Projects impacted by travel restrictions due to Covid-19 and the applicability of change of law clauses
How are Projects affected by restrictions on travel?
The expertise required for a project is both diverse and specific. Projects require the involvement of consultants, as subject matter experts, covering various fields such as technical, finance, legal, market/demand, tax, accounting and insurance. In a world which was, until recently, better connected than ever, projects were awarded and implemented with the involvement of consultants and experts from all over the globe, bringing with them the added value of their industry know-how and sharing their diverse experience.
The international connections required for a successful project do not stop there; during the construction phase it is almost always the case that projects have local and international components and rely on a complex international supply chain.
However, the Covid-19 pandemic has seen many governments implementing restrictions on travel such as imposing travel bans and/or restricting or closing border checkpoints including ports, in an effort to delay the impact of the pandemic and give health-care systems time to prepare (or brace) for the impact of Covid-19.
The travel bans have undoubtedly impacted the progress of many projects and disrupted the construction and projects sector. Although the rise in various video conferencing tools allowed many businesses, including consultancies, to communicate and engage as required, there are certain aspects of the services rendered by consultants or technical experts that require physical presence. Obvious examples are surveying, inspection, equipment testing and certification, either during construction or as part of major maintenance and repair.
In addition, travel restrictions have inevitably impacted the logistics sector causing disruption in the international supply chain's complex web. The closure or restrictions at borders and ports has posed complications to on time delivery and supply. Border and ports closure or restrictions caused extended transit periods or cargo becoming locked up in quarantine zones which has impacted the ability to meet expected work and deadlines. Even if cargo is successfully disembarked, challenges remain for such cargo to leave the port or to be delivered to its intended destination due to intra-state/district level movement restrictions. As such, the building and raw materials manufactured or originating from foreign suppliers may not be able to reach its intended destinations within the scheduled time (or at all), or the cost for transporting and distributing may simply be too high.
With these complications now materially affecting projects, parties are being forced to exercise their contractual rights and so legal concepts such as 'force majeure' and 'frustration' are now coming to force. Force majeure clauses are helpful in temporarily relieving parties from their immediate contractual obligations, whereas frustration will result in the termination of a contract.
However, some projects are pressing on despite the disruption; for example, infrastructure projects that are considered critical or essential, such as electricity and transportation works. Indeed, as existing healthcare infrastructure struggles to keep up with demand due to Covid-19, certain countries are pushing forward with building new hospitals or healthcare facilities in preparation of the Covid-19 peak. In these cases, the temporary relief of a force majeure clause is not appropriate and frustration would not be an option.
What about change in law?
In construction contracts, the general position is that the contractor is obliged to comply with all applicable legislation. Naturally, the contractor needs to build in the cost of complying with all current or foreseeable law into its price. However, there is always the risk of a change of law and the question is who should then bear the risk?
Standard form contracts, such as the International Federation of Consulting Engineers (FIDIC) contracts, have mechanisms developed in order to allow adjustments for a change of law. FIDIC contracts generally provide that adjustments may be made to take into account any increase or decrease in cost/expenditure incurred by the contractor in performing its obligations resulting from a change of law. Change of law standard clause in FIDIC contracts includes the introduction of new laws and the repeal or modification of exiting laws, as well as the requirement for any permit, permission, licence and/or approval to be obtained in order to comply with applicable laws. A contractor (using the FIDIC standard form contract) that suffers delays and/or an increase in cost/expenditure as a result of any change of law is entitled to claim additional payment or an extension of time.
However, change of law clauses are often heavily negotiated so it is important to check whether the standard clauses have been varied. In particular, contracting parties should be aware of the notice requirements and timelines that are contractually prescribed for triggering and relying on the benefits of the contract mechanisms available to them for dealing with change of law.
Many of the restrictions on the movement of goods and people imposed by Covid-19 affected countries have been imposed through legislation, either through primary or secondary legislative instruments, thus having the effect of a law. As an emergency measure, many contractors have been compelled by governmental authorities to halt their activities for a period of time before being allowed to apply for special permits/approvals to commence activities once more. Such special permits/approvals are typically subject to certain conditions such as mandatory decontamination or cleaning exercises and/or testing of employees, which may result in significant additional unexpected cost. It is extremely likely that all these legislative changes would be considered as change of law and these additional costs and other implications may be areas that could be compensated through a change of law clause.
In some countries, the closure of building sites and projects has arisen from government advice or recommendation rather than a legislative obligation. In those cases, the ability for the contractor to claim compensation for change of law, or to claim force majeure, may be significantly more difficult. Care should be taken in analysing the factual circumstances before launching any claim.
Analysts have begun to consider how the world will be different post Covid-19. The World Health Organisation, in its recommendation for international travel in relation to Covid-19, recognised the significance of international travel restrictions but went on to state that such measures must be based on a careful risk assessment, be proportionate to the public health risk, be short in duration, and be reconsidered regularly as the situation evolves. Accordingly, international travel should resume but this is likely to be in stages, and there is considerable uncertainty surrounding when and how easily the transport and logistics networks will open up and be able to get back to normal such that contractors can rely on their supply chain. The extreme pressures which the aviation industry has been under also make it likely that capacity and networks will be significantly reduced initially. The measures and protocols which governments may put in place, to screen, monitor and control the movement of travellers and supplies remain to be seen as governments will still need to monitor and survey international travel and logistics in order to reduce the risk of another wave of Covid-19. Heightened health and safety procedures are likely to be imposed along with additional protocols for freight forwarding that may increase the cost of operations.
As such, contractors should keep detailed records of the costs and time lost to these changing circumstances in order to enable claims to be made once the positions are known. It is equally important that service providers, contractors and operators of projects should explore all options available to them for alleviating the issues arising from the Covid-19 related restrictions and to mitigate their losses because compensation may not be awarded if the claimants could have avoided the damages or consequences through reasonable steps.