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Our Covid-19 reality, a wake-up call forcing a challenging future in negotiating new construction contracts.

6 July 2020

Covid-19 Statistics South Africa reported that 1 630 008 tests have been conducted, 151 209 positive cases identified, 2 657 total deaths and with 6945 new cases as at 30 June 2020. It seems it is time to accept that this virus is likely to knock on the doors for many more weeks to come, probably months and possibly years for that matter. The question to be asked is, will it ever vanish and disappear. Because of this uncertainty, we should strongly consider ways to rather adapt to the current circumstances and the sooner, the better. Life must go on!

When the respective lockdowns commenced more aggressively around the globe, there was immense impact on construction projects (amongst other business operations around the World). This caused an impact through the whole supply chain and effected all stakeholders. Projects were stopped, supply and delivery of goods or materials were either redirected, prevented or halted in its entirety, people were told to isolate, work from home. Some Governments in various countries implemented new laws that restricted or limited the movement of people. Various companies had to close doors, which prevented them from any further operation. No operations, no customers, no income, leading to the worst possible consequence, a cut in salary or even no salary, resulting in loss of jobs. This has already affected thousands and millions of people around the World.

Due to these unforeseen events and circumstances, which no person could have predicted, force majeure notices were getting issued left and right seeking relief from compliance of contractual obligations. Later, as some governments started to implement restriction laws, it raised the question if force majeure by itself was enough, was it the correct and only contractual remedy to seek for relief. This topic has been canvassed already in articles and toolkit guidelines released by various industry experts over the past few months.

With this article, the author looks to the future, by considering particular types of clauses and provisions found in standard form construction contracts, and what possible changes to these provisions will require.

How should parties approach future contract negotiations, to ensure that a perfect balance of risks remains the champion of the day. It has been noted over the years, that a perfect balance of contractual rights and responsibilities, can be achieved between parties that enter negotiations with a collaborative approach, with a “we together” mentality.

In order to understand what clause and provisions will likely need to be relooked at, it is necessary to identify the various areas of impact caused by this event. Some has been briefly stated above, but it includes inter alia the following from what we have experienced so far:

  • Works on site were suspended, stopped as a whole (whether by instruction directly from the employer or its agent, caused by this unforeseen event, and further forced by regulation implemented by governments).
  • Government regulations resulted in border closures (affecting international trade and shipping, further effecting the supply chain, materials and goods delivery).
  • Restriction of movement by people (only allowed to work from home, demobilisation of people from the site, requiring additional travel arrangements for the workforce).
  • Health and Safety (additional measures had to be put in place, social distancing, hand sanitizers, regular washing of hands, wearing of masks, immediate alertness and actions to be taken regarding medical testing upon experiencing of Covid-19 symptoms, and the list can go on).

Considering the aforementioned circumstances, which is likely not exhaustive, it is already possible to identify which particular clauses or provisions of a contract should be reviewed for amendment, that can accommodate for a specific relief and protection against the continuance of this event or the occurrence of such similar future event. The affected clauses or provisions may include:

  • delays and/or other events preventing performance, which will entitle a claim for extension of time without or with related costs.
  • access, mobilisation, demobilisation to and from site.
  • health and safety.
  • price adjustment, escalation in supplier costs.
  • force majeure.
  • types of insurances to be considered for proper cover relating to certain unforeseen events and the impact caused as a result.
  • termination of the contract.
  • notification requirements to ensure entitlement.

Delaying events can be identified and be stipulated, providing for an entitlement to claim extension of time with costs or for an extension of time without costs. Some events can be identified, whereto the parties can agree will likely occur. For example, instructions from Employer / Engineer for additional works (variations), to suspend or stop works etc. These types of clause should be reviewed to consider the current circumstances. Covid-19 was unforeseen a few months ago. However, as it is still very much present today, everyone is now aware of it. With new contract negotiations in this period, this should be considered and reviewed. With regulated levels of lockdown, and with each level with its own prescribed measures and actions to be taken, this can result in circumstances where business can proceed normal one day, but the next, a sudden announcement which causes all operations to fall back to more stricter level with stricter measures and regulations. Further with limited or no access to site, resulting in possible demobilisation and remobilisation etc.

People must travel from and to site, depending on the location of the site, some will need to be transported, thus having a costly effect relating to transporting arrangements and further limitations that can be imposed in this regard, which limits the amount of passengers that can be transported in one bus or taxi. This will also inevitably have a likely time and cost impact, which calls for review and a different approach. These cost will need to be accounted for and be agreed to. Consideration must also be given to the restrictions to travel across borders and between provinces or countries. Regulated periods for isolation or quarantine of each country when people arrive, should be considered together with possible exemptions and permit requirements.

