Since the first case of coronavirus was confirmed in Hong Kong in early February 2020, the government has imposed various measures in an attempt to contain the spread of the coronavirus. The resulting impact of the novel coronavirus is far-reaching and affects every industry and business in Hong Kong. This alert considers some of the key issues that construction contractors and developers in Hong Kong may face. If you need any specific advice, please contact May Ng or Sandy Au for further details.
How are construction projects affected?
As a result of the novel coronavirus outbreak in Hong Kong and the government’s measures to contain the spread of the virus, construction projects could be affected in a number of ways, such as:
- delay caused by disruption to public services e.g. delay in issuing permits or approving drawings;
- delay caused by temporary suspension of work on site e.g. workers being asked to self-quarantine; or
- insufficient construction workers in Hong Kong as a result of quarantine imposed by Hong Kong or travel bans imposed by other countries.
The next question would invariably be who should bear the risk of the resulting loss and delay?
Contractual Extensions of time
The first question that most contractors would ask is whether they can claim extension of time of the completion date of the project as a result of delay caused by the novel coronavirus.
We have looked at the extension of time clauses in the following standard forms:
- General Conditions of Contract for Building Works, 1999 Edition (“Standard Government Form”);
- The Agreement and Schedule of Conditions of Building Contract for use in the Hong Kong Special Administrative Region, 2005 Edition, published by the Hong Kong Institute of Architects (“HKIA Standard Form”); and
- NEC3: Engineering and Construction Contract Option B, April 2013 Edition (“NEC3”).
The Standard Government Form, the HKIA Standard Form and the NEC3 all contain mechanisms allowing for extension of time to complete a project when there is a delaying event. None of these general conditions specifically list an epidemic or a pandemic as a delaying event. However, the extension of time clauses in the forms of contract that we have examined permit the Architect to grant an extension of time for unspecified causes of delay, which can arguably cover delay caused by the novel coronavirus.
Standard Government Form
Under Clause 50(1)(b)(xi) of the Standard Government Form, an extension of time may be granted if in the Architect’s opinion, the cause of delay is “…any special circumstance of any kind whatsoever.”
If however, the delay is caused by a shortage of labour, then Clause 50(1)(c) of the Standard Government Form specifically precludes an extension of time to be granted on this basis.
HKIA Standard Form
The HKIA Standard Form contains a similar provision whereby the contractor can be granted an extension of time by the architect if the delay was caused by a “listed event”, which includes a special circumstance considered by the architect as sufficient grounds to fairly entitle the contractor to an extension of time.
If the delay is caused by delay in obtaining approval or consent from a Government department, contractors can also rely on the listed event in Clause 25.1(3)(t), which states that “delay to the Works due to time not reasonably foreseen by the Contractor in obtaining approval or consent from a Government department.”
The NEC3 allows the employer and the contractor to share the risk of any delay caused by a “compensation event”.
A “compensation event” refers to an event that stops the contractor completing the construction works or the contractor completing the construction works by the date shown on the accepted programme and which neither party could prevent, and an experienced contractor would have judged at the contract date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it.
Unless the contract for a specific construction project has been amended such that these specific general conditions have been removed, contractors who have suffered delay as a result of the pandemic could claim for extension of time pursuant to these clauses. Notice and mitigation requirements that are prerequisites for claiming extension of time should be strictly observed.
Another common question that has been raised is whether the pandemic constitutes a force majeure.
The term ‘force majeure’ has no established meaning under English law and each force majeure clause must be examined individually based on the facts of each case to determine its meaning and consequences.
If a specific event does fall within the scope of the force majeure clause, the next step is to consider what contractual effect the clause may have, for example, whether it is to release the parties from their contractual obligations forthwith without incurring liability or to suspend the performance of all or part of their duties.
A topic that is not unique to construction industry is management of the workplace. A number of organisations have adopted flexible work arrangements for their employees to reduce the risk of employees contracting the virus. For a discussion of the key issues that HR and business leaders should be considering, please follow this link to our firm’s employment alert on this topic.
What can the parties can do?
Parties should review their construction contracts and understand their contractual rights and obligations that may arise in the event of a disease outbreak, including extension of time and loss and expense clauses. Conditions precedent that are applicable to a claim should also be strictly observed.