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Construction Contracts and the Impact of COVID-19

29 May 2020
This article contains a summary of the impact of COVID-19 on construction contracts and the risks and disputes facing contractors and employers.

Introduction

The full impact of Covid19 on the construction industry in Ireland is still unknown.  The Health (Preservation and Protection and other Emergency Measures in the Public Interest Act) 2020 and public health measures resulted in the closure of many building sites throughout the country but the industry has reopened. 

Contractors will need to implement new health and safety measures and impose social distancing in construction workplaces. 

Attention is now turning to the contractual responsibility for site closures and ongoing delays and cost increases and how projects will be manged into the future. 

Contractual Relief 

Contractors impacted by Covid19 should examine their contracts to see if they are entitled to claim relief such as price variation, damages, frustration or force majeure. 

A force majeure event is an exceptional (unexpected) event which prevents one or both parties from being able to perform their contractual obligations. A contract that contains a force majeure provision may entitle the contractor to an extension of time for the period of delay or period of site closure. Most widely used construction contracts contain force majeure provisions. A contractor seeking to rely on a force majeure clause during the pandemic would have to be able to show that the health crisis is the sole reason for not being able to fulfil their contractual obligations. 

Some contracts entitle contractors to claim a price variation where the cost of performing the contractual obligations changes as a result of new regulations or laws. 

RIAI Contract

Employers and contractors who have agreed standard RIAI contracts should consider Clause 30. This clause does not define 'force majeure' but it will entitle a contractor to claim an extension of time without being liable to pay damages for the period of the delay provided the required notice of delay is given. 

Clause 4 of the RIAI Contact entitles a contractor to claim a price variation where the cost of performance of a contract changes as a result of any legislative enactment, rule or order or the exercise by the Government of powers vested in it. 

Contractors may submit claims for cost adjustment where the cost of performance of the contract is increased due to site closures, labour shortages or disruption to supply chains. The project architect must first certify the increase in cost to be added to the contract sum.  

An employer or contractor can invoke the alternative dispute resolution provisions of Clause 38 if there is disagreement in relation to the application of Clause 4.

FIDIC Contract 

Clause 13 of the FIDIC form of contract provides that a contractor is entitled to claim relief for delays and increases in costs resulting from a change in the law. This clause would entitle contractors to make a claim for delays and increased costs from mandatory site closures. 

A contractor may be entitled to an extension of time or payment of costs or the option of termination if they can demonstrate that an 'exceptional event' has occurred by reference to a 4 step test set out in Clause 18.  

Public Works Contract 

The Public Works Contract does not recognise a delay event as being a trigger for claiming relief. However, a contractor is required to perform the contract in compliance with all legal requirements which would include legislative enactment and statutory instruments and regulations. 

Contractors may claim an extension of time and an adjustment to the contract sum on foot of site closure notices issued by contracting authorities. A contractor must first notify the employer pursuant to Clauses 9.3 and 10.3 that the works is being delayed or is likely to be delayed. Contractors are obliged to issue follow up notices were they anticipate future delays. It may be possible, for example, to claim an extension of time or price variation due to social distancing requirements or disruptions in the supply of goods and materials. 

Finally, the Government announced details of an ex-gratia payment to contractors engaged in public works contracts to cover agreed reasonable non-pay fixed costs. This measure may help alleviate some of these effects and avoid significant escalation in disputes in relation to public works contracts. 

Frustration and Damages 

If there is no force majeure clause in a contract and a contractor is unable to perform their contractual obligations due to Covid19, they may be able to rely on the principle of frustration to end the contract. In such circumstances the parties will be discharged from the contract and a contractor may claim reasonable costs for the work done up to that date. However, an employer may claim a breach of contract and damages were a contractor incorrectly claims frustration (or force majeure).

There is an obligation on all contractual parties who intend to claim entitlements or damages for delay or loss to demonstrate that they have mitigated that delay or loss. Contractors should be aware that an employer may refuse to accept a claim in relation to project delay or additional costs were a building site is closed prematurely by the contractor prior to the mandatory lockdown.   

Conclusion 

The current crisis is not the fault of either party and parties will be living with the effects of the pandemic for some time to come. 

The starting point for dealing with claims for delay and costs is the contract. Parties negotiating new contracts should carefully consider the allocation of risk and type of relief and entitlements that can be claimed for delays and how events will be managed. Existing parties should keep and maintain detailed records of all events and developments throughout the project including communications and action taken.

It is recommended that all parties to construction contracts engage constructively and collaboratively to help minimise the impact of Covid19 on building projects. If constructive engagement is not capable of resolving a dispute then parties should carefully consider invoking dispute resolution provisions within the contract. 

Further Reading

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