COVID-19: impact on construction projects in the Middle East

The outbreak of the novel coronavirus disease (COVID-19) and the subsequent spread of the virus around the world has already impacted the Middle East’s construction market.

The number of positive cases identified within Middle Eastern countries will unfortunately only further impact upon the construction sector, as countries seek to minimise risk of contamination amongst populations. This has already been demonstrated by the precautionary action of the recent travel restrictions imposed by the UAE, Saudi Arabia and Qatar, amongst other GCC nations.

What are the typical issues arising on construction projects in the region as a result of the COVID-19 outbreak?

Impact on work force

This is particularly felt due to the high proportion of migrant workers involved on construction projects within the Middle East.

Many workers travelled to China to celebrate Chinese New Year which coincided with the outbreak. Subsequent travel restrictions on travel to/from China, impacted on the ability of workers to return to the region to work.

Further impact may be caused by annual leave as travel bans impact on ability to return to the region and/or result in self-isolation upon return. In turn, labour shortages may result in contractors having to pay those in country overtime to fill the void, or paying workers in lieu of leave.

Health & Safety impact for employers

Employers may need to review health and safety policies and protocols in the context of COVID-19, in order to ensure compliance with the relevant Labour Law. In the UAE, as in other jurisdictions, the employer has a duty of care to protect employees from injuries and disease in the work place.¹

Employers should therefore review their policies and consider whether it needs to make adjustments to those policies or implement safety measures to manage the risk of virus spread. This may involve, for instance, providing remote working facilities for office staff, suspending business travel, providing employees with protective equipment, improving signage and information about disease prevention on site / in workers accommodation, and/or considering crisis management options in the event of an outbreak in its staff.

Employers may need to implement some form of medical screening in order to satisfy their obligation to exercise reasonable skill and care, and stem the spread of the COVID-19 virus amongst their workforce.

Impact on global supply chains

There has already been significant impact on the global supply chains for goods, materials, equipment and plant due to a substantial decline of output in Chinese manufacturing, as well as export and logistics issues.

Particularly, the extended closure of factories in China after the Lunar New Year holiday, substantially reduced manufacturing and resulted in supply shortages of materials or finished goods. Furthermore, logistics issues impacted upon exports, and limited/prevented the supply of materials and equipment coming from or routed through impacted areas.²

China is the UAE’s largest trading partner and Chinese imports account for a large share of the goods, materials, equipment and plant used on projects in the Middle East. Consequently, manufacturing and supply issues in China can have a significant impact on construction projects in the Middle East. The more recent spread of COVID-19 virus across Europe will further impact projects locally; for instance, Italy produces a large proportion of the world’s marble and other stonework.

Companies and projects in the Middle East consequently need to plan for goods not being imported and assess whether products and materials such as stone, steel, cladding and façade materials, equipment for MEP (Mechanical, Electrical and Plumbing) works and other high-tech equipment amongst other things, can be substituted.

Notwithstanding travel restrictions on people, the UAE authorities re-state that cargo shall remain unaffected. Given the criticality of imports to the economy and its residents, no doubt the UAE will do everything possible to keep the ports open. This may involve increasing security and/or implementing medical checks at both ends of the shipping process, which could cause additional delays to clearances. If the ports are required to close, then substantial delays to imports/exports should be expected.

Impact on work progress

An outbreak of the COVID-19 virus in the region may impact upon a contractor’s ability to keep its work force fully mobilised and able to progress work on site. In a worst-case scenario, this could result in the closure of project sites.

Further delays to the manufacture and/or restrictions to the export/import of goods, materials, plant and equipment may consequently impact on progress of construction projects in the Middle East.

Looking ahead to key projects in the region, such as Expo 2020, these may be susceptible to disruption and critical consequent delay issues. For instance, if a contractors’ ability to secure critical MEP equipment / long lead pre-fabricated materials is compromised by COVID-19 restrictions, and there is limited scope to source alternatives. Or if a MEP subcontractor faces disruptions in its supply chain and is unable to progress its works, this may consequently disrupt other contractors on site.

