We are all now aware of the unprecedented obstacles that the coronavirus has thrown up for the construction industry in just a few months. The need for lockdowns and social distancing has impacted almost every facet of the construction process, be it supply chain manufacturing, the transportation of goods, materials, workers, or the conduct of on-site operations. In this article, we look at the impact on construction projects in East Africa and analyse how parties can address the different risks caused by COVID-19 such as force majeure and changes in legislation.
As in many other regions around the world, East African construction projects have been impacted by the coronavirus, leading to programme delays and the suspension of projects. For instance, construction works at Cytonn Investment’s KSH 5 billion residential development, “The Alma” in Nairobi, were suspended in order to lay down strict health and safety measures to curb the spread of the coronavirus at the site.
Contract negotiation for the foreseeable future will need to take account of this new normal, and focus on mitigating COVID-19 risk in the context of existing standard form contracts and procurement structures. The goal will be to achieve a comprehensive and coherent approach to the allocation and mitigation of specific risks, whether you are employer or contractor.
Parties will need to take account of the specific jurisdiction within which they are operating, as the risks differ in both prospect and severity even in neighbouring countries. By way of example, Kenya acted early to impose robust restrictions on the movement of people and workforces, whereas neighbouring countries took variations of that approach. The movement of goods around East Africa with these variations of approach have occasionally produced challenges.
In a business context, common law has always prized the ability of contracting parties to determine their fate by the deals they do, even where those deals may not be entirely commercially workable, and East African jurisdictions are no exception.
Taking account of experience over recent months, we analyse how parties can address the following specific risks thrown up by COVID-19:
- Force majeure
- Change in law
- Relief events
- Localisation of supply chains
- Dispute resolution
In the second quarter of 2020, when the effects of the pandemic really started to be felt, employers and contractors immediately began to consider whether the pandemic would amount to a force majeure event under their construction contracts.
In most jurisdictions, the relevant clause of the contract will determine whether the force majeure provisions are applicable. The precise wording will vary, but generally a force majeure clause will require the occurrence of an event which:
- is outside the control of either party;
- was unforeseeable at the time of entering into the contract; and
- which prevents or hinders a party from complying with their contractual obligations.
At the start of the outbreak, it was fairly easy to satisfy these conditions: COVID-19 was certainly an event outside of the control of either party, neither party could have foreseen the effects of the pandemic and, with widespread site closures, disrupted supply chains and new site working practices, the pandemic certainly hindered or prevented parties from complying with their contractual obligations.
However, parties who are in the process of negotiating a contract now should carefully consider whether COVID-19 will satisfy force majeure requirements going forward. Whilst it is quite likely that the pandemic may still prevent or hinder a party from complying with its contractual obligations, the first two parameters of the test are not so clear cut.
Accordingly, parties may consider specifically addressing the coronavirus and its effects within their force majeure provisions, agreeing at the outset:
- whether COVID-19 related delay constitutes force majeure (and specifically excluding it if not);
- which specific circumstances constitute force majeure; and/or
- whether a specific threshold ought to be met for force majeure to apply.
Change in law
The general position in construction contracts is that the contractor is obliged to comply with all applicable legislation. In certain circumstances, however, the contractor may be entitled to claim an extension of time or additional money under the contract as a result of a change in legislation.
If a change in law mechanism has been drafted into the contract, it will generally define what is meant by a “change in law”. It is likely to capture changes in legislation or the judgment of any relevant courts, but may not necessarily cover government advice or guidance. In many jurisdictions, lockdowns and curfews were mandated by executive order and not formally enshrined in regulation. Going forward in any contract negotiation, parties should consider whether the change in law definition is sufficiently wide to capture any COVID-19 related guidance or advice issued by the government.
Even where a change in law has occurred, some contracts may not grant relief for all general changes in law. Often they are limited to discriminatory changes where the change applies to:
- the particular project or contractor in question, but not to other projects or contractors; or
- the type of asset being constructed or services being delivered, but not to other assets or services.
Equally, the definition of “change in law” may be limited to those changes not reasonably foreseeable at the time of contracting. In the current context of divergent global approaches, the extent to which COVID-19 related regulatory intervention is foreseeable is unclear. Parties should endeavour to agree whether this is intended to cover the effects of the coronavirus in the context of the relevant jurisdiction.
Finally, consideration should be given to any relief available for a change in law – whether the contractor will be entitled to an extension of time, additional money or both? Some contracts may limit any entitlement so that it only applies where the contractor is delayed or incurs cost as a result of a change to the completed works caused by the change in law. Arguably, most COVID-19 related changes are to the way in which the works are to be carried out, rather than a change to the completed works themselves, and so relief may not be available in such circumstances.
Relief events – time and/or money?
As evidenced above, a future pandemic (or resurgence of the current one) may not fit neatly into the force majeure or change of law provisions.
Accordingly, parties might consider including specific relief events to properly allocate the risk of future outbreaks affecting the progress of the works. Of course, it will be for the parties to agree whether time and/or money should be awarded, or if the contractor should programme and price the risk from the outset.
Employers will want to ensure that any relief events are specific and limited in their nature to avoid spurious claims from contractors under open-ended provisions. Such provisions should be tailored to the particular issues facing the project in question and the jurisdiction in which it is situated, be it (for example);
- availability of expert engineers;
- delayed arrival of imported materials due to (e.g.) border closures;
- restricted working hours; or
- restrictions on labour on-site.
Employers (including government procurement agencies) will undoubtedly take divergent approaches to such relief events. Where they are unwilling to build in time and cost flexibility, contractors may need to consider commercial solutions to avoid shouldering the risk in its entirety.
Localisation of supply chains
COVID-19 has reduced access to international supply chains for materials and expertise due to travel restrictions and the economic impact of the pandemic. As a result, parties should consider building supply chain resilience into their contracts.
Procurement requirements might already stipulate that local resources are to be mandated or preferred. Short of this, parties might agree an express duty on the contractor to obtain materials and labour from alternative local suppliers in the event of disruption.
When engaging local suppliers, contractors should ensure that they impose appropriate contractual terms on their supply chain, balancing the need for contractual protection with practical enforceability. Contractors seeking to flow-down provisions of their construction contracts will need to be mindful of local content requirements and domestic legislation which might impact payment provisions, choice of law and the enforceability of the contract as a whole.
Dispute resolution mechanisms need to be robust enough to ensure that the parties have certainty as to how their disputes will be heard, but also flexible enough to ensure that they can be resolved in a timely fashion in spite of global travel restrictions. For example, arbitration clauses may need to specifically provide for remote hearings and electronic submissions.