COVID-19 or the 2019 Novel Coronavirus has been declared a global pandemic by the World Health Organization (WHO). It has had a great impact on construction contracts that have been a key concern for many clients. The global situation has greatly impacted the construction sector in the Gulf region, as most of the clients are using forms of contracts like JTC, etc., with amendments.
The construction sector has been adversely affected because the work requires a significant amount of resources like materials and labor. As the current situation has greatly impacted labor movements and the whole supply chain, the construction work has been disrupted and delayed. Some of the potential impacts of COVID-19 on development contracts incorporate project disruptions, delays, changes in construction plan, cost overruns, and halting the construction altogether.
How is Coronavirus a threat to the Construction sector?
The OECD has declared COVID-19 as the “biggest danger since the financial crisis to the global economy.” Parties entering into contract include all possible risks in case of any unforeseen event. However, the scale and extent of Coronavirus are so atypical that none of the parties were able to contemplate its risks at the time of making contracts.
Here are some of the risks of Coronavirus on construction contracts and ways to allocate those risks.
Force Majeure in construction contracts
Article 273 of the UAE Civil Code states that,
“In bilateral contracts, if a force majeure arises that makes the performance of the obligation impossible, the corresponding obligation shall be extinguished and the contract ipso facto rescinded.”
It means that in case of any natural disaster or a situation where progress on work is impossible, the contract will automatically be canceled.
However, there have been no reported cases where it is specified that COVID-19 constitutes a force majeure and will depend upon each case. In a normal case, the contractor has to notify the employer ahead of time of the circumstances, which will cause a delay in the construction. In this case, however, the contractor did not have time to consider the risks, so the other parties may terminate the contract if the construction is suspended on force majeure for more than two months.
There is a clause under force majeure that states the term “Exceptional Event”. According to the clause, an “Exceptional Event” is:
“beyond a Party’s control; the Party could not have reasonably 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.”
Although pandemics are not included in the potential “Exceptional Events,” but the contractors can argue that COVID-19 fits the criteria as it has impacted their work. That way, parties are entitled to an extension of time.
Delay damages and additional costs
With COVID-19, the performance of a contract is still possible, but it will be implicated as the primary cause of potential losses in cost overruns and time. Under the JCT contract, in case of a delay in construction due to an “Exceptional Event,” the contractor can ask for an extension in time for completion of work.
Although the pandemic itself is not part of the “Exceptional Event” as discussed above but the contractor can claim extra time and financial resources due to delays caused by the virus subject to some mitigation factors due to a shortage of materials and the need to self-isolate the workers for a few days. Therefore, getting assistance from a quantum expert seems like a viable option to help mitigate the losses in the wake of this pandemic.
Frustration is an automatic response when a contract becomes physically impossible to perform, and the parties are ultimately discharged from their duties. In practice, the idea of frustration is involved in cases with extreme circumstances and is less likely to be applied in a contract that includes a force majeure clause like COVID-19 disruptions.
Another impact of this global pandemic on construction contracts is the suspension of work. In the JCT and other laws, under force majeure, there is a mutual right of termination of a contract in casework or the whole project is suspended for more than two months.
Given the current situation in the Gulf Region, it is highly likely that development projects could be significantly disrupted, bringing about termination and suspension of contracts. In any case, both the parties would most certainly request to extend the qualifying period of suspension in regards to the present circumstances.
What can You do?
At this stage, it is difficult to conclude how courts in the UAE will be dealing with force majeure and other risks and issues in the wake of COVID-19. There are companies providing quantum expert services that can help you with the management of your construction delays and amendment of contracts.
It all depends on the severity of the outbreak of the virus and the extent of disruptions caused in the construction sector. It seems that many related legal issues will be brought into light over the coming weeks, and courts will have to consider the existing contracts under the Civil Code.