Analysis

Coronavirus: COVID-19 and its impact on the construction market in the region

Director Dan Hughes and Philip Cronin, head of claims at Omnium Resolve look at the strains on project delivery during the outbreak

We cannot ignore that the COVID-19 pandemic is having a global impact on the delivery of construction projects, and especially for the nations closer to home in the Middle East, says two of Omnium Resolve’s leading experts.

Through high profile events including Expo 2020 Dubai, as well as the UAE’s Vision 2021 and the Kingdom of Saudi Arabia’s Vision 2030, these leading nations of the MENA region have acknowledged the need for diversifying their economies away from the reliance on the oil and gas sectors, explains Omnium Resolve director Dan Hughes.

“It is important to remember that a party affected by the COVID-19 pandemic is ultimately still required to perform its obligations under a contract and may be liable if it fails to do so. Therefore, irrespective of the projects type of contract and underlying governing law, an affected party will be required to prove that the impact of the event has prohibited, or severely hindered their ability to perform the works in accordance to the contract.”

Each project will have its own facts and circumstances, but already we are witnessing parties claiming delay, disruption and cost escalation. Furthermore, we are now observing some employers looking to potentially suspend projects, in order to mitigate and manage delays.

“Under some contracts the global COVID-19 pandemic could be considered an unforeseen event,” he says. “In this scenario, parties may rely on force majeure clause as a method to remedy the impact. Alternatively, as working conditions are continually altering as a result of government or jurisdictional directives, provisions regarding “change in law” could be applied to instruct or notify of change under the contract. It is important to note however to claim under either circumstance, would still need to be in accordance with the parties contract.”

“In respect of force majeure, we take the view that it has still been possible for some contractors to carry out their obligations, albeit most have probably had to undertake mitigation measures inherent within their contracts to avoid delay and could have possibly suffered disruption, as a result of the closure of the suppliers’ factories as an example.”

Regarding a contractor’s reliance on the “change in law”, such provisions can often enable claims for reimbursement of additional costs incurred.

“The success of such claims is not entirely straight forward. In the UAE for example, as suppliers of the construction sector are exempt from the Sterilisation Programme restrictions pursuant to DM Regulation, it is arguable that the Sterilisation Programme did not make the contractor’s operations unlawful and at best, it was a by-product of the implementation of the law,” notes Hughes. “Conversely, the courts could be sympathetic to the contractor if as a matter of fact, the Sterilisation Programme did result in for example the closure of supplier factories.”

Delay and Disruption Claims

Traditional delay and disruption events are essentially a breach of contract by one of the parties. However, force majeure and change in legislation are generally considered unforeseen, and contract provisions are usually written to entitle the employer to amend the completion date as a result.

At present, in the UAE, we are generally observing projects suffering delays and disruption due to reduced work force, lack of supervision, and abridged work times as a result of the current national sterilisation restrictions.

Whether a project is suspended or not, an extension of time (EOT), and the relief it provides against delay damages, could be possible under prevailing standard forms of contract. However, the matter of costs, particularly preliminaries / general costs, will be an issue for many contractors with the impact specific to the relevant circumstances. Furthermore, the onus is on the contractor to demonstrate mitigation measures implemented.

Philip Cronin, head of claims, Omnium Resolves adds: “We have observed claims notices which rely on the COVID-19 pandemic as justification for certain delays to projects. So far, many of these claims are being used to mask inexcusable delays stemming from earlier nonrelated events or poor performance”.

Suspension Claims

Due to the uncertainty of the COVID-19 pandemic, no party to a contract can determine what action a governing jurisdiction may take to curb the spread of the virus and therefore, some developers may look to suspend contracts, writes

Suspension of works is generally allowable under a contract, albeit, the contractor will be generally instructed to stop the work and reduce its site presence to a skeletal team to ensure the works remain secure and weather sealed where applicable.

“A recurring question being posed is “who is responsible for the suspension costs?”. Most modern contracts provide the employer express provisions to suspend the works, and they generally allow the contractor to recoup suspension, demobilisation, and remobilisation costs,” says Cronin.

If a contract provides an express maximum period of time for suspension, the assumption is that on expiry of the said period, it would be both parties contractual responsibly to resume the work from the point it stopped.

“If a resumption to work cannot be commenced on expiry of a fixed suspension period, we may witness parties mutually extending the suspension, or in worst case scenarios witness acceptance from the parties to terminate the contract or in the case of partial suspensions omit parts of the works that have been suspended by way of a variation order,” Cronin remarks.

Termination of Projects

“During the financial crisis of 2008, the construction industry witnessed a complete halt to major projects on a global scale,” Omnium Resolves Dan Hughes recalls.

Unlike suspending or delaying a project, terminating a contract results in both parties separating without completing the agreed scope of works. Construction contracts, broadly speaking provide a mechanism to terminate for cause or convenience, both of which generally have separate outcomes.

“For an employer to terminate a contract for cause, it must be able to demonstrate that the contractor has been in breach of contract. Such a scenario often results in claims between the parties,” he says.

“On the other hand, a termination of convenience, generally requires that the contractor be compensated for costs incurred as a result of termination. In the current scenario, it is not unexpected that some contracts will be terminated, and more so, terminated by mutual consent for convenience”.

Collaboration

An important message relayed by FIDIC regarding the COVID-19 pandemic is the recommendation that users not only consider the contractual and legal matters, but also long-term business interests, social responsibility, long term health of supply chains and societies at large.

Prominent leaders in the MENA construction industry will need to lead a collaborative approach and strategy in order to ensure projects remain on track, and avoid a similar negative impact witnessed during the last global recession in 2008.

Omnium Resolve can provide proactive & tailored Claims Services, Dispute Solutions & Expert Witness throughout a Project’s life-cycle and across all sectors of the Construction Industry.

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