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11 Jan 2023

Covid as a force majeure event in construction

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Introduction

The COVID-19 pandemic has had a profound impact on the construction industry worldwide with many of its stakeholders having experienced severe challenges, such as significant supply chain disruption, workforce restrictions, changes in laws and regulations, delayed authority approvals and inspections, an increased focus on health and safety on site and the suspension of construction projects.

Such challenges have inevitably resulted in projects worldwide experiencing severe cashflow difficulties as well as significant cost and time overruns, thereby eroding already tight industry profit margins.

While the construction industry has made significant efforts to address the impact of the COVID-19 pandemic with stakeholders on projects agreeing mutually acceptable solutions which do not necessarily fall within the strict confines of the construction contracts, it is expected that an unparalleled level of claims from developers, contractors and subcontractors will crystalise for years to come as a result of the mounting financial losses experienced with many considering their entitlements either pursuant to a contract or at law.

Overview

Many contractors and subcontractors have declared Force Majeure in response to the difficulties caused by the COVID-19 pandemic.

A "Force Majeure" provision is a contractual clause in a construction contract that offers an affected party relief from performing part or all of its contractual obligations in the event that a specified event occurs which is beyond the affected party's control and prevents it from performing some or all of the contract.

In wake of the COVID-19 pandemic, the construction industry will inevitably be closely observing how the courts determine such Force Majeure claims. Many, if not most, construction disputes are resolved through arbitration. Therefore, the awards are not typically publicly available.

As such, there is currently little insight as to the determination of COVID-19 related claims, and Force Majeure in particular. There are, however, some recent cases in Singapore and the UAE which shed some light on the issue. Below we consider the latest position on Force Majeure in England and Wales, Singapore and the UAE.

Current position in England and Wales

"Force Majeure" is not a recognised concept under English law. It is a contractual remedy and is therefore incapable of being implied into a contract under English law if the contract is silent on Force Majeure.

Force Majeure provisions in construction contracts, including FIDIC, EPC and NEC, typically define a Force Majeure event or circumstance as being (1) beyond a party's control (2) an event which could not reasonably have been provided against before entering into the contract (3) not reasonably avoided or overcome, and (4) not substantially attributable to the other party.

Force Majeure provisions also typically list events or circumstances in which the provision shall apply which can be either general or specific. For instance, FIDIC contracts list war, terrorism, rebellion, riots, strikes and natural catastrophes as Force Majeure events. However, EPC contracts typically go even further and also list epidemic as a Force Majeure event.

Most notably, in a recent judgement (European Professional Club Rugby v RDA Television LLP [2022] EWHC 50 (Comm)), the Court accepted that the COVID-19 pandemic constituted a Force Majeure event where the contractual Force Majeure provisions referred to "epidemic". Whilst this case does not relate to construction, the courts determination provides a useful insight into the contractual interpretation of Force Majeure provisions and the events that constitute Force Majeure.

Provided construction contracts include a Force Majeure provision which expressly provides for events or circumstances that would include the COVID-19 pandemic and/or its effects within its scope, the courts would likely consider that the COVID-19 pandemic constitutes a Force Majeure event and grant the relief an affected party is entitled to under the contract.

Force majeure provisions also often require the affected party seeking relief to demonstrate it has taken measures to mitigate, to the extent possible, any impact of the Force Majeure event in order to obtain an entitlement to relief.

Recent development in Singapore

The Singaporean High Court recently considered the interpretation of a Force Majeure provision in relation to a dispute that had arisen from a construction contract between a developer, the building contractor, and the architect (Ser Kim Koi v GTMS Construction Pte Ltd and others and another appeal [2022] SGHC(A) 34).

Clause 23(1) of the construction contract provided the architect with the power to award the contractor with an Extension of Time ("EOT") for certain specified events and circumstances provided the contractor had complied with the condition precedent set out in the contract. One of the specified events was Force Majeure (Clause 23(1)(a)). However, no definition for Force Majeure was expressly provided in the contract.

During the course of the project, the building contractor was awarded with an EOT for a period of 40 days due to the requirement to install an OG Box for the purposes of providing the power supply, as well as for the testing and commissioning of the M&E services due to delay of the electrical turn-on by power grid.1

The Owner alleged that the EOTs were improperly awarded for several reason but most notably because the Force Majeure provision (as set out in Clause 23(1)) was too vague to be enforceable, as it simply stated the phrase “force majeure” as one of the events entitling the contractor to an EOT.

However, the Court stated that given the sufficient body of law in Singapore relating to construction contracts and the use and meaning of Force Majeure as used in construction contracts, the Owner's "submission that the phrase force majeure (standing by itself in one of seventeen paragraphs) without further elaboration amounts to unworkable vagueness and unenforceability will not even get off the ground."

Notwithstanding this, the Court held that in its view, the essence of a force majeure event is a radical event that prevents the performance of the relevant obligation (and not merely making it more onerous), and which is due to circumstances beyond the parties’ control.

The Court held that:

"Clearly, many of the events and circumstances set out in cll 23(1)(b)–(e) could fall within the meaning of force majeure events and circumstances. However, the fact that they have been separately placed in succeeding paragraphs of sub-clause (1) [Force Majeure] shows that force majeure events and circumstances under cl 23(1)(a) covers force majeure events and circumstances other than those set out in cll 23(1)(b)–(e). What cl 23(1)(a) covers will therefore be… radical external events and circumstances that prevent the performance of the relevant obligations and which are due to circumstances beyond the parties’ control – for example, the COVID-19 pandemic and the “lock down” that followed over much of 2020 and 2021, the shortage of labour and materials due to the COVID-19 pandemic lock-downs, the prohibition of travel between countries and the ensuing disruption of supplies and manufacture of goods and material. We note, for completeness, that cll 23(1)(l) and (m) specifically cover the shortage of labour and the shortage of goods or materials respectively resulting from domestic and foreign government actions."

