As the coronavirus (COVID-19) continues to spread across the globe so too do the commercial and economic impacts on business. In particular, major construction projects which rely on Chinese and South Korean contractors, materials, plant and equipment may be affected.
What are the potential impacts?
- Disruption to project supply chains, including manufacture, shipping and delivery of plant and equipment;
- Travel restrictions for labour resources and key personnel and the imposition of quarantines (including repatriation of staff deployed in affected areas);
- 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?
Contractors are reportedly already claiming force majeure to seek relief from their contractual obligations. Whether relief is available will depend on the terms of the contract and the legal remedies available in the relevant jurisdiction.
In common law jurisdictions (e.g. English law), the scope of force majeure relief will be determined by the express provisions of the contract. In civil law jurisdictions, force majeure relief may also be available under the civil code, typically where the event is: (i) not the responsibility of either party, (ii) unforeseeable, and (iii) incapable of being overcome.
Key considerations include:
- Is there a relevant specified event of force majeure under the contract?
- What steps can and should be taken to mitigate the effect?
- Can you engage an alternative contractor/supplier?
- Are you bound by tendering requirements either contractual or under public procurement law?
- Did the coronavirus outbreak cause the failure to perform?
- Have all contractual conditions precedent been followed?
- When will the event of force majeure be over?
What are the alternatives to force majeure?
There may be alternative contractual or legal remedies available to provide relief or mitigate the impact of the event outside the scope of force majeure, e.g.:
- Price escalation and currency fluctuation provisions;
- Hardship clauses (or any hardship remedies available at law);
- Change in law provisions to adjust contract price;
- Insurance policies;
- Termination or suspension rights;
- Legal rights to terminate, such as frustration.
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 and beware differing governing law provisions.
- Deploy AI tools to assist review of multiple contracts: Freshfields’ contract review AI tools 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.
We will be continuing to monitor developments related to coronavirus and major projects and update our briefings as the situation evolves. For more detail and practical tips on managing the impacts of coronavirus in the construction industry, please see our client briefing and our updates in the Freshfields coronavirus alert centre.