Covid to impact construction claims ‘until at least 2023’

Across Europe, the Middle East and Africa (EMEA), contractors expect that Covid-19 will continue to impact on their projects until at least 2023. Across Africa, where vaccine roll-out is slower, the pandemic may continue to impact on projects for even longer.

At this point, projects are predominantly being impacted not by the ‘hard’ lockdowns which characterised the early stages of the pandemic but by increased health and safety measures, social distancing and limits on the number of people allowed on site; border restrictions; and the impact on the supply chain. New strains of the virus, such as the now-dominant ‘Delta variant’, may lead to further restrictions in future.

Against this backdrop, and despite economic support measures introduced in most major markets, we have not generally seen any support measures targeted to the construction sector. While support for workers under insurance or furlough schemes has been common to most jurisdictions, these have not been a game-changer for the construction industry.

Although some claims brought in respect of Covid-related delays have been settled, we still lack real clarity from the courts and arbitral institutions on how these disputes will be handled. One exception to this is in Saudi Arabia, which has introduced a specific process for disputes arising under construction, supply and lease contracts signed before the pandemic began.

We have also observed differences between how civil and common law jurisdictions have dealt with the pandemic. In France and Spain, many construction and infrastructure activities are governed by public law, and a number of regulations have been introduced to deal with Covid-related claims. This kind of regulation has been limited in respect of private projects.

Force majeure claims

Common and civil law jurisdictions may treat Covid claims differently, depending on the jurisdiction. A contract may provide for relief by treating the pandemic as a force majeure event. Where the contact does not provide for this, the parties may have to look at the laws applicable to that jurisdiction to see whether they grant some entitlement and relief.

For example, the Spanish civil code allows for force majeure events where the contract itself does not necessarily provide for these. A similar provision arises under the French civil code.

In some cases, the effect of Covid laws restricting movement of people and goods into a country has given rise to force majeure claims where the closed list includes a ‘blockade’ or ‘embargo’ as an event of force majeure. In other instances, costs associated with force majeure have been expressly excluded under the contract. Ultimately, the merits of each claim will be evaluated on a case by case basis.

Changes in law

A change in law – such as an enforced lockdown preventing performance of the works, or visa restrictions or quarantine provisions delaying planned completion – may provide an alternative basis for relief in the circumstances of a Covid claim.

Many construction projects allow for relief for changes in law after the conclusion of the contract, including extension of time for delay and relief for costs consequent to that delay. However, it is not uncommon to come across provisions where a change in law entitlement excludes claims for time and costs where the change in law arises from a force majeure event – that is, the change in law entitlement is subject to additional restrictive conditions that requires there to be no alternative routes to relief available.

Arguments have also arisen where existing, rather than new, legislation was used to effect lockdowns and minimise the spread of Covid, and so the measures were arguably an accepted risk.

A particularly problematic scenario could arise where one party declares force majeure before a change in law due to Covid comes into effect. The force majeure provision gives no entitlement to costs, while the change in law provision entitles the contractor to both time and costs. In both instances, the underlying cause is the pandemic, but the relief and the parties’ positions are diametrically opposed.

To deal with these conflicts, some jurisdictions set guidelines or legislated relief for delays in construction projects during the early stages of the pandemic. For example, in Saudi Arabia, a civil law jurisdiction, the Supreme Court of Appeal set out rules for dealing with Covid claims in private contracts and specific courts have been designated to deal with construction claims. The courts effectively look at what is fair in the context of Covid, while setting specific conditions for an entitlement to arise.

We may see these types of interventions become more common, as more countries consider and grapple with the long-term impact of Covid on construction projects.

Calculating length of delay

Different jurisdictions reacted differently to the pandemic, with not every jurisdiction opting to shut down all construction sites for a lengthy period of time. Where there has been a lengthy site stoppage, it might be relatively straightforward to gauge the period of delay. However, where sites stayed open but were impacted by different measures or restrictions put in place in response to the pandemic, there is likely to be a more enduring impact on the project and calculating the length of the period of delay will be more challenging.