The Court further held that the reasons for the contractor's delay, which formed the basis for the EOT granted to the contractor, did not amount to such a radical or external event that it can be considered a force majeure event.

Recent development in UAE

The UAE Court of Appeal considered the interpretation and application of a force majeure clause in a contract for a purchase of an off-plan property (Case No. 458 / 2021 / 479 Real Estate Appeal). Clause 7 of the Contract stipulated that the property was to be handed over on 31 June 2019. However, in breach of Clause 7, the Defendant extended the date of delivery to 30 June 2020, and then again to 30 April 2021, causing the Claimant financial loss.

The Claimant requested the court of first instance to terminate the contract and oblige the developer to (i) repay the sums paid by the Claimant with interest and (ii) compensate the Claimant for the rent of a parable unit. The court ruled in favour of the Claimant.

The Defendant appealed the judgement on the grounds that there was an error in the application of the law and lack of reasoning. The Defendant claimed that they had notified the Claimant that due to circumstances beyond their control the property would be ready for delivery on 30 April 2021 which confirms that the Defendant seeks to execute the contract in good faith and in accordance with the law.

The Defendant further claimed that it was a relatively short extension on comparison with the duration of the project. The Defendant sought to rely on Clause 14(1) of the contract which stipulates that:

"The Seller shall not be liable for any failure or delay in the performance of its obligations under this Agreement in the event that they are for reasons beyond its reasonable control such as wars, floods, terrorism, protests, earthquakes, accidents, riots, decisions of the government body, workers' disputes, delay in delivery, interruption or disruption of utility services"

The Defendant relied on the decision issued by the Council of Ministers No. 5 of 2021 dated 10 January 2021, which provides that "the situation resulting from the Coronavirus (COVID-19) pandemic in the period from the date 1/4/2020 until 31/7/2021, is deemed as an emergency financial crisis."

On the basis of the above, the Defendant argued that the COVID-19 pandemic is a force majeure that caused the delay in the completion of the project, as it was necessary for contracting companies to observe social distancing and reduce the number of workers within the means of transport to below 25% of their capacity as well as prevent gatherings within the workers' housing area and reduce the number of workers working on projects.

In hearing the case and adjudicating the basis for a force majeure claim, the Court noted:

  1. The law describes force majeure in its general sense as an exceptional and unusual event that cannot be foreseen at the time of contract nor can it be prevented after its occurrence.
     
  2. The law describes force majeure in its general sense as an exceptional emergency and unusual accident that cannot be foreseen at the time of the contract nor can it be prevented after its occurrence. It should be demonstrated that the inaction in the performance of the obligation was the result of that force majeure and that the assessment of whether the alleged incident is considered force majeure and that the lack of performance was due to it is subject to the assessment of the trial court within the limits of its discretion so long as its judgment is based on valid reasons supported by the presented documents.
     
  3. According to clause 14.1 of the Contract, the defendant is exempt from liability in case of a force majeure. This clause states that Defendant, shall not be liable for any delay in the performance of its obligations under this Contract as a result of reasons beyond its reasonable control. The correct legal concept of force majeure, which if it occurs in the contract, makes the implementation of the obligations contained in the clauses impossible in accordance with clause (1) of Article (273) of the Civil Transactions Law and the explanatory memorandum of the Civil Translations Law.

However, the Court of Appeal also noted that:

  1. The defendant notified the Claimant on 30 January 2020 of a second extension period until 30 April 2021 without mentioning any reasons that prevent it from completing and handing over the real estate unit to the Claimant.
     
  2. In particular, the Defendant did not inform the Claimant that the pandemic was the alleged cause of delay in performance and the Defendant "did not go on to say that the impossibility was the reason for the delay in the letter for extension which was sent on 30 January 2021 and the second time on 30 June 2020".

In its decision, the Court placed particular emphasis on the Defendant not providing any reasons to the Claimant for requiring an extension of time to complete the property in its notification letter.

Furthermore, the Court of Appeal considered that the Covid-19 pandemic had not caused the project to stall as the Defendant had issued a notification of postponement as well as a further extension of the handover date prior to the Covid-19 pandemic.

Conclusion

Whether the COVID-19 pandemic measures constitute a force majeure event shall depend upon how the Force Majeure clause is drafted and specifically how Force Majeure has been defined. Whilst many stakeholders in the construction industry have declared Force Majeure in response to the difficulties caused by the COVID-19 pandemic as a result of their inability to perform their contractual obligations, it is clear that the concept of Force Majeure is interpreted and applied restrictively by the English, Singaporean and UAE courts.

For the purposes of claiming relief as a result of Force Majeure, it will be necessary for parties to evidence that the COVID-19 pandemic has impacted their ability to perform its contractual obligations as well as to ensure compliance with any notification requirements or a duty to mitigate against loss and damage.

Get in touch

Should you have any queries or require any specific advice in respect of a potential or existing dispute please do reach out to your usual contact at Stephenson Harwood, or to Chris Bailey or Magda Kofluk, who will be happy to assist you.

 
 

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KEY CONTACT

Lauren Tang

Lauren Tang
Managing partner at Virtus Law

T:  +65 6835 8664 M:  Email Lauren | Vcard Office:  Singapore

Magda Kofluk

Magda Kofluk
Managing associate

T:  +971 4 407 3934 M:  +971 54 581 6577 Email Magda | Vcard Office:  Dubai

Nancy Kapoor

Nancy Kapoor
Associate

T:  +971 4407 3964 M:  Email Nancy | Vcard Office:  Dubai