In our original article from September 2020 “COVID-19 – The Next Wave? The Allocation of Force Majeure Risk in the New Normal,” we considered what was unfolding and the effect of the pandemic on the construction industry in Australia, Asia and the Middle East. We have reflected on the last 11 months and whether this has changed or deviated from what we considered and also predicted in that article.
In short, little has changed from our thoughts reflected in that article, in that the situation remains unpredictable with countries fluctuating between some form of lockdown restriction on site activity to a moving to some form of near normality. This perhaps also reflecting differing approaches in various jurisdictions with some countries operating a containment strategy whereas others adopt an exit strategy that focuses upon a return to everyday practices.
None the less whichever strategy is adopted the effects on the industry will remain with us for some time to come and the risks for contractors ever present on both live contracts and tendered projects.
The experience in Australia is that both the impact, and approaches to dealing with the effects of COVID in the construction industry has been fragmented. That is, it differs across States and Territories (States). This lack of consistency, especially for national contractors and specialist contractors working in most States, has made it difficult for the industry to plan for, or manage, these effects in construction contracts.
For example, New South Wales (NSW) construction sites were closed during July 2021, whereas in Queensland (QLD) construction workers are seen as essential services and largely exempt from lockdown. Accordingly, a contractor who had projects under construction in both NSW and QLD during July 2021, will have experienced a shut-down of one and business as usual in the other. The extent to which the contractor can seek relief for the NSW project will depend on the contract and the relationship between the contracting parties.
In the event the contract provides relief in respect of, for example, site shutdowns, supporting claims for such relief may be complicated by the interaction between the contract and the government policies in that State. For example, the Victorian government introduced a temporary waiver of payroll tax in 2020, which meant that large contractors were exempt from paying some tax on its employees. Under these circumstances, what is the situation where the contract provides daily monetary rates for staff who are stood down and these rates already include an allowance for payroll tax?
In Asia, the experiences represented in Australia are being similarly played out, with different countries enforcing different restrictions and practices on site activity and related operations. Another acute effect has been the evidence of a serious impact upon the supply and prices for raw materials, many key materials such as reinforcement, aggregates, cement and the like are now in certain countries in very short supply, which has caused a huge spike in basic prices. The effect of this for contractors who have been unable to secure stable supply chains could be significant, for both existing and actively tendered projects.
Also, in Asia and similarly perhaps for other regions, is that pandemic related claims are now an active feature in various arbitrations, where the treatment of both the delays and any related financial compensation are key features
of the disputes being addressed in the arbitration. The awards whilst being confidential and also the claims being fact sensitive, will in in due course assist in providing some level of guidance perhaps through appeals thereby making the arbitration award public, also perhaps with various articles, this could help shape best practice. However, this in any event, is unlikely to provide any direct assistance to parties in the short to medium term.
THE MIDDLE EAST
The approach to tackling the pandemic in the Middle East has not been uniform. Even within the confines of the UAE, the differences in approach have been stark. Dubai, an economy sustained on tourism was swift to open its borders after the short sharp shock of a lockdown and invested heavily in providing its citizens and residents with one of several available vaccines. In contrast, Abu Dhabi has been slower to lift restrictions on the movement of citizens and residents across its borders, potentially reflecting the lesser extent to which it is reliant on the tourism sector.
Relief to the construction sector has been comparatively limited in all the Emirates. Whilst economic stimulus packages in excess of AED 7 billion have been proffered in Dubai – and even greater sums in neighbouring Abu Dhabi – the direct impact to the construction industry has been limited. Classifying construction as a “vital sector” during the initial lockdown period in Dubai allowed construction activities to continue, albeit with productivity materially curtailed by social distancing measures. More broadly, the Dubai government directed that relevant government organisation expedited the payment of monies due to contractors for public works projects. The extent to which this has helped to invigorate the construction sector is unclear, with no specific statistics available. Similar material shortages as identified in Asia and beyond have also been a feature in Dubai, with the inevitable consequence of rapid price increases for the in-demand raw materials.
The impact of the delays and reductions to productivity that befell the construction industry during the onset of the pandemic are now featuring in arbitrations in the Middle East region. Anecdotally, the approach adopted by employers appears to have been to ‘wait and see’.
The effect of this strategy on the construction will only likely become clear as the ever-growing number of pandemic-related arbitrations play out in the regional arbitral institutions. The authors advice however remains unchanged from our article on September 2020: take a pro-active approach to manage the risk; do not try to ignore the impact of the pandemic, and do not simply transfer all risk to the contractors.
In our experience over the past year, parties have typically endeavoured to avoid disputes and reach commercial solutions on contracts executed before the pandemic started. This sometimes relies on Force Majeure (FM) clauses and others on an ex-gratia basis.
Parties have in some instances attempted to rely, largely unsuccessfully, on existing FM clauses through a creative interpretation of the various unforeseen circumstances typically listed in such clauses. With reference to possibly this clause, usually considered to be an extraordinary and unanticipated natural event, it seems reasonable that it could have been relied upon in pursuit of relief in respect of the first COVID-19 wave. However, as future waves of COVID-19 can reasonably be contemplated by contracting parties, it is likely that attempts to rely on the same provision to cover future pandemics may be more difficult to pursue.
Increasingly, contracting parties have turned their minds to providing for commercial solutions to deal with COVID-19, such as drafting new contract clauses, altering standard conditions and making monetary provisions. These include, new or amended FM clauses, expanding the coverage of variations and altering the change in law provisions.
Contracts are increasingly being drafted with new and/ or amended FM and/or specific ‘Pandemic’ provisions. It appears that to apply a standard approach would be helpful to all parties and whilst there are a number of important considerations when drafting these clauses, it appears amongst other things that of particular importance is defining what constitutes a pandemic which, as suggested in our original article, might best be placed in the hands of an appropriate body such as WHO.
Canvassing others in the industry, suggests that a combination or pre-agreed rate and provisional sums for pandemic rated matters will be the norm in future contracts.
Mike Allen - Managing Director, Secretariat (Hong Kong)
Conrad Bromley - Managing Director, Secretariat (Dubai)
Paul Roberts - Managing Director, Secretariat (Brisbane)
‘COVID-19 and beyond: Drafting for future pandemics and dealing with the fallout from this one’ – Ashurst - Infraread Issue 14 - 15 June 2020