As the Middle East is preparing for the unknown impact of COVID-19 on its workplaces, workforce and families, many clients are wondering what will happen to their construction projects, will they be delayed and will compensation be required?
The Legal Situation: Under a standard FIDIC Red Book 1999 Edition (FIDIC) contract, relative to the current coronavirus outbreak, a contractor may be entitled to an extension of time if it can be demonstrated that this was a result of;
▪ Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental action.
▪ Any operation of the forces of nature which is unforeseeable or against which an experienced contractor could not reasonably have been expected to have taken adequate preventative precautions.
▪ Force Majeure. Whilst Force Majeure is defined within FIDIC, it will have to be argued by the contractor, that COVID19 falls within the stated definitions/circumstances. With any extension of time, it is incumbent on the contractor to demonstrate that the exceptional event that caused the delay had a direct impact on the works.
But if the employer can demonstrate that the contractor was already causing delay, or the delay was only indirectly caused by the exceptional event, then an extension of time might not be awarded. More importantly, in the absence of local or central Government on-site activity restrictions, depending on the jurisdiction, the local court may have significant discretion to determine whether COVID-19 is considered a valid reason under Force Majeure.
With regards to compensation, the granting of an extension of time relieves the contractor of any delay damages for the period of the extension. However, this extension does not automatically mean an entitlement to compensation for the cost of the delay to the contractor.
For cost to apply, the contractor needs to demonstrate separately, which means that the employer has an argument not to have to pay compensation where the contract is unamended.
An important note, however, is that if the contract Engineer delays in the performance of their duties due to the current crisis this will give grounds for cost. Undoubtedly the COVID-19 outbreak will have an impact on the construction industry and the execution of construction contracts. Insolvency remains a key feature in the construction sector at present.
Therefore, the risk of project delays, with little chance of receiving compensation and the potential risk of delay damages applying if the contractor cannot demonstrate that the delay was a direct result of an exceptional event, would only increase this risk further.
Here are some practical steps that clients can take to help manage and mitigate the risks:
• Ask your contractor to carry out a materials audit to identify where materials are being imported from. Consider switching to materials that can be sourced from countries less severely affected. Where materials cannot be sourced elsewhere, ask your contractor how they are intending to maintain continuity of supply. Where materials off-site provisions apply, ask your contract Engineer how the materials are to be inspected and valued.
• Ensure regular cleaning of site welfare facilities, staff canteens and meeting places and the provision of adequate washing facilities along with following government guidelines.
• Under a standard FIDIC contract, the contractor is required to notify the employer as soon as a delay becomes reasonably apparent and must use best endeavours to mitigate any delay. Re-sequencing of the works could mitigate a delay, particularly where supply of materials becomes an issue. Our Top Tips to Mitigate Contract Risk During COVID-19:
• Ask your contract Engineer what business continuity plans are in place to ensure that the regular progress of the works is not affected.
• Make sure that adequate records are kept of progress against program and labour on site, as this will assist in reviewing extension of time claims.
• Be mindful of how delays due to the outbreak may affect pricing qualifications in tenders.
To manage potential insolvency risk in the short to medium term:
• Ensure that due diligence checks are carried out on the supply chain, as well as main contractors prior to appointment, including checking up references and pre-qualifying of trade contractors to help ensure the right quality of suppliers. If these checks have been carried out sometime ago, these must also be re-done.
• Procurement teams should look beyond lowest price and ensure that financial security factors into the pre-qualification process.
• Ensure that any building contracts are properly signed and executed. Performance Bonds or Parent Company Guarantees provide an additional layer of protection. Letters of Intent create uncertainty and risk.
• Look for tell-tale signs of financial problems. If productivity levels are falling, the main contractor is defaulting on payments or is seeking to negotiate early payments, then these are signs of an underlying issue. Ensure that the correct protocols have been observed with regard to payment of materials off site, particularly where they may be from affected countries.
• If the contractor does become insolvent, immediately secure the site to prevent removal of any plant and materials.