As governments across Sub-Saharan Africa introduce restrictions on movement and social interaction in an attempt to halt the spread of the COVID-19 virus, parties to infrastructure projects are facing increased pressure to close their construction sites where necessary. In this article we consider the issues parties to a construction contract should consider both before, and during, any site shut down.
Who should close the site?
Site closure is a drastic step for either party to a construction contract to take and so employers and contractors should carefully consider the contractual implications before instructing a site shut down.
Employer instructed shut down
Employers under a construction contract are often developers responsible for the overall project or the site owner. As a result, they may face increasing public or political pressure to close down their sites to reduce the spread of the virus, but employers should consider whether this may expose them to claims from the contractor for additional time and money.
Employers are generally under an obligation to provide the contractor access to the site. If the employer issues an instruction to the contractor to close the site, or takes action to block the site, the employer could potentially be in breach of this obligation and face a claim from the contractor. Both the main FIDIC and NEC standard form construction contracts entitle the contractor to an extension of time and additional money where the employer fails to provide access to the site.
Construction contracts will also often entitle the contractor to an extension of time, and potentially additional money, where the employer hinders or prevents the contractor's progress of the works. Instructing a site closure, or issuing restrictions on the use of the site, could give rise to a claim from a contractor that the employer has hindered or prevented the contractor's progress of the works.
Employers should be wary when issuing notices to contractors or responding to any contractor queries regarding whether or not the site should remain open during the outbreak, in case any response could be interpreted as an instruction to close or restrict site access. This could inadvertently open up the employer to a claim from the contractor it may not otherwise have had.
Contractor instructed shut down
Contractors may also consider shutting down their sites unilaterally, in particular as a result of health and safety concerns.
Most construction contracts will contain various health and safety obligations, for instance the FIDIC Red, Yellow and Silver Books require the Contractor "at all times to take all reasonable precautions to maintain the health and safety of the Contractor's Personnel" and to ensure that suitable arrangements are made for the "prevention of epidemics".
Contractors will also be under legislative and regulatory obligations to comply with health and safety requirements – the nature and extent of such obligations will depend on the jurisdiction of the works.
Contractors must ensure that they continue to comply with their health and safety obligations, both under the contract, and any applicable legislation or regulations - even if that means closing down a site to protect the contractor's workforce and the public. Failure to do so could not only result in a breach of contract, but also potentially fines or other legislative penalties.
If a contractor does take action to close its site, it should consider whether it is entitled to any relief under the construction contract.
Most contractors will be required to complete the works by a specified date or face a claim for delay liquidated damages if they fail to do so. Where sites are closed due to the COVID-19 outbreak, this will inevitably lead to delays and potential claims for delay liquidated damages.
Contractors should consider whether they may bring any claims for an extension of time (and thus relief from any liability to pay liquidated damages) and/or to recover any costs incurred, as a result of the outbreak. Our previous articles on the FIDIC standard form contracts and NEC Engineering and Construction Contract, considered such potential claims in more detail.
Contractors should also consider whether unilateral action on their part to close the site could potentially lead to an abandonment claim from the employer. Many contracts entitle the employer to terminate the contract where the contractor abandons the works – contractors should be careful to communicate any intention to close the site, and the reasons for doing so, with the employer in advance to avoid any such claim.
Government/local authority instructed shut down
Where the government or local authorities issue guidance (or potentially legislation) that construction sites should close, both parties should comply with such guidance but also consider the potential contractual implications of doing so.
If the contract contains a change in law provision or provides relief for action taken by government authorities, the contractor may be entitled to additional time and payment as a result of such government action. Again, our previous articles on the FIDIC standard form contracts and NEC contracts considered such entitlements in more detail.
If there is no express entitlement to relief, then the contractor may be forced to carry the burden of any delays suffered as a result of a government instructed site closure. Inevitably, contractors will be reluctant to expose themselves to any liability for liquidated damages that may arise as a result of delays due to a site closure. Contractors should think very carefully though before continuing to keep the site open in an attempt to avoid any contractual liability for delay, as this could potentially result in far greater government imposed penalties.
