On 28 February 2020, the Nigerian Federal Government reported the first confirmed case of COVID-19 or the new "coronavirus" in sub-Saharan Africa.
This announcement came at the end of one of the worst weeks for financial markets since the global financial crisis in 2008, which has been largely attributed to the ongoing outbreak. On 5 March 2020, the South African government reported its first case. This article provides an overview of the key contractual issues parties involved in construction projects in sub-Saharan Africa should consider in order to protect their commercial positions as a result of the risks caused by the COVID-19 outbreak.
The spread of COVID-19 is an increasing cause for concern for businesses, governments and development banks involved in infrastructure projects in sub-Saharan Africa. Although we hope for the best, similar pressures may in future affect Tanzania and the broader East Africa region.
Parties involved in infrastructure projects may be unable to fulfil their contractual obligations as a result of the outbreak due to the increasing likelihood of labour and material shortages. These pressures will be particularly acute for Chinese contractors who have a very strong presence on the continent.
The article is generally applicable to legal concepts across the continent however where necessary we have qualified our remarks in order to emphasise an East African context. Although 'Infrastructure' can be defined broadly, we focus on its application in the construction sector and the contracts which underpin that sector.
Extensions of Time / Additional Costs
Construction contracts generally strike a careful balance in the allocation of responsibility for delays between the employer and the contractor. The determination of whether the employer or the contractor is responsible for a long delay to completion can be the difference between whether a project is profit or loss making for a party.
In the event that an employer is responsible for a delay, a contractor will be awarded an extension of time to complete the project, and in some cases be entitled to recover any additional costs from the employer. In the event that a contractor is responsible for a delay, an employer is generally entitled to recover liquidated damages from the contractor as a result of the delay.
Contractors concerned that they could face delays or increased costs as a result of the COVID-19 outbreak should consider whether they have any express entitlements to relief under their contract – such an entitlement could arise in the following circumstances:
Labour shortages – Shortages of labour, mainly as a result of preventative measures to alleviate the outbreak spreading both within and between jurisdictions, but also due to infection and the resulting quarantine required, could lead to significant problems on labour intensive construction sites. Most contracts will require the contractor to bear the risk of any labour shortages but the contractor may be entitled to relief in certain limited circumstances. Standard form FIDIC contracts are widely used across sub-Saharan Africa and a different approach is adopted to labour shortages depending on the relevant contract adopted. Under the FIDIC Conditions of Contract for Construction 1999 (the "Red Book") and the FIDIC Conditions of Contract for Plant and Design-Build 1999 (the "Yellow Book"), unforeseeable shortages in personnel caused by epidemic or government actions will entitle the contractor to an extension of time. Foreseeability is assessed at the date of tender submission – for any contracts that went out to tender before January 2020, it can be fairly safe to assume an outbreak such as this was not foreseen. If, however, a project has been procured using the FIDIC Conditions of Contract for EPC/Turnkey Projects 1999 (the "Silver Book"), no such entitlement exists and the contractor will bear the risk of such labour shortages.
Shortages of plant and materials - Shortages of plant and materials required for projects, or delays in their transportation, are extremely likely, particularly given the prevalence of materials manufactured in China in the global supply chain – construction projects are extremely vulnerable to supply shortages or disruptions. As with labour shortages, most contracts will generally place the risk of shortages, or disruptions in the supply of, plant and materials on the contractor, but once again the FIDIC Red and Yellow Books grant the contractor an extension of time for unforeseeable shortages in Goods (equipment, materials, plant and temporary works) caused by epidemic or government actions. Under the Silver Book, the contractor is required to carry this risk.
Blocked access to site – Most construction contracts oblige the employer to provide access to, and possession of, the site to the contractor. If the site is closed or access is restricted as a result of measures to contain the COVID-19 outbreak, the employer may find itself in breach of its obligation to provide access, which could entitle the contractor to an extension of time and recovery of costs incurred. Each of the FIDIC Books contain an express entitlement to an extension of time and additional money if the employer fails to provide access to the site.
Delays due to necessary action taken by government authorities in order to protect the public - Given the likelihood of action by governments to prevent the spread of the outbreak, parties should also carefully consider the application and effect of any clauses in their construction contracts governing delays caused by governments and other public authorities, which may limit the remedies available to employers under the contract and provide a way in which contractors can mitigate the commercial risks associated with the outbreak. Each of the FIDIC Books grant the contractor an extension of time as a result of delay or disruption due to the contractor following procedures laid down by public authorities, where such delay or disruption was not foreseeable at the date of tender submission.
