of contractual obligations and makes recommendations for negotiating construction  contracts in the future.


INTRODUCTION

With the impact of COVID-19 threatening lives and leading to an increase in the number of countries affected by the virus, the World Health Organization (WHO) on 11th March 2020 characterized the COVID-19 as a pandemic[1]. In line with WHO’s declaration, governments of several countries have implemented some actions to curtail the spread of the virus.


Consequently, since late March 2020, the Federal Government of Nigeria has implemented travel restrictions, lock-downs, stay-at-home orders, and curfews (the “COVID-19 Orders”) in an attempt to curtail the spread of the COVID-19 virus.


As a result of the COVID-19 Orders, several construction companies have been forced to halt all construction projects. It is therefore not in doubt that the COVID-19 Orders will cause delays and affect the prompt completion of construction projects.


WHY IS THIS SO?

Construction projects are generally time-bound. Thus by signing a construction contract, the Contractor agrees to perform his obligations in line with the contract terms and complete the project within the time specified in the contract. This is why the COVID-19 Orders have caused contractors to worry about delays in completing their respective construction projects and the potential implications of such delays.


 


HOW CAN THE CONTRACTOR DEAL WITH THIS PREDICAMENT?

This article will present three steps that a contractor can apply to deal with the effect of delays and disruption caused by the COVID-19 Orders.


STEP 1

The Contractor should confirm if the contract contains a force majeure clause and if the clause provides for an exceptional event or circumstance that can be relied on


A party’s obligations may be excused by the construction contract where it anticipates that projects may be impossible to execute within the agreed time due to circumstances beyond the party’s control. Such a provision would be contained in a force majeure or exceptional circumstance clause in the construction contract.


What then is force majeure?


Force majeure means an exceptional event or circumstance which is:


(a) beyond a party’s control;


(b) such that a party could not reasonably have provided against before entering into the contract;


(c) such that a party could not have reasonably avoided or overcome having arisen; and


(d) not substantially attributable to the other party[2].


The force majeure clause stands to excuse or free parties from liability and/or from performing their obligations in circumstances that are beyond the party’s control such as wars, strikes, plagues, hurricanes, floods, epidemics, pandemics, earthquakes, legislation, government policies and directives, etc. As such, parties may be excused from delays in completing their projects or performing their obligations where there exists a ‘force majeure’ clause in the contract, and the alleged “circumstances beyond the party’s control” fall within the provisions in the clause.


Also, it is important to note that to rely on the force majeure clause, the particular event resulting in the delay or failure to perform must be specifically listed in the force majeure clause. In typical force majeure clauses, some commonly listed force majeure events include natural disasters such as floods; earthquakes; hurricanes; epidemics; quarantines; war; terrorist acts; lockouts; government policy and action such as eminent domain or changes in laws; industrial/union activities such as strikes and slow-downs; and shortages of necessary materials. From the above list, the COVID-19 Orders could fall under an unforeseeable change in law – a force majeure event – which has affected the contractor’s ability to fulfill his contractual obligations. Similarly, the contractor can rely on lockouts and epidemics, where referred to in the force majeure clause.


For contracts modeled after the International Federation of Consulting Contracts Engineers (FIDIC) Conditions of Contract for Construction for Building and Engineering Works designed by the owner, 1999 Edition ( ‘FIDIC Red Book’), one will see that the FIDIC Red Book lists force majeure as an exceptional event affording the contractor a host of options if the contractor can show that the project was delayed as a result of a force majeure event listed. Clause 19.1[3] of the FIDIC Red Book gives instances of force majeure events wherein any delay will be excusable as it provides:


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:


  • War, hostilities (whether war be declared or not), invasion act of foreign enemies;
  • Rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war;
  • Riot, commotion, disorder, strike or lockout by persons other than the Contractor’s Personnel and other employees of the Contractor and Sub-contractors;
  • Munitions of war, explosive materials, ionizing radiation or contamination by radio-activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radioactivity; and
  • Natural catastrophes such as earthquakes, hurricanes, typhoons, or volcanic activity.

Although the FIDIC Red Book does not refer to government actions and orders, it provides an extensive listing of force majeure events. Furthermore, the courts or arbitration tribunals may likely interpret the ‘lockout by persons other than the Contractor’s personnel’ clause to include the COVID-19 lockdown order[4]. Therefore, it is safe to say that the COVID-19 Orders constitute a force majeure event under the FIDIC Red Book or any construction contract having similar provisions.


STEP 2

The contractor should notify the project owner of the occurrence of a force majeure event


This point is dependent on the construction contract. However, if the construction contract is modeled after the FIDIC Red Book, the contractor is required to notify the project owner of the COVID-19 Orders, a force majeure event, and state how the Orders have prevented him from completing the project within the agreed time[5]. This notice is to be made within 14 days from the date it became certain that the COVID-19 Orders prevented the contractor from performing his contractual obligations under the contract[6].


By failing to give notice of a force majeure event under the FIDIC Red Book, the contractor runs the risk of forfeiting his right to be excused from performance and may instead be exposed to termination or other sanctions according to the contract. Notification of the force majeure event is extremely important as it is upon such notification that the contractor is excused from performing his obligations[7]. The requisite notice must also be given in the manner provided by the contract i.e. by certified mail, personal delivery, etc.


STEP 3

Parties should know the options available to them


It is important to know that in every construction project, parties (project owner and contractor) will be entitled to several options upon giving notice of the occurrence of a force majeure event. Again, this depends on the construction contract. However, if the contract is modeled after most standard forms of construction contract, then parties are likely to be entitled to three options:


1. Suspension of performance


This is usually the first option taken by contractors during the subsistence of a force majeure event. With the consent of the project owner, the performance of construction works can be suspended – temporary cessation of construction works pending when the force majeure event, COVID-19 Orders, has been lifted or suspended. Most contracts require the project owner to be notified of the contractor’s decision to suspend the performance of the contract.