Employers should also think carefully about leaving any decision to close a site (and the risk of doing so) down to the contractor alone. As the owner of the site, or the party with overall project control, there may be implications for employers in allowing any site to continue operating after a government instruction to close.
Site safety and security
Where a site is closed as a result of the outbreak, parties should consider any ongoing obligations to protect the site.
Contractors will generally be responsible for ensuring site safety and security, even where works have ceased. Such obligations may extend to protecting the works against any deterioration, loss or damage during any suspension, as well as obligations to ensure unauthorised persons are kept off the site, as is the case under the FIDIC Red, Yellow and Silver Books.
In order to ensure site safety, contractors may need to ensure skeleton staff remains on site. If so, it is important to comply with any health and safety provisions in relation to any labour remaining on site and to ensure that any precautions (such as additional hygiene facilities and PPE) are in place to protect them from the spread of the outbreak.
Employers may also have obligations relating to site security, particularly where the works are part of a larger project or where the employer is a local authority or government entity. Both parties should double check the extent of any employer safety and security obligations and ensure they are complied with.
Supply chain
The contractor should also consider its supply chain during any site closure – subcontractors who are required to be on site or suppliers who have upcoming deliveries at site will need to be notified of any site closure (or access restrictions).
The contractor will also need to consider, in respect of each individual subcontract, whether the subcontractor may have a claim for an extension of time or additional money as a result of a site closure. It isn't uncommon to see a mismatch between the main contract and any subcontract in relation to relief entitlements, that could potentially expose the contractor to a claim from its supply chain that cannot be passed up to the employer under the main contract.
Insurance Policies
Both parties should consider any requirements or restrictions under any insurance policies relating to the site.
Whether the contractor has taken out a construction all risks policy or the employer has taken out a project wide policy, the parties should consider whether insurers either need to be notified of any site closure or have any requirements that should be complied with when closing a site.
Parties should also consider whether there are any potential claims that could be brought under an insurance policy. Employers will often take out business interruption insurance to protect against potential delays to the project – whether or not a claim can be brought will depend on the precise wording of the policy but employers should check carefully for any restrictions requiring delays to be caused by physical damage or any epidemic/pandemic exclusions.
Mitigation and cooperation
Both parties should also be mindful of any duties to mitigate the effects of any site closure, as well as obligations to cooperate with one another.
The majority of contracts will require a contractor to try to mitigate the effects of any event or circumstance giving rise to a claim, and failing to do so could reduce any entitlement to relief. Contractors should, so far as possible, consider how they can mitigate the effects of the COVID-19 outbreak. Such mitigation may take the form of undertaking a review of all ongoing and upcoming operations to ascertain which of those operations may continue to be carried out safely or rearranging the sequence and timing of works packages to enable any offsite works to progress during a site closure.
Employers and contractors should also ensure they cooperate with each other both before and during any shut down. Many contracts will require parties to cooperate with each, or seek to consult with each other to mitigate the effects of any events giving rise to increased costs or delays. NEC contracts go so far as to require the parties to "act in a spirit of mutual trust and cooperation". Given the unprecedented nature of the COVID-19 outbreak and the far-reaching effects, parties should be encouraged to work together to find a solution to best protect the project.
Contractual claims process
Contractors, in particular, should be careful to comply with any contractual claims procedures during the outbreak. Even where initial claims notices have already been served on the employer, given the ongoing nature of the pandemic, the effects are unlikely to be resolved soon.
Most contracts will require contractors to keep up-to-date records and to submit periodic interim claims. Given the ever-changing and urgent nature of the situation, it is easy to overlook such records and interim claims, but failure to do so could reduce any entitlement to relief.
Conclusion
Site closure is a drastic step to take under any construction contract, but given the wide-ranging implications of the COVID-19 outbreak, we are seeing more and sites shutting down.
Both parties need to carefully consider the contractual implications of any site closure and be alive to any consequences of doing so.
Please do not hesitate to contact us if you would like our assistance in considering your contractual rights and obligations, and so that we can help better protect your business in light of COVID-19 and its potential consequences.
This briefing is prepared for clients and contacts of Clyde & Co Tanzania. We aim to keep our clients abreast of developments in Tanzania as they happen and if you have any questions on the issues raised above please contact us directly.
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