Changes in law - Many construction contracts contain a mechanism for the contract price to be adjusted to take account of changes in the costs to the contractor of performing its obligations under the contract as a result of changes in legislation after the commencement of the project. Parties should carefully consider the application and effect of such mechanisms, given the likelihood of emergency legislation in many jurisdictions in the event of a widespread outbreak across the continent. Each of the FIDIC Books entitle the contractor to an extension of time and additional money as a result of a change in law which affects the contractor in the performance of its obligations under the contract.
It is vitally important that both parties to a construction contract fully understand all of the relevant clauses of their contract and how they operate in order to assess whether a contractor would be entitled to make any claim for an extension of time or additional money as a result of the current outbreak.
In the event that problems arising from the coronavirus outbreak are substantially impacting on parties' ability to comply with their obligations under construction contracts, parties should also look carefully at the force majeure clauses in their contracts, in order to ascertain whether these clauses can be of assistance in avoiding liability for failure to comply with their contractual obligations.
Force majeure clauses in construction contracts vary – some may be general in nature or they may set out an exclusive or non-exclusive list of events or circumstances that may amount to force majeure.
Typically there are requirements that the event of force majeure must be beyond a party's control, could not reasonably have been provided against, could not have reasonably been avoided or overcome and is not attributable to the other party – as is the case under the FIDIC Books.
Many force majeure provisions will also include specific examples – whilst the FIDIC Books do not address epidemics expressly, it isn't unusual to see references to "epidemics", "pandemics" or "the plague" in a force majeure clause. Even without an express reference (save for those construction contracts which contain an exclusive list of force majeure events or circumstances which don’t capture an outbreak such as this) it seems likely that the COVID-19 outbreak will satisfy many of the tests generally found for force majeure relief in construction contracts.
Careful consideration will also need to be given to the relief granted by a force majeure clause – will the contractor be entitled to an extension of time and/or recovery of additional costs? Under the FIDIC Books, the contractor will be entitled to an extension of time but recovery of costs is limited to specific events that do not include epidemics or pandemics. Some force majeure provisions may only grant relief from termination, in which case contractors will need to look elsewhere for an entitlement to time and money.
Some standard form construction contracts contain provisions which may release contractors from their contractual obligations due to impossibility and it is important that both parties to construction contracts are aware of how these provisions apply and operate. Such clauses are generally broader and more easily satisfied than Force Majeure clauses, however impossibility generally does not cover circumstances where it is still possible for the contractor to carry out the works but it has become more expensive for it to do so. For those construction contracts which do include impossibility clauses, they will also set out the contractor’s entitlements in the event of impossibility, which can include the right to terminate the contract.
Compliance with claims procedures
Even if a contractor has an entitlement to relief under a construction contract as a result of the COVID-19 outbreak, it will need to carefully follow any procedures set out in the contract for bringing a claim to ensure it doesn’t forfeit the right to claim additional time, money or any other relief. Many claims procedures include time-bars on the contractor's right to make any recovery – the FIDIC Books each require the contractor to make a claim within 28 days after the contractor became aware, or should have become aware, of the event or circumstance giving rise to the claim. If this procedure isn't followed the employer is discharged from all liability in connection with the claim.
We hope that this article has been of assistance to parties to construction contracts relating to infrastructure projects in sub-Saharan Africa who are concerned about the commercial effect of the Coronavirus outbreak on their operations. We advise parties to carry out a careful and wide ranging review of the terms of their contracts in order to determine the rights of both parties in relation to extensions of time, entitlement to reimbursement of additional costs and avenues for avoiding liability for non-compliance. Parties should also consider all effects of the outbreak, including changes in legislation or regulations and problems with site access.
It is extremely important that parties' contractual provisions are followed to the letter, including compliance with all necessary legislation and requirements of authorities, timely service of contractual notices, in addition to keeping proper records of site progress and cost to substantiate claims.
Please contact us if you have any questions or would like our assistance in reviewing your contractual rights and obligations.
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.
Further advice should be taken before relying on the contents of this summary. Clyde & Co Tanzania accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. No part of this summary may be used, reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Clyde & Co Tanzania.