With the global pandemic of the novel coronavirus – also called COVID-19 –construction industry all over the world, including the Gulf States, is already experiencing its adverse effects and yet there is more to come. With the death toll rising globally and a rapid increase in cases being reported, no one can tell for sure its overall impact on businesses across the globe.
The spread of coronavirus presents unique challenges to the construction industry and legal systems covering disruption cases. One way to look at the current situation is through the force majeure clause in the contract.
Reasons Why Coronavirus Will Impact Construction Industry
A serious implication of the virus is its impacts on Chinese production, curfews, and travel bans. It has crippled the manufacturing sectors. Following are some of the ways the coronavirus outbreak is affecting the construction industry:
1. Supply Chain Disruptions:
As China makes up one-third of global manufacturing, since the coronavirus outbreak, there have been significant production delays that have manifested problems in the construction industry all across the globe. Delay in construction material will significantly impact jobs in the next few weeks as the industry is already seeing its effects, and contractors should expect the price of materials to go up due to shortage.
Due to the global pandemic, people are quarantined across the world in their homes, which means the ability of contractors to do work is limited. Quarantine is severely impacting construction jobs. Workers who are ill cannot come to work, and others are not coming to work due to concerns over large groups of people.
3. Legal Disputes:
Due to the Coronavirus outbreak and construction delays, payment is a mess owing to the economic uncertainty. The current situation outlined by supply chain disruptions, quarantine, etc., will create legal disputes concerning project delays and payment delays.
4. Economic Challenges:
In light of recent events, there is a huge possibility of a global economic recession, and this will also impact the construction sector. Anirban Basu, an economist, says that “Risk of recession over the next three to six months is arguably more elevated than at any period since 2007.” While the specific impact of coronavirus on the global economy is unknown but it will slow down the growth in 2020 undoubtedly.
What is a Force Majeure Clause?
One of the ways contractors can seek protection and ensure their payments is through force majeure clause in their contracts. Given the widespread effects of the virus, the inclusion of a well-composed force majeure law can help contractors deal with unforeseen events.
A force majeure clause “relieves one party from performing contractual obligations under certain circumstances that would make performance impossible, impractical, and even illegal.” This clause can be drafted generally to cover a wide range of delays or specifically to cover delays in the result of a specific event such as this pandemic.
Depending on how parties draft the clause, it may have a variety of consequences; for example, excusing the party from performing contractual duties, excusing delays in performance, suspension, or extension of time or termination. You may also seek the advice of a delay expert to help you draft the clause in your contract to ensure that you have to face zero liability in case of delay.
A party who is seeking to use force majeure clause must include in their contract that:
- Non-performance is due to events and circumstances beyond their control
- Force majeure event is because of the inability to perform contractual duties or performance delay
- There was nothing that could be done to avoid or mitigate the consequences.
How Standard Force Majeure Clause Applies to Coronavirus Delays
The force majeure clause includes following approaches to define the event which has impacted the construction work, relieving the contracting party from liability:
1. Specific Events:
Events under this category include war, terrorism, natural disasters like earthquakes, tsunamis, plagues, epidemics (pandemics), and the act of governments. As the word pandemic is clearly used, so it naturally covers COVID-19.
Another way to look at the current situation is how acts of governments have impacted the construction works. Due to the coronavirus outbreak, the governments have imposed travel bans, quarantines, closed international borders, imposed trade embargoes, and shut down local buildings and public places. However, this position is less clear where the governments have used legal power or made recommendations to the public.
In case no specific event is mentioned in the clause, it is essential to know if you have included that the list is intended to be exhaustive or non-exhaustive. If you say your list is comprehensive, it means it is complete, which will prove difficult in an unforeseen situation like this. So it is better to suggest clearly that your list is non-exhaustive.
2. General Criteria:
Contracts may refer to events in a broad category as “beyond the party’s reasonable control.”Thus, determining whether this definition covers issues due to coronavirus or not depends upon interpretation and is fact-specific. However, in the current situation, courts are likely to be generous in their interpretation with parties who are encountering difficulties in performance. But these parties must provide evidence that the non-performance was out of their control and could not have been prevented. To legalize the disruptions due to coronavirus, consult a delay expert that can help you to prove that the current circumstances prevented, delayed, or hindered your project.
Coronavirus and Construction Delays
Given the unusual nature of the coronavirus outbreak and response of governments across the globe, it is highly likely that COVID-19 would be a part of the force majeure clause as a force majeure event. However, just because of a force majeure event, parties don’t need to be protected from any liability or delay in performance.