A Contractor's Guide To Managing The Commercial Impact Of The COVID-19 Virus On Construction Project

On 30 January 2020, the World Health Organization ("WHO") declared the Novel Coronavirus (now called COVID-19) a "public health emergency of international concern". The outbreak of the COVID-19 has already had a significant effect on global businesses due to shortages in the labour market and disruptions to supply chains.

The construction industry is far from immune to such effects and concerns are being raised by contractors and employers alike as the commercial impact of the outbreak is being immediately felt across the globe. This update is intended to provide some guidance to contractors seeking to analyse the issues that apply in their specific situations. It focusses primarily on common law jurisdictions and uses the FIDIC Red Book (First Edition 1999) as an example contract but will hopefully be of more general use for contractors to start to and draw up a plan to manage the commercial risks.

This note focusses on the contractor's ability to excuse liability for non-performance, to obtain additional time and recover cost. Of course issues relating to employees' health and safety are of paramount importance. These are the subject of other guidance from Clyde & Co.

2. Areas of Impact

   There are essentially three main areas of impact:

   Difficulties in procuring materials and plant: Many cities in China were and still are under an unprecedented lockdown with labour unable to move around freely; the reopening of some factories after Chinese New Year has been delayed and some shipping carrying plant and materials have been unable to leave China; Difficulties in movement of staff to and from China and within the region (labour as well as executive management): Staff may be unable to leave or return to China, or are subject to compulsory quarantine periods. In addition to the lockdown of some cities, various countries have restricted entry of Chinese nationals or foreigners who have travelled to China. Many airlines have halted their flights to China. Travellers have been placed under quarantine, or have cancelled their business trips to China fearing they would be quarantined upon returning to their home countries; and Difficulties caused by implementing preventive measures on site and/or dealing with the effects of a COVID-19 outbreak on site and/or production facilities: These include everyday measures such as additional cleaning and temperature checking for labour and visitors; mandatory leave of absence, quarantine orders, additional accommodation for replacement labour etc. C. Sources of Relief

   Broadly speaking there are two areas that a contractor should consider when looking at ways to manage the impacts of the COVID-19 outbreak on its projects:-

   General Contractual Provisions and legal principles which excuse liability for non-performance; and Specific Contractual Provisions which may give entitlements to additional time and money. D. General Contractual Provisions and Legal Principles

   If a contractor is facing problems which are substantially impacting on its ability to carry out the works, the starting point will be to look at 3 general routes that may excuse the failure to perform. Two of these routes will depend upon the presence of specific types of clause in the underlying construction contract. The third is a generally available source of relief, albeit that it will also be impacted by the applicable contractual provisions.

   1. Force Majeure

      In common law jurisdictions, Force Majeure arises out of the contract rather than the underlying law so all will depend upon whether there is a Force Majeure clause in the relevant contract (although most construction contracts have one) and the specific wording of any such clause.

      The Definition of Force Majeure

      Some Force Majeure clauses are general in nature and do not attempt to define the specific events that may amount to Force Majeure, whilst others take the opposite approach and set out an exclusive list of events that may amount to Force Majeure. Still others (like the FIDIC Red Book Clause 19.1) take a middle course by setting out the general requirements for Force Majeure to apply together with a non-exclusive list of events or circumstances that may amount to Force Majeure.

      The definition in the FIDIC Red Book is as follows:-

      "In this Clause, "Force Majeure" means an exceptional event or circumstance:

      Which is beyond a Party's control, Which such Party could not reasonably have provided against before entering into the Contract, Which, having arisen, such Party could not reasonably have avoided or overcome; and Which is not substantially attributable to the other Party." Although disease and/or epidemics do not feature in the non-exclusive list of events and circumstances that follows this definition, it seems likely that the COVID-19 outbreak would in principle be covered by the general definition set out above. It is an exceptional circumstance, caused by neither party, which the contractor could not reasonably have provided against, avoided or overcome.

      Although the clause does not expressly introduce a requirement of unforeseeability, the test of whether the contractor could reasonably have provided against the event or circumstance clearly raises some issues of foreseeability. It should also be noted that foreseeability does feature as an express part of the definition in some other contract forms. If a contractor needs to demonstrate that the COVID-19 outbreak...