Cost impact to contractors / vendors

In order to avoid risk of contractor culpable delay, contractors have a positive obligation to mitigate risk of a potential delay event. Consequently, if there’s potential to secure alternative materials or equipment from another non-impacted subcontractor/supplier, or to secure alternative shipping routes from / through non-impacted areas in order to avoid impacting its work progress, then such party should do so. However, it may be difficult to find an alternative supplier in an unaffected location (or indeed, an unaffected location may subsequently be infected). There may be significant operational issues involved in moving production and infrastructure logistics to another vendor, particularly in the case of pre-fabricated or bespoke materials and/or specialist equipment. Consideration should be given to whether switching to another manufacturer will require further advance payments to be made and/or whether any existing advance payments can be recovered.

The additional cost of providing such alternatives will, at least initially, be borne by the contractor and may affect its bottom line. As this article will discuss further below, cost relief may be possible under the contract or at law, although at least in the short term the cost impact of COVID-19 is likely to cause cash flow issues for contractors.

More broadly, it remains to be seen what impact the economic effects of COVID-19 will have on UAE businesses, particularly in light of the dramatic fall in oil prices. A fall in the market may have repercussions on liquidity and cash flow through the construction sector, particularly in this region where ‘pay when paid’ clauses are permitted and often seen in subcontracts.

What potential relief is available for additional time and/or costs claims?

The FIDIC Red 1999 contract remains widely used across the region and contains various routes for time and cost entitlements that may be triggered due to impact of COVID-19 on projects.

Firstly, Article 8.4 of FIDIC Red 1999 entitles a contractor to claim for an extension of time (but not costs) in the event of “unforeseeable shortages in the availability of personnel or Goods caused by epidemic or government actions.” On the face of current circumstances, and particularly the latest government imposed travel restrictions in the region, this provision may likely apply. Contractors should be mindful to keep good records to evidence the shortages suffered and the reasons for them.

Additionally, contractors may claim additional costs and varying the contract price under the contract, as a result of changes in the laws of the project country pursuant to Clause 13.7 of the FIDIC Red 1999 Contract.³

As matters currently stand, the directives and guidance issued by the UAE government in response to COVID-19 to date arguably fall short of the Clause.13.7 requirements. However, other countries in the region, such as Saudi Arabia and Qatar, have recently issued a statement temporarily banning entry on people arriving from certain countries due to COVID-19 concerns, and have notably imposed travels restrictions on those from other GCC countries. It remains to be seen whether governments in the region take further legislative action and contract parties should consider what impact such action may have under their contracts.

It is conceivable that the current government travel restrictions discussed above may impact projects involving a large migrant workforce and contractors should consider whether this may have a potential delay or cost effect to their project based upon the facts specific to them (for instance, with reference to the personnel affected by the travel ban and the specific impact of this loss of productivity on the project).

Lastly, it is worth noting that a contractor/subcontractor may also seek to rely on provisions of the UAE Civil Code (Federal Law No 8 of 1985) to defend against any losses claimed by an employer/main contractor due to its non-performance, including:

• Article 287: an obligor will not be liable for loss caused by (among other things) force majeure, in the absence of a legal provision or agreement to the contrary; and
• Article 386: an obligor is not liable to pay compensation for non-performance if it is proven that the impossibility of performance arose out of an external cause (in which it played no part).

Claims for force majeure

Often categorised as an ‘act of God’, ‘force majeure’ is a contractual clause or legal principle that seeks to allocate risk for future events beyond the reasonable control of the parties, that if they occur, will affect the ability of the parties to perform the contract.

A claim of force majeure may result in the variation, suspension or termination of the contract. We consider that there may be a rise of force majeure claims on project in the Middle East as a result of COVID-19. Given the potential for claims, we consider below each of the various steps comprising force majeure in further detail.

Does the present COVID-19 situation qualify as a force majeure event under the contract or at law?