2.  Extension of Time (EOT)[8]


When a force majeure event has been resolved and the contractor returns to the site, it is commendable when the contractor completes the project within time despite the happening of a force majeure event. However, if the contractor concludes that completion of the construction project is likely to be delayed, then the contractor has the option of notifying the project owner and requesting an extension of time to complete the project. Again, to be entitled to an extension of time, most standard construction contracts require the project owner to be notified[9].


3. Release from further performance of the contract[10]


In many standard forms of construction contracts, parties understand that the continuous pendency of a force majeure event may frustrate a contract, thereby, making it impossible for parties to fulfill their contractual obligations. A typical example could be where the COVID-19 Orders persist for a longer period thereby preventing the contractor from performing his obligations in the contract and completing the construction project[11]. If this is the situation, then a release clause will allow parties to be discharged from the contract and released from further performance of the contract. By activating the release clause, all the parties’ rights under the contract are extinguished as the contract has come to an end[12].


Deciding on which option to adopt is dependent on the circumstance, extent of work done, the length of the outbreak and government directive, and the nature of the contract.


Practical Considerations for contractors


To sum this up, here are three key takeaways for the contractor to note:


  1. Check the contract terms for force majeure provisions, options available to the contractor given the force majeure event, and the notice requirements that may be triggered as a result of a force majeure event.
  2. The contractor should notify the project owner whenever delays occur or when works are likely to be delayed or disrupted. This should be in line with the contractual requirements.
  3. Notices must be carefully drafted and must conform to the contractual requirements. Also, notices must clearly show the following:
    1. That the COVID-19 Orders constitute an exceptional event that was unforeseeable and beyond the contractor’s control[13].
    2. That the COVID-19 Orders were not attributable to the project owner[14].
    3. That given the COVID-19 Orders, it will be impossible to complete the construction project within the agreed time.
    4. That the contractor had taken reasonable efforts to minimize any delay in performing the contract as a result of the force majeure[15].

Option for Contractors without Force Majeure Clauses in their contracts


It is noteworthy that the force majeure clause may not be included in many construction contracts. Because of this, contractors can cite frustration as a reason for non-performance of contractual obligations owing to the COVID-19 Orders. Frustration occurs when an unforeseen event undermines a party’s principal purpose for entering into a contract such that the performance of the contract is radically different from the performance of the contract that was originally contemplated by both parties, and both parties knew of the principal purpose at the time the contract was made[16]. Consequently, the contractor and project owner may be released from their obligations in the contract due to the COVID-19 Orders, an unforeseeable circumstance that has fundamentally affected the contractor’s ability to fulfill his obligations in the contract. In relying on frustration, the contractor must note the following:


  • Frustration automatically brings the contract to an end; and
  • The rights and obligations of parties before the frustrating event remain unaffected.

Key takeaways for contractors negotiating future construction contracts


In negotiating future construction contracts, parties must ensure that the following four issues are included in their contract:


  • Parties should ensure that a ‘force majeure’ clause is included in the contract.
  • Parties should ensure that the ‘force majeure’ clause covers anticipatory supervening events including pandemics, epidemics, and government orders/actions.
  • Parties should ensure that the force majeure clause provides for a time frame for the contractor to communicate/notify the project owner of the force majeure event. This will put parties in control of the contract and will obviate the need for the court or tribunal to determine a time frame for such notification. Parties should ensure the force majeure clause provides for a mode of communication/notification of the force majeure event. Besides other methods of communication and given the movement restriction by the government, parties could add that notifications be made via email so that there is no communication gap.
  • Parties should ensure that the contract provides for a host of options upon the happening of a force majeure event. As earlier discussed, the options could include that the force majeure clause should provide several options to parties relying on force majeure. As discussed earlier, the parties can include suspension of performance, an extension of time, and release as viable options.

CONCLUSION

This article has shown that the COVID-19 Orders could qualify as a ‘force majeure’ event. It has also shown that the contractor may be excused from completing the construction project within the agreed time if he can show that the COVID-19 Orders are contemplated in the force majeure clause and that it has prevented him from performing his obligations under the contract. Where there is no force majeure clause, the contractor may be able to rely on frustration of purpose.


 


Footnotes:

[1]‘WHO Director-General’s Opening Remarks At The Media Briefing On COVID-19 – 11 March 2020’ (Who.int, 2020) <https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—11-march-2020> accessed 30 March 2020


[2] Clause 19.1; FIDIC Red Book 1999


[3] FIDIC Red Book 1999


[4] Clause 19.1; FIDIC Red Book 1999, 1st Edition


[5] Clause 19.2; FIDIC Red Book 1999, 1st Edition


[6]Ibid


[7]Ibid. See also ‘Commentary: FIDIC Conditions’ <https://onlinelibrary.wiley.com/doi/pdf/10.1002/9781119085966.oth1> accessed 31 March 2020


[8] Clause 8.4, FIDIC Red Book 1999, 1st Edition


[9]Ibid.


[10] Clause 19.7, FIDIC Red Book 1999, 1st Edition


[11] Clause 19.6, FIDIC Red Book 1999, 1st Edition


[12]Ibid. See also the case of N.R.M.A.& F.C. v. Johnson (2019) 2 NWLR (Pt. 1656) 247 at 266, paras E-F


[13] Clause 19.1 (a) & (b), FIDIC Red Book 1999, 1st Edition


[14] Clause 19.1(d), FIDIC Red Book, 1st Edition


[15] Clause 19.3, FIDIC Red Book 1999, 1st Edition


[16] Codelfa Construction Pty Ltd v. State Rail Authority of NSW [1992] HCA 24



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