Stay in the know
We’ll send you the latest insights and briefings tailored to your needs
Measures that have been widely adopted by governments around the world to address the COVID-19 pandemic have already and, will no doubt further, spill-over onto the construction sector.
There are many possible ways in which COVID-19 may cause delays to a project. This may include:
Whether a contractor or employer must assume the fallout, such as project delays, from COVID-19 caused circumstances, will depend upon the wording of the contract and applicable governing law. An employer may be required to grant extensions of time to a contractor and/or cover a contractor’s additional costs or a contractor may be required to pay delay damages to an employer for late completion of works.
Construction contracts commonly specify those events that cause delay and who must bear the consequences. Where delays result from circumstances provoked by COVID-19, in addition to clauses addressing pandemics or diseases (if any), parties should consider the application of clauses which address, amongst others:
Where a contractor intends to claim an extension of time, great care must be taken in formulating and preparing the claims and in doing so, carefully consider the issues such as:
When formulating claims for particular delay events, a contractor must carefully consider the event for which the claim is made as certain delay events may give rise to additional time to complete the works but not the right to recover costs, while others may in parallel provide a right to recover costs incurred due to the delay e.g. idle costs, overheads, etc.
One impact of COVID-19 is the imposition by governments of new laws, regulations or orders, which impact project works.
A change in law may entitle a contractor to seek additional time to complete the works and any additional costs incurred as a result, if it affects the contractor’s ability to progress with the works. Whether the contractor has such right will depend upon the wording of the contract. Contractors (and also employers seeking to dismiss such claims) should consider, amongst others:
In general, if COVID-19 is considered as a force majeure event under the contract it may give rise to the contractor’s right to an extension of time, to suspend works or otherwise alter the contract on the basis of the impact suffered as a result of the virus on project works. If not foreseen in the contract itself, the applicable local laws should also be reviewed as they may provide for force majeure and affect the parties’ of contractual obligations.
The relevant contractual provisions must be analysed carefully with consideration given to issues including:
Local law may provide for other remedies for COVID-19 related circumstances and should be reviewed. The rebus sic stantibus doctrine in Spain or the doctrine of Frustration in England and Wales, are such examples. Contracts may be considered as frustrated if it is no longer possible to perform the contract, or performance thereof would radically change the subject matter of the contract.
In general, the application of doctrines of this type tends to be exceptional and requires a material impact on the performance on the contract.
The suspension of works may be a consequence of any of the above issues i.e. it may form part of a force majeure or other delay event, or it may be an autonomous right under the contract or local law upon the occurrence of certain impediments. The right to suspend works may not however, necessarily attract an automatic right to an extension of time.
COVID-19-related health concerns may be a valid ground to suspend works, whether on the basis of contractual health and safety obligations or measures adopted by public authorities, which provoke the suspension of works. Caution must be exercised in formulating claims for extension of time together with a suspension of works. If works are invalidly suspended by a contractor, an employer may claim indemnities, delay damages or even in some circumstances, terminate the contract.
Construction and infrastructure contracts commonly impose detailed insurance obligations upon the different parties intervening in a project, and frequently regulate who should be included as additional insured under each policy as well as the precise scope of the insurance coverage required to be taken out. The measures adopted by governments in different countries to address the COVID-19 pandemic, have affected the normal development of the projects as a consequence of which, may activate the following types of insurance covers, amongst others:
To be effective, an insurance policy may require the compliance with certain formalities as set out in the international master insurance policy of a given group of companies as well as under local policies therein. There may also be further additional requirements depending on the local law applicable to an insurance claim and the invoked policy, such as:
With respect to liability insurance, it will be necessary to review whether any of the company's actions taken as a result of the COVID-19 pandemic could give rise to a claim by third parties (including by workers in relation to the prevention of occupational risks). In these cases, a preventive notification to the corresponding insurer of the circumstances that may give rise to such claims should be considered.
Before either party to a contract makes a decision to take any action in light of an event caused by COVID-19 affecting project works caution is advised in the following respects. Both parties must carefully review the relevant contractual clauses and seek local law advice. Caution must be exercised to ensure that all relevant contractual steps are taken, including the issuing of notice and also in determining, monitoring and documenting the beginning and end dates of the force majeure or other impeding event.
While it is generally in the employer’s interest to put an end to the force majeure event (or any other delay event) as soon as possible with reference to e.g. the date when governmental measures are lifted, in practice the consequences of a force majeure event may be ongoing beyond such date, an example being the enduring effects of material or labour shortages. It is important to adequately analyse any notices sent by the other party and to substantiate with contemporaneous records any ongoing effects of a force majeure event (e.g. attempts to contact suppliers or to recruit workers).
If a company is considering or adopts any course of action as a consequence of COVID-19, the following issues must be considered and should form part of the wider strategy on a project and overall portfolio level:
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2024
We’ll send you the latest insights and briefings tailored to your needs