Int’l Construction Contract Strategies During The Pandemic

Bizar Male

By William Godwin

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Law360 (January 27, 2021, 5:05 PM EST) —

William Godwin

As the COVID-19 pandemic continues, major international construction projects are being delayed and disrupted by supply problems, workforce reductions and local coronavirus restrictions.

One of the projects being held up is the $6 billion Jakarta-Bandung high-speed railway — Indonesia’s first high-speed rail project — which will transport people from the capital Jakarta to Bandung in West Java at 350 kph in approximately 40 minutes. The Chinese-backed project was said to be nearly 64% complete by the end of 2020, but has suffered substantial delays since work commenced in 2015, including a stoppage and delays in early 2020 due to COVID-19 restrictions.

Similarly, in March 2020, the Norwegian energy company Statkraft SF had to delay the 100 megawatt Tidong hydropower project in India, the 52 MW Los Lagos hydropower project in Chile and the 43 MW Windy Rig wind farm in Scotland due to the pandemic. Even where work is not completely halted, the need to ensure compliance with local restrictions intended to reduce the spread of the virus has caused substantial delay and disruption to these and numerous other projects.

One ray of sunshine is the recent distribution of vaccines that look as though they will, if sufficiently widely taken up, control the virus so that more normal working practices can be resumed, and the additional time and cost of antivirus measures and restrictions reduced or eliminated.

But it remains to be seen, as we begin 2021, when the vaccines will become widely enough available to start to have an impact. And it is also important to recognize that they are unlikely to help very much unless real and rapid progress is made in inoculating whole populations, since no projects occur in a vacuum — not least major international projects, involving personnel, suppliers and the like from many different regions.

It will probably not be until at least the second half of 2021 that we will begin to see any significant positive impact of the vaccines. In the meantime, we face the widespread and continuing effects of the COVID-19 virus.

Many contractors, employers and others have been looking closely at their contracts to see if there is anything there that might enable them to put off or avoid their obligations, even if only temporarily, or whether there is some other way they can avoid having to perform.

Steps to Take

One of the first things an affected company needs to do is to check whether their contract terms include a force majeure clause, which might excuse performance for the duration of a relevant event or circumstance. If so, do the particular facts of the situation come within the scope of the clause?

If the clause, properly construed, does apply to the particular facts of the situation, that may provide the relief needed. Not every contract, however, contains a force majeure clause — and even if it does, the facts might not fit.

Even if force majeure is unavailable, a contractor can still seek extensions of time under its contract in order to avoid delay damages, as long as the events relied upon come within the contract terms. In FIDIC Silver Book contracts, for example, the unamended time provisions are much harder on the contractor than a Red or Yellow Book contract would be. Whatever the contract, any notice requirements for claiming an extension, and/or additional costs incurred, need to be followed to the letter in order to avoid potential time bars.

We will look at these points more fully below, but one thing to note here is that, in some cases, a contractor might be able to rely on circumstances outside the four corners of the contract. If, for example, the contract is governed by English law, it might be possible to show that the pandemic has caused the contract to become “frustrated” by supervening events or circumstances.

This could help both contractors and employers or sponsors who want to get out of a project. If frustration can be shown — and it is a difficult thing to prove — the parties are discharged from any further performance and the contract comes to an end.

Force Majeure Clauses

A force majeure clause excuses one or both parties from performance of the contract in some way, following the occurrence of certain events or circumstances. Although they may take any number of forms, the underlying purpose of force majeure clauses is that if certain events or circumstances occur which are outside a party’s control, it should be excused from performing all or part of its obligations, and therefore be able to avoid liability for its failure to perform those obligations, as set out in the clause.

There is no general doctrine of force majeure in English law, unlike in other systems, so it is essential for the events or circumstances constituting the force majeure and their effects to be carefully defined. Typically, a list of events or circumstances is set out which, if they are beyond a party’s control, may constitute force majeure, although often this list is expressed not to be exhaustive.

Some contracts will define what is to constitute a force majeure event by stating specific requirements, in addition to being beyond a party’s control, such as that the affected party could not reasonably be expected to take measures to avoid or overcome its effects. Typically, the affected party has to take reasonable steps to mitigate the effects of the force majeure.

Force majeure clauses differ in the extent to which the relevant events might interfere with performance of the contract. In some clauses, force majeure may be invoked where the event hinders or delays performance, whereas in others the event must have “prevented” performance, rather than made it difficult or unprofitable.

If the clause applies, its effect is generally to suspend performance for the duration of the relevant event or circumstance. As the event comes to an end, the contract is reactivated.

In many cases the affected party will have to serve notice of force majeure on the other party in order to benefit from the clause, and there may be provision for termination of the contract in the event of a prolonged force majeure.

Termination

Termination is an area that can produce real problems if a party to a contract doesn’t get it absolutely right. The first thing to do is to make sure there is a valid ground to terminate. This can be particularly difficult where the relevant ground may not be easy to establish.

For example, the FIDIC 1999 contract forms enable a contractor to terminate where the employer “substantially fails to perform his obligations under the Contract” (clause 16.2), and enable an employer to terminate where the contractor “without reasonable excuse” fails to proceed with due expedition (clause 15.2). In cases like these, where the grounds may be particularly open to different interpretations or argument, it is important to be especially confident of the facts before terminating.

Some contracts may contain a proviso of good faith: For example, the U.K. JCT standard form 2011 clause 8.2.1 says that notice terminating the contractor’s employment is not to be given unreasonably or vexatiously. A similar constraint exists under the NEC3 and NEC4 mutual trust and cooperation obligations.

Getting a termination wrong could mean having substantial damages to pay, or could itself constitute a ground for termination by the other party. If in doubt, a contractor should consider whether there is anything it can do in order to improve the relationship, and avoid the nuclear option.

It is important to note that contractual termination rights may be in addition to any rights to terminate under the governing law of the contract — that is, the law according to which the rights and liabilities of the parties are to be determined. In an English law contract, for example, certain sufficiently serious breaches of the contract may entitle the other party to terminate lawfully, even if that conduct is not a ground of termination set out in the terms of the contract.

Whether contractual rights are exclusive will depend on the proper interpretation of the contract. This also applies to the remedies available to the terminating party: The contractual remedies available — for example, to certain payments following termination — may not be exhaustive, and the terminating party may be entitled to further or other remedies, in accordance with the governing law. Sometimes the contract expressly preserves such entitlements — for example, clauses 15 and 16 of the FIDIC contracts.

Conclusion

The pandemic’s effects on international construction projects have been devastating, and its aftereffects will be long-lasting.

In better times, contractors and employers or project sponsors might be able to take a hit on a project and move on. But the severe impacts of the current situation mean that claims are often pursued all the way to arbitration. Awareness of contractual and other rights is more important than ever — and a big part of any effective strategy to avoid or reduce disputes.


William Godwin is counsel at Arnold & Porter, and a former member of the FIDIC Updates Task Group.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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