With regards to health and safety on site, regulations have promulgated additional safety measures that needs to be implemented by all businesses to protect its workers and prevent the spread of the virus. This will require a detailed and proper stipulation of health and safety specifications in a contract. Proper guidelines and protocols which can be followed. On construction sites, additional measures must be in place and the costs related thereto should be agreed, which will then form part of the contract value. These additional measures inter alia includes, hand-washing stations, sanitisers, screening equipment, protection gloves, face protection or masks, sterilisation of safety gear and clothes, restriction on sharing of tools, equipment and machinery between persons, medical testing and possibly testing facilities on or close to site. The parties should also take into account the required period of isolation in quarantine.

This event had an immense impact on the supply chain. Construction works were affected and completely halted as a result of materials that could not reach the country or the site due to border restrictions. Various contractors placed orders for materials, paid therefore and waited for it to be shipped and delivered. These orders and delivery on construction projects, are sometimes subject to a programme and delivery schedule in order to plan works properly and by hoping that works can proceed upon receipt of materials as initially planned. Other scenarios are where prices were already agreed at contract commencement. However, the lockdown and border restrictions have forced a different date of supply or delivery, which period likely extended beyond the pricing terms and conditions that was locked-in at the start. Suppliers can then become entitled (or may demand), escalation in prices as a result of the changed circumstances, possible changed routes to deliver the materials etc. It makes it necessary that the contracting parties should discuss and consider the options of sourcing more than one supplier as back-up in such circumstances. Further, review and consider how the pricing and conditions can be adjusted to accommodate supplier restrictions and or delays by defining the circumstances which will entitle an escalation in prices.

The clause (which has quickly become very popular), the one dealing with force majeure. A pandemic as the Covid-19 are no longer unforeseen, it is ongoing and all are aware. The effects thereof have forced certain changes already, as stated, regarding new health and safety requirements (some regulated by governments or some as a direct instruction from the employer). In negotiating current new construction contracts, the parties must carefully review the circumstances and expressly define the events that will be accepted to be force majeure events. Attention should be given to the express use of wording to avoid confusion. Some standard forms contracts do not expressly use and stipulate wording, such as “virus”, “epidemic” or “pandemic”. Under this clause, you generally only become entitled to an extension of time, but no additional costs, because its usually events which no party could have foreseen or prevented, but which prevents the performance of certain obligations.

The parties must review the types of insurance policies to cover for certain events. Covid-19 has made a lot of companies realise that they need to rethink their future. Companies need proper cover to protect itself against loss of income and or loss of revenue, to protect its workers and place itself in a position to be able and to continue paying salaries, adapt to accommodate different working environments (where people are forced to work from home and not the office). Policies to cover additional company costs which may arise if workers must have access to office facilities like printing, scanning and network connections. In addition, are further insurances that may produce cover for security, protection of works, materials, equipment, and site offices during a time of lockdown, with no access to site. Lastly, cover for possible loss or delays to the supply chain regarding the delivery and supply of materials as per a planned schedule or to cover cost related to the termination of a supply or service agreement.

With an event as Covid-19, it is understandable if any party want to protect itself and consider termination. It is an uncertain event, with an uncertain outcome, and with no one knowing for how long this can still endure. The parties can review and consider the express conditions relating to termination for convenience in circumstances of such a pandemic. Termination in this regard, should purely result in the commercial protection of both parties. It must make commercial sense for both contracting parties. The conditions for such termination should be agreed and be expressly set out in clear words, notice requirements and the subsequent responsibilities and procedures that follows thereafter.

The periods related to notification must be clearly stipulated, to whom it should be addressed and how it should be transmitted. Notification conditions are sometimes prescribed in a clause on its own or is incorporated within other clauses. For various circumstances, the contracts require some notice. This includes for claims due to a delay, variations, instructions by employer or its agent to suspend or stop works, termination and disputes. If properly complied with and within the prescribed contractual period, this can ensure an entitlement to a claim for additional time and / or costs or the alternative relief sought in terms of the contract. Notification requirements must be considered and reviewed, to accommodate for Covid-19 types of circumstances.

In conclusion, the risks and circumstances to each respective project will differ from the other. The parties will need to identify and research the various possible areas of risk to their particular project, and adapt thereto accordingly by reviewing the provisions of the contract and agree to clear, balanced duties and responsibilities, which will result in efficient and cost effective operations. The considerations stated above, deals only with few identified provisions

and clauses, and can likely still evolve as the time goes on. That being said, in these times, it has become a lot more clear that parties should start to seek resolution collaboratively, and communicate form the outset of any such event in an attempt to seek ways of mitigation, or to decide and agree the best commercial way forward to the benefit of both, including any other stakeholders, which should avoid a party from getting financially scarred, or worse, burn down to the ground (figuratively speaking).

Author: Barry Herholdt, Senior Associate