by Anisa Pinatih
Construction, like many sectors, is facing unprecedented turmoil in the current pandemic situation. Now, with the ever-changing uncertainties and government regulations to momentarily halt projects, contractors are facing even bigger challenges. Although risk management is a complex task that involves legal or client-specific risk mitigation, this has become a crucial matter to look at, now more than ever, with the widespread implications of COVID-19, especially in terms of performance bond claims.
Supply chains are disrupted, leading to difficulties in material procurement or increased prices. Labour supply and movement are limited. The longer-term impact on the economy might even put owners’ financial assurance in jeopardy. However, resilience is needed to sustain businesses. Government policies are being put in place to assist the industry, in emerging and developed economies alike, because the construction development is a major contributor to each country’s GDP.
In Indonesia, for example, infrastructure construction remains a priority in 2020, with budget being increased to US $26 billion. Malaysia has also planned to boost its construction through its Budget 2020. Likewise, construction demand in Singapore is expected to remain strong and reach up to S $33 billion. With such a central role in the economy, construction industry players must be able to navigate their way through the difficult situations.
What we can learn so far is expect the unexpected. Contractors need to take into account unforeseeable events such as the COVID-19 pandemic in their contracts.
WHAT ARE THE KEY CONTRACT CLAUSES TO CONSIDER?
Force majeure: This is usually covered in a contract as part of delay clauses. Unpredictable events such as earthquake, terrorism or virus outbreak may be expressed explicitly in a contract. Even if it is not, contractors are still entitled to relief because this is beyond their control. The clauses should allow for an extension of time. Compensation may be claimed, such as when the owner refuses to grant extension, forcing the contractor to accelerate their work.
Escalation clauses: This allows a contractor to receive an increase in its contract price if costs go up under circumstances described in the clause. If the contract is cost-reimbursable up to a guaranteed maximum price, the contractor should not agree to it at this time without including an exclusion that allows for a claim if costs increase beyond the base.
Change-in-law clauses: This can be useful to protect against unforeseen policies over the course of a project. Ideally, the contract definitions should provide a broad definition of law to include not just laws and regulations, but also actions taken by government officials, such as when they order a city to go under a lockdown.
Mutual waiver of consequential damages: Contractors may waive its rights to recover consequential/indirect damages suffered by the owner, especially if the owner’s profit/loss is foreseeable, such as when the virus outbreak was declared a global pandemic by WHO.
Owner’s duty to provide adequate assurances of financing: Evidence of adequate financing to complete a project is commonly recorded in a contract. However, longer-term impacts of unexpected situations such as the virus outbreak may jeopardise the owner’s financing. A contractor may want to exercise its right to seek for documentation that ensure the continuation of its project.
Emergency and safety clauses: With social distancing practices in place, it is impossible to work in cramped spaces. Contractors may want to consider various ways of addressing this, for example, by building temporary shelters with good ventilation. This may qualify for a claim under the emergency clause.
WHAT SHOULD CONTRACTORS BE CAUTIOUS OF?
The propositions in key clauses above may be able to protect contractors from the unforeseeable circumstances. However, they should be cautious of the fact that courts tend to have a narrow view of what can be considered as force majeure. Causation must have three conditions: that the event was unforeseeable, unavoidable and impossible to overcome .
Timelines play an important role in this context. Existing bond contracts made before the COVID-19 outbreak can easily meet the three conditions. The question lies with contracts signed after 11 February 2020 when WHO declared COVID-19 a global pandemic. There was even an earlier notice on 30 January 2020 stating that the outbreak is a Public Health Emergency of International Concern. Any contracts made thereafter should not deem the pandemic as unforeseeable. This may increase the risk of performance bond claims if projects are delayed or not completed.
HOW CAN RISKS BE MINIMISED?
Also read a construction lawyer’s point if view, Chan Kheng Hoe: COVID-19 and Contractors’ Dilemma
Construction disputes are expensive and time consuming. The best practice is to draft a contract that covers a virus outbreak. Learning from the current situation, a little bit of work up front will minimise the pandemic impacts on projects and business in general. But what if the contract has been signed without a virus outbreak classified in the force majeure clauses?
The first step is to consult with a good construction attorney and draft a new contract that includes content specific to COVID-19 delays. Leaving the contract up to the court’s interpretation may put a contractor at a disadvantageous position. Here are some key steps to reduce likelihood of claims against bonds.
Planning for risk: Project managers should be encouraged to add COVID-19 into project risk registers and create risk mitigation strategies for shortages. Guidance from the health authorities should also be incorporated into site practices.
Being proactive and communicative: If there are concerns about risk to a project, a surety company should be involved. In areas impacted by COVID-19, contractors must contact relevant parties, including suppliers, to discuss contingency plans and strategies; communicate the contract clauses; list the liquidated damages or penalties for delays; and see if an agreement can be reached.
Reviewing backlog: Backlog adjustment should be made if resources, such as labour, are prioritised for a job that is impacted by COVID-19. If resources are becoming limited, some projects in the pipeline may be deferrable until the pandemic is under control.
Assessing the financing: Up front payments to suppliers may increase the risks, especially with the current development as governments are exercising stricter border controls and domestic mobility. If possible, capital expenditures should be delayed until there is more certainty. This can help conserve cash in the business.
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