Briefing

11 March 2020

Coronavirus and the impact on global projects

As the commercial and economic effects of coronavirus (COVID-19) continue to intensify as the virus spreads, it is clear the execution of major construction projects globally will be both directly and indirectly impacted, particularly given the reliance on Chinese and South Korean contractors, plant and equipment. A number of high profile Belt and Road projects have already been disrupted due to Chinese labour and materials being held up in China, for example Indonesia’s $6 billion high-speed railway from Jakarta to Bandung, projects in the Economic Corridor in Pakistan, as well as the $1.62 billion Orange Line Metro Train Project in Lahore which has been suspended due to the outbreak of the disease.

This briefing considers the issues highlighted in our previous briefing on contractual implications under English and PRC law, but with a major projects and construction focus, and offers practical steps to identify potential disruptive factors, manage the risks and mitigate the impact.

What are the potential impacts?

Examples of potential direct and indirect impacts of coronavirus to projects include:

• disruption to project supply chains, including the manufacture, shipping and delivery of plant and equipment;

• restrictions on travel for labour resources and key personnel required to supervise and execute the works and the imposition of quarantines;

• upheaval in the financial markets and currency fluctuations which could result in financial hardship and insolvency; and

• postponement of projects and impact on cash flows.

Is coronavirus or its consequences an event of force majeure?

Whether relief will be available from any failure to perform caused by a force majeure event will depend on the terms of the contract and other legal remedies in the relevant jurisdiction. The following considerations are key to determining your rights and obligations:

• What is the governing law of the contract? Under common law systems such as those derived from English law, force majeure is a contractual construct with the express terms of the contract determining its scope and conditions to claim relief. For civil law jurisdictions, such as those based on the French civil code, force majeure is available under the civil code without the need for it to be expressly provided for in the contract. Typically, under civil law for an event to constitute force majeure it must be: (i) an event for which neither party is responsible, (ii) unforeseeable, and (iii) incapable of being overcome.

• Is there a relevant specified event of force majeure? There may be specific provisions in the contract to cover epidemics or labour and materials shortages as events of force majeure. If not, there may be other language that would cover the impact of the coronavirus such as a catch-all provision regarding events beyond a party’s reasonable control. Will the failure of a subcontractor to perform because of the effects of the virus constitute an event beyond the reasonable control of the main contractor? The answer is not necessarily straightforward and depends on the governing law and express terms of the contracts as well as the factual position. 

• What steps can be taken to mitigate the effect of force majeure? Typically, the party seeking to rely on an event of force majeure has an obligation under the contract or at law to mitigate the effect (for example under Clause 18.3 of FIDIC Silver Book 2017). Such steps would include taking work-around measures to progress parts of the works not affected by the event. It will also be essential to ensure all medical and travel advice has been followed, and reasonable precautionary measures have been taken to help prevent the spread of the virus between project personnel.

• Can you engage an alternative contractor/supplier? Consider whether an alternative contractor or supplier can be engaged or whether sub-contractors can perform work the main contractor is unable to do, for example by importing labour from another, unaffected country. Such an arrangement may require the agreement of the main contractor to omit works from its scope and give those works to an alternative supplier unless the contract provides rights to take such steps. Which party bears the costs of these alternative arrangements may be a source of dispute.

• Are you bound by tendering requirements either contractual or under public procurement law? If so, do you have framework agreements in place which permit call off contracts to alternate suppliers? Alternatively, can you rely on any exemptions which permit sole sourcing directly from a chosen supplier for example, because of urgency?

• Did the coronavirus outbreak cause the failure to perform? This is a factual question, but the answer will not necessarily be straightforward, particularly where the project was already in delay or there are other concurrent or dominant causes of the contractor’s failure to perform. For example, where a contractual obligation may be partially fulfilled, such as by allocation of supply of materials among customers, failure to make a reasonable allocation (i.e. to supply one customer over another) can break the chain of causation and result in relief being denied.

• Have all contractual conditions precedent been followed? Typically, contemporaneous notice of the event of force majeure and particulars of the event and its consequences including efforts to mitigate the impact must be given. These requirements may be a pre-condition to relief (see for example Clause 18.2 of FIDIC Silver Book 2017). 

• When will the event of force majeure be over? It will be crucial to monitor and assess when the event of force majeure ends, in particular as notice may need to be given under your contract. Determining this will require careful consideration of the specific circumstances, for example easing of local restrictions or government action.

What are the alternatives to force majeure?

Those undertaking major projects may have alternative contractual protections to invoking force majeure available, including:

• Price escalation and currency fluctuation provisions which allocate the risk of increased costs and/or currency movements to one of the parties (see for example the price escalation provisions in Clause 13.7 of FIDIC Silver Book 2017);

• Hardship clauses or principles of law which provide a remedy where performance has become excessively onerous as opposed to physically or legally impossible. The remedy under a hardship provision is generally renegotiation of the contract as opposed to excused performance. For example, such relief is provided for in Article 6.2.2 and 6.2.3 of the UNIDROIT Principles of International Commercial Contracts 2016 and under civil law systems, such as under Article 249 of the UAE Civil Code;

• Change in law provision which can be used to adjust the contract price where a change in law has caused contract performance to be more expensive (for example under Clause 13.6 of FIDIC Silver Book 2017);

• Insurance policies which may be responsive such as business interruption insurance. Note that care should be taken to ensure any notification requirements are followed to maximise prospects of recovery;

• Contractual Suspension and termination: does your contract provide for a right to terminate if the effect of force majeure continues for a significant period? For example, under Clause 18.5 of FIDIC Silver Book 2017 where execution of substantially all of the works is prevented for a continuous period of 84 days, or for multiple periods which total more than 140 days due to force majeure either party has a right to terminate on 7 days’ notice; and

• Frustration: absent an express right to terminate can you argue that the contract should be treated as frustrated, i.e. at end because it is impossible to perform? Typically this doctrine is kept within narrow limits and mere delay to performance is normally insufficient.

Practical tips to manage risks:

• Know the supply chain: identify on which projects you are dependent on labour, equipment, supplies or materials from an impacted area. 

• Conduct a review of contracts: to understand your rights, obligations and options, including under relevant finance and security instruments such as bonds and guarantees. Express contractual provisions may well differ up and down the supply chain.  Moreover, the contracts may be governed by different laws resulting in varying remedies under civil code or statute in addition to contract terms. 

• Deploy AI tools to assist review of multiple contracts: Using Freshfields’ contract review AI tools, we can assist by quickly identifying and extracting key contractual provisions.  By leveraging this technology, we can deliver substantial time saving by comparison to a manual review of multiple contracts.

• Keep detailed records and communications regarding the impacts of coronavirus. These may be essential to support actions taken and the adequacy of mitigation measures should a dispute arise later.

• Beware of creating unhelpful internal documents and maximise the availability of legal privilege.

• Beware of obligations under local law regarding health and safety, environmental protection and other sector specific regulations which may result in liability reverting to you if your contractor is unable to perform.

If you have questions, please ask.

We will be continuing to monitor developments related to coronavirus and major projects and update our briefings as the situation evolves. For further Freshfields thinking, see the our updates in the Freshfields coronavirus alert centre.