Dealing with Covid-19 in the construction industry: Contractual rights and remedies

27 March 2020

Introduction

The coronavirus disease 2019 (“Covid-19”) has disrupted the construction industry. Contractors are faced with shortages of labour and materials due to the unprecedented measures imposed by governments in Singapore, Malaysia, China and beyond to curb the stem of the virus. Employers are also feeling the strain of Covid-19, as they prepare to deal with issues such as impending delays in their project timelines, while balancing their social responsibility commitments and public image in the way that they deal with contractors affected by the Covid-19 measures. In this regard, the Building and Construction Authority (“BCA”) has advised government agencies to take a sympathetic view of construction project delays and grant requests for extensions of time (“EOTs”) to project completion dates, and the government has sought the support of the Real Estate Developers’ Association of Singapore (“REDAS”) for private sector developers to take the same view. In fairness to developers, it should also not be forgotten that project delays can compromise a developer’s commercial objectives for developing a project and even expose developers to significant financial liability, for instance, where developers of residential projects do not meet the project completion period of five years.

The key concern or dilemma faced by employers and contractors alike, is whether the Covid-19 outbreak, and / or the consequences arising from the outbreak, would entitle contractors to time and cost reliefs. Ultimately, this is an issue that is determined by the terms of the construction contract. Nevertheless, this circular aims to provide guidance on the circumstances in which contractors may be entitled to time and cost reliefs. 

Force majeure and extensions of time

In the wake of the disruptions caused by the Covid-19 outbreak, a common issue is whether contractors whose progress has been delayed and disrupted, should be entitled to EOTs under their contracts. Force majeure is one of the commonly found grounds entitling contractors to EOTs in construction contracts. Other grounds that may entitle contractors to EOTs arising from the consequences of the Covid-19 outbreak, will be discussed further below.

In the general sense, a force majeure clause allocates the risks between contracting parties upon the occurrence of an event that is beyond the contemplation of the parties (see RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd and another appeal [2007] 4 SLR(R) 413 (“RDC”) at [53]). In the context of a construction contract, a force majeure clause typically “excuses” the contractor’s delay and entitles the contractor to an EOT. Force majeure clauses are therefore typically contained within the contractual mechanism for granting EOTs to the contractor.

Whether a contractor affected by the Covid-19 outbreak may rely on a force majeure clause to excuse its delay would depend on the precise wording of the force majeure clause concerned. This means that parties must look to the wording of their contract to determine whether or not Covid-19 falls within the ambit of their force majeure clause. In this regard, the Singapore Court of Appeal in RDC held at [54] that:

“The most important principle with respect to force majeure clauses entails, simultaneously, a rather specific factual inquiry: the precise construction of the clause is paramount as it would define the precise scope and ambit of the clause itself. The court is, in accordance with the principle of freedom of contract, to give full effect to the intention of the parties in so far as such a clause is concerned.” (emphasis added)

Further, a contractor who wishes to rely on a force majeure clause must also demonstrate how it is prevented or hindered (depending on the wording of the force majeure clause) from performing its contractual obligations in the circumstances, and that it has taken all reasonable steps to avoid its operation, or mitigate its results (RDC at [64]). It is therefore not enough for a contractor to simply cite Covid-19 as a reason for its delay, without showing that it had taken steps to mitigate the delay. For instance, the shortage of labour from China may not excuse a contractor if, that particular contractor did not rely significantly on labour from China, or if it is reasonable to resort to alternative sources of labour, having regard to the relevant facts and circumstances.

Force majeure in standard form construction contracts

Force majeure operates as a ground for EOT under many construction contracts. However, whether Covid-19 qualifies as a force majeure event ultimately depends on the precise language of the clause. Some construction contracts define what constitutes force majeure (such as the REDAS Design and Build Conditions of Main Contract (“REDAS Form”)), whilst some do not (for example, the Public Sector Conditions of Contract for Design and Build 2014 (“PSSCOC Form”), and the Singapore Institute of Architects Building Contract 2016 ( “SIA Form”)).

