There’s a lot of discussion in the press and on social media about the impact that this global pandemic is having on construction projects. There’s also lot of scaremongering about an impending global depression, about the collapse of the oil price, and the lack of direction at a governmental level leaving many companies fighting for survival.
I believe in times like these that you need to take action on what you can influence or control, and try not to worry too much about what you can’t. At Kingsfield, we have been hosting webinars on COVID-19 related topics (with more to come) and I hope that we convey our genuine interest in offering practical advice on what actions you can take now and in the coming weeks to at least not make matters worse but also to prepare for whatever is to come.
In this vein, I want to share with you some real scenarios on construction projects in execution that we’ve received from our contractor clients and the advice that we’ve been giving. Let’s first consider some general points that we highlighted on our previous webinars (now available on our YouTube channel) in relation to the main remedy sought by many contractors – which is an extension of the time to complete the project due to Force Majeure:-
- In each case it is necessary to ask the question “…what contractual obligation cannot be performed and what is preventing this?…” So that could be, for example, where there’s an obligation to perform work at a construction site, and the owner doesn’t allow you access hence preventing your ability to perform
- If the answer is Covid-19 and there is a Force Majeure clause and it specifies “…epidemics or similar…” or is more widely crafted, then it is probably FM
- If the owner is prevented from performing a contractual obligation that impacts you but does not declare FM (or any other contractual reason), then the owner will most likely be in breach of contract
- Unless the contract is crafted very loosely, suspension (by either party) is unlikely to be implied, enabling it to be invoked by either party – any owner action which is de facto an act of suspension but not an order in conformity with the contract will most likely be a breach of contract
- FM established under a subcontract or purchase order in a different legal jurisdiction is unlikely to imply any such right under the contract with the owner
- If subcontractors/vendors are affected by Force Majeure and that can be demonstrated to have affected you, then there may be a case for FM under your contract with the owner as well as under the subcontract / PO with your vendor
- The party suffering the effects of FM is obliged to declare/notify it – owner, contractor, subcontractor, vendor, etc. – even if you don’t know what the impact will be yet or how long it will last, so getting notices submitted is really important
- A declaration of FM is not a speculative adventure – the circumstances are either FM or they are not. The only probable missing element at the time of notice of declaration is actual impact and in which case, the notice is a warning of the probable impact
- Force majeure needs to satisfy at least four criteria – unforeseeable at the time of entry into the contract, not preventable by the parties, not under the control of the parties, and actual prevention of the performance of a contractual obligation. Owners that do not declare force majeure (when it is necessary to do so) will be in breach of contract
However, actual advice on your projects is only possible on the basis of the documented facts (what occurred, when and how), the express terms of the contract and the governing law, and how it considers/treats FM or any other legal concept being considered.
One obvious shortfall for contractors of pursuing only a FM claim is that this will only enable recovery of time but not costs. There are a number of other options open depending again on the specifics of your project. Whatever route you might want to choose, it’s essential to keep records of what’s happening on your projects including down the supply chain. Without being able to clearly demonstrate the cost impact, you will considerably weaken your position when and if you decide to try to recover the costs.
Where there are grounds for FM and other grounds (e.g. change in law), it will be necessary to notify and claim for both separately because (a) the contract requires it and (b) the effects may be quite different – FM would most likely be confined to critical delay and EOT whereas change in law may impact cost (disruption, productivity, prolongation, etc) as well as possible critical delay.
Depending on the attitude of your clients, you may have some tough negotiations ahead and probably will not escape without some formal disputes. As I hope comes across in our webinars, we highly recommend the collaborative, amicable route to a commercial settlement in the best interest of the project.
Now moving on to some real scenarios from our clients.
