The rapidly growing coronavirus pandemic poses an increasing concern for business continuity, especially within the construction industry.
With cancellations of events around the world and uncertainty in impending lockdowns and international border closures, it is critical for businesses to thoroughly review the rights and obligations in their existing project agreement contracts. For those dusting off executed agreements in force for projects, there are five different provisions that should be reviewed with careful consideration:
1. Force Majeure:
The force majeure clause is often in the boilerplate near the end of a typical project agreement. Is there a specific reference to an “epidemic” or “pandemic” as a force majeure event? If not, is there language in the force majeure clause covering “any other causes beyond the party’s control”? How broadly is a force majeure event defined? What happens in a force majeure event – for example, does a force majeure event provide for a right to an extension of the time for completion for the length of the force majeure? If so, how are payments, losses and damages allocated?
Delay is sometimes covered in a specific clause in a project agreement but is often referred to in a few different clauses. If you are a contractor delayed by your own subcontractors or suppliers due to COVID-19, can the delay be overcome by retaining a different subcontractor or supplier? Is there a clause in your project agreement which allows a contractor to unilaterally decide to substitute a different subcontractor or supplier or can that only be done with consent of the project owner? A project owner may have insisted on having strict control in the project agreement over a contractor’s chosen subcontractor’s or suppliers – which in the case of a pandemic such as this may make it more difficult and time-consuming to address delays.
The project schedule is often stated in an appendix to the project agreement with the final “completion date” or “commercial operation date” being noted in the body of the agreement. Do the project agreements provide for a schedule which has a contingency time period to avoid a contractor or supplier delayed by COVID-19 from missing a deadline and defaulting? The project owner may have insisted on strict compliance with the project schedule which may also make it difficult for the contractor to maintain the schedule. Project agreements often contain change order process to vary the scope of work of the contractor. Does the project agreement allow the contractor seek a change order due to a COVID-19 related circumstance?
4. Material Adverse Change:
Is COVID-19 an event which could have the potential to cause a “material adverse change” if such is defined in the project agreement? What are the consequences in the project agreement of a “material adverse change”? For example, does a material adverse change entitle a contractor to a change order? Or can an owner terminate the project agreement without penalty?
Financing and lender security is an important part of project agreements. Lenders will mostly have broad rights to security in the project agreement. However, does the project agreement have a specific contractual obligation on the lender to finance the project? What happens if the lender cannot provide capital to an owner as agreed due to technical issues or lack of human resources? Is it an event of default if a lender cannot fund a project owner due to COVID-19 issues? What if the owner cannot get the money from their lender due to COVID-19 and cannot pay the contractor?
When an unexpected and unique global event such as the COVID-19 pandemic happens, our project agreements are tested in ways stakeholders may not have anticipated. Engaging experienced project lawyers early to assist owners, contractors and suppliers to interpret rights and obligations in project agreements can be useful in avoiding disputes. If a dispute cannot be avoided by agreeing on a common interpretation, then most project agreements provide for a dispute resolution clause which is often an arbitration process. Our commercial litigation lawyers experienced with project agreements can assist in moving though that arbitration process if required. Even as the full extent of the COVID-19 pandemic remains unknown, it is clear that having well-drafted fully negotiated project agreements in place can serve as a useful roadmap in navigating uncertain times.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.