There is no fixed legal definition of ‘force majeure’ under English law. Contracts deal with it differently.

The English case of Lebeaupin v Richard Crispin & Co (1920) held that force majeure is a wide concept and events outside a parties control would cover war, any direct legislative or administrative interference and epidemics.

Under UAE law, there is similarly no exhaustive list or specific definition of ‘force majeure’. Broadly, force majeure is triggered by physical (e.g. natural disaster) or legal (e.g. changes in law) impossibility.

The FIDIC Red Book 1999, includes reference to ‘force majeure’ or exceptional compensation events. Particularly:

Clause 19: 'force majeure' means an exceptional event or circumstance which: (a) is beyond a Party’s control; (b) the Party could not reasonably have provided against before entering into the Contract; (ci) having arisen, such Party could not reasonably have avoided or overcome; and (d) is not substantially attributable to the other party.

Epidemics or pandemics are not specifically listed in FIDIC as being a force majeure ‘exceptional event’. However, we often see this included in amendments to FIDIC or other forms of bespoke contract.

Even in the absence of epidemics being specifically listed, a party may not be precluded from making a force majeure notification although they will likely have additional hurdles to overcome. It could be argued that a government lockdown may qualify as a force majeure event, even if the underlying epidemic did not.

Therefore, in order to assess whether COVID-19 would trigger a force majeure event, it is important to consider the various characteristics of force majeure.

The Characteristics of force majeure

Under English law in order for force majeure to be triggered, the relevant circumstance or event must meet three conditions:

(i) It must be completely outside the parties’ control;
(ii) It should render performance of the contract impossible by the party claiming it; and
(iii) There should be a direct causal link between the event and the impossibility of performance.

• Outside of a parties’ control - an ‘act of God’?

  A useful definition of ‘act of god’ has come out of the Hong Kong Court, which described it as: an event, occurrence, or accident due to natural causes; which must occur independently of human intervention, and must not have been capable of being foreseen, or if it could, it could not have been avoided by the exercise of reasonable skill and care.

• Impossibility of performance

  The circumstances or events must be demonstrated to impact upon a party’s ability to perform the contract.

  The level of impact required upon the performance of the party relying on the clause, and this may be a varying threshold depending upon the wording of your contract (for example, performance must be “impossible”, “impractical”, or “hindered”).

  The law in the UAE contains mandatory provisions in regards to force majeure. Particularly, Article 273 of the UAE Civil Code contains the impossibility of performance requirement for contractual obligations. In the UAE, this is understood to mean that the impact of the event causes performance of the contract impossible by any party. Although it is permitted under UAE law to argue impossibility over part of a contract, which, if successful renders that part of the contract cancelled.

  FIDIC requires prevention, namely that a party is or will be prevented from performing any of its obligations under the contract by force majeure. This is a high threshold. If performance is still possible, albeit maybe more costly through securing alternative materials/equipment or personnel, then there is no force majeure under the contract.

  The law in the UAE likewise reflects this position, and it is particularly notable that the UAE courts have traditionally interpreted force majeure clauses very narrowly, such that the events must make performing a contract impossible, unforeseeable, and uncontrollable. Likewise, as with FIDIC, a mere difficulty in performing contractual obligations will not be sufficient under UAE law to argue impossibility.

  However, it remains open to parties to claim relief under Article 249 of the UAE Civil Code where a contract has become more difficult and costly to perform due to events outside of its control. Article 249 permits a court to amend parties’ contractual obligations to redress a potential economic imbalance arising under the contract.

• Unforeseeable

  In the UAE, jurisprudence from the Court of Cassation confirms that a force majeure event must be unforeseeable to the parties.

  For the majority of existing contracts, it is clear that COVID-19 is outside the control of the parties and an unforeseen event as at the point of contracting.

  However, it is understood that the first case of COVID-19 in the UAE was identified on 29 January 2020, about a month after the first confirmed case in Wuhan on 31 December 2019.