- Basically my questions are focused on knowing our position´s strength trying to prepare ourselves for future claims due to basically the lack of decisions from the Clients (which is the case for all our projects where they suggest or instruct to take measures but not addressing to any Clause of the Contract) and in parallel prevent ourselves to declare Force Majeure (regardless we have notified potential impact in all of them as preventive measure) since initially we would not be entitled for cost compensation in that case and we find alternative ways to defend our position (suspension, change in law, access restrictions to Site due to new guidelines from Clients) with a cost compensation which would mitigate the situation:
As noted above, there will be instances where clients are in breach of contract if they don’t make decisions that prevent you from performing – and you should always submit your notice of FM as the clients actions do not prevent you from doing this. You are correct that most FM clauses do not allow contractors to claim for additional costs – which is why we are recommending the negotiated settlement route if at all possible. Note that the longer this situation lasts, you will probably have contractual and/or legal rights to terminate the project (which is also why the notice is important to start the clock ticking). Assuming that your clients want their projects finished at some point, this will then give you significant leverage to bring the client to the negotiating table to re-baseline the project including compensation. Will you recover everything? Unlikely, but everyone is going to have to bear some share of the financial consequences of this pandemic.
- In case the Owner doesn´t allow us to go into the Site without any contractual clause, we are considering the scenario of Suspension from the Client for reasons not attributable to the Contractor. In fact we consider, just in case they would declare FM, it should not be applicable since the government restrictions doesn´t prevent specifically to attend the Site jobs (other companies in the country are allowing other contractors working “normally”). In our opinion is not COVID what is preventing the Contractor to comply with his obligations but an unilateral decision from the Client, so this is not as per FM definition
If so, this could be a breach of contract.
- Could the Client not to declare a suspension or force majeure and just say that he has not responsibility on the suspension of the works at site because he is safeguarding the people at site without reference to any contractual clauses and considering government didn´t say nothing about it?
Yes, but it’s not in your control to decide this and of your work is impacted the you should submit a notice anyway.
- If later on the Client finally allows us to go inside the Site and our job is limited because of the safety restrictions due to COVID-19, could be considered that this delay were produced by a FM event?
Yes, possibly if it’s agreed to be FM – but it could also be disruption for which you could claim costs.
- In case that Client instruct new safety guidelines who would disrupt our activities (i.e 14 day of quarantine to access to site when you come from abroad) it would be considered as a new contract situation, and so claim, if the Client didn’t raise FM conditions? The situation would be the same regardless this Client guidelines comes from Client itself or following government recommendations?
Yes, you could certainly raise change orders if the client introduces new ways of working, but be careful of breaking this down into such small pieces that each is then argued to be inconsequential. This is about thinking about the definition of change as something that not only impact WHAT you supply but HOW you were planning to execute it. Also read your contract as there is often the right of owners to impose whatever is necessary in the interests of safety, without any additional compensation. Therefore, you are unlikely to recover too much by going down this route.
- Would it be preferable to go to one alternative or would it be valid to keep all of them open and work in all the alternatives in parallel just to see how the things goes on not waiving any of our rights?
See the general comments above – don’t try to make FM fit if it doesn’t work. Don’t waive your tights but it’s better to have a well constructed, strong case rather than just throwing everything at a client hoping something will stick.
- Should FM be declared for every specific event or is enough just with first one?
This is a tough question and depends on the wording of the FM definition, and also what happens with this pandemic. For example, what happens if the virus mutates and we have a similar but not the same situation in several months’ time. It also depends on what the governing law says, particularly in Civil Code countries where the is more intervention provided for in law.
It’s clear from these and other questions that we’ve received that contractors are expecting a battle. It’s not surprising as the contractual regimes around most construction projects create an adversarial atmosphere, with parties imagining that risks have been passed down the supply chain, and positions become rapidly entrenched. You cannot change the contracts you’ve signed, although maybe you’ll be looking with a fresh pair of eyes at the ones you’re just about to sign. However, it is people that breathe life into contracts, and the focus for everyone in the supply chain should be on the interests of the project not at the expense of the parties. Definitely gather your data, prepare your case, and follow the contract obligations, but what we all then choose to do with this data is up to us – and if the project is going to win, that means everyone collaborating to find creative and viable solutions to make that happen.
Karen Cherrill – Partner Kingsfield Academy