How will the pandemic affect meeting obligations from construction contracts?
According to some economists’ projects, construction will be one of the industries most affected by the consequences of the COVID-19 pandemic. It seems major state infrastructure projects will be continuing, and the minister of infrastructure even stated they would gain new momentum in this period. Naturally, the hope is that this will contribute to recovering the economy – as a kind of “new deal”. Construction is an industry that can have significant multiplicative effects on the domestic economy. On the other hand, it is also important to consider the legal ramifications of the pandemic for current construction projects. Many among them—generally larger and more complex construction projects—are implemented based on a standardized FIDIC contracts. FIDIC contracts anticipate a number of situations that could otherwise be easily overlooked by the parties and fairly distribute the risk between the employer and the contractor. Read on to learn which provisions in FIDIC contracts are especially pertinent in the current circumstances and what legal consequences they have for the contractor and the employer1.
Health and safety of personnel
Already in the general provisions, a FIDIC contract states the constructor’s obligations as being responsible for the safety of all its operations and activities on the construction site; it goes on to determine in other sections their specific obligations regarding ensuring health and safety on the construction site. In particular, one of the contractor’s obligations is to comply with the applicable health and safety regulations and Laws to ensure that suitable arrangements are made for all necessary welfare and hygiene requirements and for the prevention of epidemics. This illustrates that the contractor’s obligations are somewhat more definitively set than the obligations of ensuring safety in the workplace stipulated in the ZDR-11 and the ZVZD-12.
Delays and extension of the time for completion
a) What happens if the pandemic causes the contractor to have difficulties in mobilizing personnel or there are issues with the supply chain?
If the contractor is facing delays due to unforeseeable shortages of personnel or supplies, caused by the pandemic or government measures, the contractor will be able to request an extension of the time for completion. This FIDIC provision stipulates the option of extending the time for the completion, but does not also specify that the contractor is entitled to any financial compensation.
Let us imagine a hypothetical example in which delays occur due to repeated health and safety inspection of the worksite (e.g. use of protective equipment and other measures for preventing an epidemic). These kinds of delays caused by the authorities are also regarded as a justifiable reason for a delay, affording the contractor the right to seek an extension of the time for completion of the works.
b) What happens if the contractor is incurring additional delays and costs, because the employer i.e. engineer is working remotely and is mostly absent from the worksite, which leads to most of the decisions being passed with a delay?
In this event, the contractor may explore remedies under Sub-Clause 8.4(e) of the FIDIC Red Book, which provides the contractor with an entitlement to an extension of the time for completion in the event of any delays, impediments, or preventions caused by or attributed to the employer, the employer’s personnel or the employer’s other contractors on the site.
c) Adjustments for changes in legislation
FIDIC contracts are standardized contracts that must be subjected to mandatory statutory provisions in force. Any changes to the legislation after the base date4 can constitute a reason for a change of the contract pursuant to Sub-Clause 13.7 of the FIDIC Red Book (Adjustments for changes in legislation). If the changed legislation demanded of the contractors that they ensure special security measures on construction sites, such as e.g. safety masks, disinfectants, adjusted working hours, additional premises and similar, then said adjustments could constitute as adjustments for changes of legislation pursuant to Sub-Clause 13.7.
d) What if government measures or an epidemic causes the execution of the works on site to become impossible?
If continuing works has become impossible due to government measures (e.g. quarantine, curfew, inaccessibility of the worksite due to movement restrictions etc.), then the relationship between the parties may well be handled through the changes in Laws provisions as set out under Sub-Clause 13.7, as explained above.
Further, or in the alternative, an investigation needs to be made whether this situation could qualify as force majeure, as defined under Sub-Clause 19.1 of the FIDIC Red Book. This Sub-Clause stipulates that a force majeure means any exceptional event of circumstance that:
- Is beyond a Party’s control,
- The Party could not reasonably have provided against before entering into the Contract,
- Having arisen, such Party could not reasonably have avoided or overcome; and
- Is not substantially attributable to the other Party.
Situations that constitute force majeure are primarily listed in Sub-Clause 19.1. Among others, such events include man-made events (e.g. war, riots, strikes) as well as natural events (e.g. earthquake, hurricane, volcanic activity). Cognizant of the fact that pandemics are not listed as a part of this list of examples of force majeure, each individual instance will have to be subjected to analysis to decide whether all the elements exist to satisfy designating the situation as force majeure pursuant to Sub-Clause 19.1. It seems the most challenging element to prove will be whether the condition of “which, having arisen, such Party could not reasonably have avoided or overcome” has been met. It could be argued that the implementation of the relevant health and safety measures may have made it possible to overcome said circumstance.
In the event of a force majeure, the contractor will have to specifically state which activities were prevented from being implemented due to force majeure within 14 days and inform the opposing party regarding this. The first legal consequence of force majeure is that the contractor is (temporarily) excused from performing their contractual obligations. Furthermore, the event of force majeure will also entitle the contractor to an extension of time for completion for such delays due to force majeure and to the payment of costs that arise as the consequence of force majeure. In terms of the entitlement to financial reimbursement, it should be noted that the FIDIC Red Book does not provide a clear basis for the conclusion that a pandemic is the kind of event that would entitle the contractor to financial reimbursement pursuant to Sub-Clause 19.4(b).
If the contractor is able to continue work on site—although with difficulties—then it is likely that these scenarios would fail the test of Sub-Clause 19.1 on force majeure. If a contractor continues work on site, this constitutes proof that an exceptional event or circumstance could be reasonably overcome, thus not qualifying as force majeure. The performance of obligations is more difficult, but not necessarily prevented.
FIDIC contracts have been prepared based on years of experience in implementing complex construction projects in harsh environments. It is therefore no coincidence that FIDIC has also foreseen the possibility of a pandemic outbreak during the time of a project implementation and has included provisions on how the parties should act in such circumstances.
1. For the sake of simplicity, we will only be focusing on the FIDIC Red Book, 1999 edition.
2. Employment Relationships Act (Official Gazette of the Republic of Slovenia, no. 21/13 as amended, “ZDR-1”).
3. Health and Safety at Work Act (Official Gazette of the Republic of Slovenia, no. 43/11 as amended, “ZVZD-1”).
4. The base date is the cut-off-date to which the tenderer must consider certain facts or information in preparing their bid.