In the second of these scenarios, the party making the claim will first need to show what was planned to have happened, with reference to the original base line programme of works. Problems can arise if this programme was not correct or not realistic, or if it was not kept up to date before the effects of the pandemic began to be felt.

The party must then be able to show what caused the delay, when and why. For this, records of progress will be necessary – for example, planning decisions that were taken and any mitigation measures. Again, problems will arise where these records have not been kept on a rolling basis.

Witnesses may be helpful in filling in any gaps in the documentation. However, if they have been let go before there has been a change to record their recollection of what happened, a useful resource will have been lost.

Challenges may also arise where there were delays before the pandemic hit. The party relying on the delay must be able to differentiate between the effects of these two causes of delay. In this scenario, the contractor may argue that its own delay was manageable but made much worse by the pandemic; while the employer may argue in response that were it not for the contractor’s existing delays, the Covid impact would not have been so problematic.

Calculating impact of disruption

Similarly, documentary evidence will also be critical for a party seeking to demonstrate the disruptive impact of the pandemic on the project.

First, the party will need to be able to show what productivity would have been but for the impact of the virus, based on an assessment of baseline productivity – showing the resources that the contractor would have relied on to complete the work, and at what cost. The potential challenge here is if the tender baseline for productivity was already unreasonable, or if it was not updated to account for the pre-Covid reality on the ground, taking account of any variations for example.

If the party is not able to properly establish what it would have done in terms of normal productivity, it will be very difficult for it to establish the impact of the Covid disruption event.

Secondly, the party will need to show the cause of the disruption, with reference to contemporaneous factual evidence. Possible causes include lack of labour as a result of travel restrictions, quarantines or stay at home orders; or inadequate supplies. Additional health and safety measures on-site may also be disruptive to the project: staggering start, finish and break times to reduce congestion; social distancing while working; implementing one-way systems around the site; minimising the number of workers involved in a task or restricting interactions with others; or resequencing works to avoid congestion.

The final step is to show the effect of the disruption. This is often the most challenging element of a claim, because the party must be able to not only show the impact that the virus has had on baseline productivity but also to dis-entangle that from the effects on productivity of any other, unrelated issues.

This is not easily done when you consider what actually happened during the pandemic, with different measures and restrictions introduced at different times; and that the effects of those measures will not have been uniform across construction sites or even different work activities or disciplines on the same site or project. Corrective measures – working longer hours, or acceleration – may not actually assist, and may even hinder progress.

Government intervention

To protect parties’ positions and to minimise the burdens on national courts, some jurisdictions introduced various measures limiting parties’ freedom to rely on agreed contractual positions and to encourage the use of alternative forms of dispute resolution (ADR).

Notable examples include:

• in Singapore, the Covid-19 Temporary Measures Act (TMA) provides that other delay damages are not payable in respect of events after 1 February 2020 and provides a defence to any claim for breach of contract against a party unable to perform “to a material extent” due to a Covid-19 event. However, the Act does not operate automatically – those wishing to seek its protection must serve a compliant notice, while assessors are required to consider the “ability and financial capacity” of the party in breach to perform the obligation in question;
• the TMA also allows parties in dispute to apply for the appointment of an assessor to resolve disputes over the application of the Act, in a less formal and more time- and cost-efficient alternative to court proceedings
• in France, an ordinance neutralised the effects of liquidated damages and termination clauses from 12 March 2020 until the expiry of a one-month period after the end of the ongoing state of emergency;
• France also introduced state-funded mediation for disputes of up to €50,000 through the Centre de Médiation et d’Arbitrage de Paris, while courts encouraged parties to apply for mediation as a matter of course;
• in the UK, the Cabinet Office issued guidance to encourage responsible contractual behaviour and the use of early forms of ADR before escalating to formal disputes. Fast track methods are also encouraged, including in the construction sector where the Construction Industry Council has developed a fast-track adjudication procedure.

Several states also provided emergency financial relief to businesses. Again, this was designed to safeguard the financial health of companies impacted by the crisis, but also to avoid parties turning to courts to seek recourse against contractual counterparties.

Co-written by Florian Quintard of Pinsent Masons