Force majeure under the REDAS Form

Force majeure is expressly defined under clause 18.2 of the REDAS Form. However, the definition of force majeure does not include a pandemic, such as, Covid-19. As a result, a contractor who wishes to rely on the force majeure clause in the REDAS Form would first have to overcome the hurdle of showing that the definition of force majeure in clause 18.2 of the REDAS Form is not an exhaustive / closed list (i.e., limited only to those events listed under clause 18.2 of the REDAS form), but an open-ended one, which may include other events that the law may generally regard as a force majeure event.

Force majeure under the SIA Form and PSSCOC Form

The issue is somewhat different in a standard form which does not expressly define what constitutes a force majeure. Under the SIA Form and the PSSCOC Form, “force majeure” is one of the grounds that would entitle the contractor to an EOT (see clause 23.1(a) of the SIA Form, and clause 14.2(a) of the PSSCOC Form). That said, the forms do not expressly define or list out the events that would constitute a force majeure and courts will attempt to give effect to what parties intended to cover as constituting force majeure.

Other grounds for EOT

Nevertheless, in the scramble over determining what constitutes a force majeure it is essential for parties to be aware that there may be other grounds, which may be relevant to the question of time and costs.

For example, clauses 23(2)(l) and (m) of the SIA Form provide that shortages of labour or goods resulting from domestic or foreign government acts (which may arguably include, travel restrictions and the lockdown of cities) may entitle a contractor to an EOT. In the case of the PSSCOC Form, clause 14.2(e) provides that compliance with the requirements of any law, regulation, by-law or public authority or public service company may entitle a contractor to an EOT. Thus, it is arguable that compliance with travel restrictions, mandatory stay home notices and quarantine orders may excuse a contractor from delay caused by such compliance, under clause 14.2(e) of the PSSCOC.

In summary, parties should not only be asking the question whether the Covid-19 pandemic is a force majeure event but also whether each of the attendant consequences can give rise to time and cost implications on their own.

Know your rights

Even if there is a ground for a contractor to apply for EOT, it is important to bear in mind that the contractor’s recourse lies within the mechanism contained in construction contracts.

This means that the contractor is still required to comply with the various contractual requirements, some of which may operate as condition precedents to the contractor’s entitlement to an EOT. Thus, it is important for parties to be mindful of the requirements for and effects of triggering an EOT claim on the grounds of force majeure (or other grounds) under the mechanism provided for in the contract:

1. First, most construction contracts will require the contractor to give notice of its entitlement to claim an EOT within a prescribed period after the delaying event occurs - failing which, it is deemed to forgo the claim. In this regard, the timely issuance of the notice is critical. From an employer’s perspective, even if the contractor has a substantive entitlement to an EOT claim, the failure to comply with this procedural requirement may justify rejecting the claim altogether.
2. Second, various implication arise when an EOT is awarded. Crucially, where a contractor is awarded an EOT for a particular period of delay, the employer may not impose any liquidated damages (“LDs”) for that period of delay. Further, where an EOT is granted, the contractor may also be entitled to claim loss and expense (“L&E”) subject to the terms of the contract. For example, the PSSCOC Form limits the circumstances under which a contractor is entitled to bring an L&E claim, which, crucially, does not include delays arising from a force majeure event. 
3. Third, in the situation where a contractor is already in culpable delay for reasons which do not entitle the contractor to an EOT (for example, due to its own poor planning or inefficiencies), and a concurrent reason for a delay in the same period arises (in this case, the Covid-19 outbreak), it is possible that the contract administrator may refuse to grant the contractor an EOT. While most construction contracts do not expressly deal with the issue of EOT entitlement in the event of a concurrent delay, the Society of Construction Law Protocol which is widely adopted by courts and tribunals suggests that in the event of a concurrent delay, contractors may be entitled to an EOT, but not to L&Es suffered during the period of concurrency. 
4. Fourth, where timely completion of the project is the paramount objective of the employer, the employer may consider instructing the contractor to accelerate works in order to “catch-up” on the delay caused by the Covid-19 outbreak, notwithstanding the contractor’s entitlement to an EOT. However, it bears noting that under such circumstances, the contractor would then be entitled to claim the costs of acceleration measures undertaken to meet the original contractual deadline. In order to substantiate a claim for acceleration however, it is important that the contractor properly documents the costs incurred in accelerating the works over and above the original costs it would have incurred under the contract, and be able to attribute such increased costs to the specific acceleration measures undertaken.  

