McDonald ... now, more than ever, parties have become increasingly aware of the importance of record-keeping.
Impact of Covid-19 on contracts
PAMELA MCDONALD* analyses the impact of the Covid-19 pandemic on the construction sector and what actions companies are taking to pre-emptively protect their businesses.
01 November 2020
The impact of Covid-19 was immediately felt by all commercial parties, most noticeably through the sudden unavailability of labour and resources. Consequently, the movement of materials was, and to some extent remains, disrupted and delayed.
Along with the direct impact of the virus on the ability of the supply chain to honour its outbound obligations, the construction sector has also been doubly affected by the indirect impact arising from government actions in response to the virus, such as bans being imposed on the unloading of materials shipped from certain countries, and the refusal of visas for labour and staff to travel into a project’s host country.
Parties to construction contracts immediately had to consider how to address claims of force majeure from suppliers and subcontractors and also how to protect their entitlements in respect of their own claims for additional time and compensatory relief. Addressing these claims varies from jurisdiction to jurisdiction and from contract to contract.
To mitigate the impact through the medium to long term, affected parties are now re-evaluating the contractual status quo of projects – assessing where they are likely to be on strong ground and where their weaknesses lie. They are also seeking ways to preserve a back-to-back position with the supply chain, which aligns with their own obligations.
There is a strong focus on how to mitigate through delays and disruptions, and navigating through the progress and programming issues that might arise. Now, more than ever, parties have become increasingly aware of the importance of record-keeping, to maintain evidence of any delays, disruptions and cost incurred along with being able to question the supply chain, if required.
Unfortunately, there has also been a need to understand insolvency due to cashflow tensions caused by the crisis. Hence, company leaders are trying to predict what short- to long-term actions they can take and what they can do pre-emptively to protect their position in the market.
Whilst some contracts are continuing to be procured and negotiated as usual in the current circumstances, there has been a noticeable reduction in new projects being let. At this stage, there is no sufficiently consistent approach to suggest a straightforward and general market position on the pandemic and its consequences on the number of contracts being entered into compared to last year. In some jurisdictions, there have been no change in contract terms at all this year. This is predominantly in jurisdictions that have been least impacted by Covid-19 and where safety measures by the government have been relaxed. However, this varies amongst different jurisdictions.
In some Middle East countries such as Qatar, the UAE and Saudi Arabia, specific provisions are being considered for inclusion in infrastructure and energy contracts, such as the force majeure and change in law clauses, to exclude the consequences of Covid, which are being dealt with under separate unique new provisions.
Contractors have begun expressing their entitlement to an extension of contractual completion dates, which is mostly being accepted. The associated time-related prolongation costs are more challenging to negotiate and are being less readily agreed to by employers. This requirement is being more easily dropped in the context of more immediate shorter term contracts – most likely because shorter typically means lower value, so they perceive less risk or sums at risk, or possibly because they are more confident they can judge the more immediate future.
Generally, the specific provisions on Covid-19 are drafted so that entitlements are linked only to delays or costs that are the result of the pandemic or its consequences. At the extreme, some larger companies cannot envisage agreeing to any lump sum or fixed completion date-based contract of any size in the near future, as a result of Covid-19 concerns.
In the Middle East, the main Covid-19 associated risks affecting recent projects include: issues with the shipment of components and movement of manpower; management at the construction site itself from a health and safety perspective; and unavailability of key components and the impact on manufacturing capacity, creating issues with meeting the proposed schedule for the project.
Where the project is not capital funded by the government (such as in Qatar, the recent public private partnership [PPP] projects being released to market), prospective investors and lenders are interested to ensure there is adequate provision in the contract to mitigate against any additional risk related to time and cost over-run associated with these Covid-related issues. That is in addition to the other risk factors in the Middle East that are difficult to predict. For example, the recent unexpected increase in VAT in Saudi Arabia, the sizable increase in insurance premia in the market in the last few months and the possible changes in custom charges for imported goods.
As a result of the trying trading environment, commercial parties are making an effort to agree as much as possible before acting. This allows them to remain flexible and enables them to navigate through a clear lens. Often contracts do not contain all the answers and the key is to keep the records and understand what happened, when and why. With these themes in mind, parties to commercial contracts are setting the scene to protect and enable their businesses to propel forward despite the challenging circumstances.
* Pamela McDonald is Senior Associate - Construction, Advisory & Disputes at Pinsent Masons Middle East.