Practical steps: What you can do

In view of the issues discussed above, employers and contractors should consider adopting the following measures in order to safeguard their position in relation to time and cost reliefs arising from Covid-19:

1. Parties should review their construction contracts for the precise wording of the force majeure clause. Ultimately, whether or not a contractor may be excused from delays arising from the Covid-19 outbreak depends on the interpretation of the wording of the force majeure clause, and other contractual grounds that may entitle a contractor to EOT.
2. Parties should also consider whether the other collateral consequences of the Covid-19 outbreak (such as travel restrictions and lockdown of cities) constitute a separate contractual ground that could give rise to an EOT entitlement.
3. Parties should ensure that their records are updated and in order. For contractors to be able to claim time and cost reliefs, whether in reliance of a force majeure clause or other contractual grounds that give rise to an EOT entitlement, it is especially important to keep records of the correspondence, for example, between themselves and their labour / material suppliers to show that the labour / material shortage was unavoidable. Further, any attempts to mitigate the delays (such as, attempts to source labour and materials from alternative sources) should also be well documented, in order to prove that the contractor took steps to mitigate the delay. Finally, contractors should also keep contemporaneous as-built records and daily reports to be able to attribute a certain period of delay to the impact of the Covid-19 outbreak. Such records would facilitate a proper assessment of EOT claims by employers / contract administrators. From an employer’s / contract administrator’s perspective, it is necessary to properly review EOT applications to ensure that they are properly substantiated, and to exercise their right to request for further substantiating documents where necessary, before granting an EOT.
4. Parties should be diligent in giving timely notices. In particular, contractors should give timely notices so that EOT claims can be contemporaneously assessed, and employers / contract administrators should be diligent in documenting their responses to those notices. From a contractor’s perspective, this is crucial to ensure that the condition precedent to an EOT entitlement is met. From an employer’s perspective, where the intention is to reject the contractor’s claim for time and cost relief, it is important to have the employer’s position on record.
5. Parties should also maintain proper discipline over communications with each other. Often, such correspondence would serve as the crucial notice of delay that is a condition precedent to the contractor’s EOT entitlement. While it is commendable that parties try to find an amicable solution under these unprecedented circumstances, it is crucial that parties distinguish between “without prejudice” communications attempting to reach an amicable commercial solution, and other communications establishing each party’s legal position on record.
6. It is recommended that parties seek legal advice on their rights and remedies based on a proper interpretation of your construction contracts.

A black swan event, which Covid-19 has now become, has and will continue to impact employers and contractors alike. Legal rights and remedies aside, a collaborative approach involving all project participants may help parties best navigate the challenges posed by Covid-19. Facilitative measures by the authorities, such as, the BCA allowing certain prefabricated prefinished volumetric construction projects to install partially completed modules on-site to mitigate supply delays will also go a long way to help the industry. On 26 March 2020, Deputy Prime Minister of Singapore and Minister for Finance Heng Swee Keat stated that the Singapore Government is studying the issue of providing parties who have been affected by the Covid-19 pandemic relief from their strict legal obligations. A set of measures is expected to be unveiled next week.

Further information

Allen & Gledhill has a Covid-19 Resource Centre on our website www.allenandgledhill.com that contains published knowhow on legal and regulatory aspects of the Covid-19 crisis. 

In addition, we have a cross-disciplinary Covid-19 Legal Task Force consisting of Partners across various practice areas to provide rapid assistance. Should you have any queries, please do not hesitate to get in touch with us at covid19taskforce@allenandgledhill.com.

 

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