  This is important to note as the requirement of foreseeability means that contracts executed after the outbreak may be unlikely able to rely on the force majeure provisions. Parties currently involved in negotiating contracts, should be particularly mindful of their potential exposure on the basis that force majeure provisions will almost certainly not cover COVID-19 triggered events. Parties should therefore now look to others around the world, observe the steps that have been taken elsewhere to minimise the impact of COVID-19, and seek to implement measures in their contracts in an effort of avoid or overcome the effects of the virus.

• Location?

  It is arguable that in order to claim entitlement to costs under a FIDIC force majeure clause the trigger event must have occurred “in the country”, where country is defined as where the site is located.

  This means parties may be precluded from claiming cost relief under the contractual force majeure provisions for projects located in the Middle East even though they may be impossible to perform due to events in China/other countries.

Remember to notify claims properly and on time

Prompt and effective notice is key to protect any potential claim for additional time and/or cost. It is important to remember and adhere to the claims notification procedure under the contract, so as to avoid risk of potential time bars.

• What are the contractual notice requirements: Closely consider the wording and notification requirements of the contract as failure to comply may impede an ability to pursue a claim for force majeure under the contract.

  For example, FIDIC Red 1999 stipulates: “notice must be given of the event or circumstances constituting the force majeure and shall specify the obligations, the performance of which is or will be prevented”, and notice must be given within 14 days from the date the party became aware, or should have become aware, of the event or circumstance.

  Failure to give proper notice within this 14 day period could prevent an otherwise proper claim for time and cost relief under a force majeure provision.

• A party who receives a notice of force majeure: Consider whether that party has contractual entitlement to claim force majeure, and determine whether the notice is issued correctly and pursuant to the contract.

• Accepting a force majeure notice: Decide what to do next, affirm or vary the contract (extend time for completion and determine cost consequences)? Assess the consequences on the party’s requirement to perform, for instance any requirement to mitigate the effects of the force majeure under the contract, or of any affected subcontracts? Alternatively, parties can elect to suspend or terminate the contract (in the case of FIDIC there is a process set for payment and release in the event of opting to terminate – Clause 19.6 FIDIC 1999)?

What is the outcome of a force majeure claim?

As a matter of UAE law, if force majeure is successfully applied pursuant to Article 273 of the UAE Civil Code, the parties are released from performance and the contract is automatically cancelled.

Under FIDIC, a contractor may be entitled to an extension of time resulting from the delays arising from the ‘prevention’ (and thereby avoid liability for Liquidated Damages). But. as discussed above, a contractor may only be entitled to recover cost (not profit) for some types of force majeure events (and depending if the events occur where the site is located). In the event of a prolonged force majeure (more than 84 days for one event), either party may give notice to terminate the contract. Lastly, provided an event occurs outside of a parties’ control which renders it impossible for them to perform contractual obligations, the parties may be discharged from further performance.

> View our video about Covid-19, the construction industry and force majeure

Potential claim for frustration?

The legal argument of frustration is also a relevant consideration, as it applies in the event continuation of the contract performance becomes impossible. In English law, if a contract becomes impossible to perform a party can argue that it has been frustrated. The law of frustration allows an entire contract to be discharged due to a supervening event.

A contract is frustrated where something occurs after the formation of the contract (without the default of either party and for which there is no contractual provision) which:

• Causes a contractual obligation to be incapable of being performed; or
• Transforms the obligation to perfm a radically different obligation from that undertaken at the time of entry into the contract.

As frustration brings the entire contract automatically to an end, it is narrowly construed and only available in limited circumstances.

For instance, a frustration argument cannot be applied if:

• The consequences of the relevant event are already agreed;
• There is an alternative method of performance; or
• Just because performance has become more costly. The court won’t intervene because a change in circumstances causes hardship to one of the contracting parties.

> Read more about COVID-19 and its potential impact on trade finance
> View our webinar on COVID-19: force majeure and the law of frustration

Conclusion

Given the impact of COVID-19 to the construction sector, businesses will need to seek to minimise any potential delays and reduce their cost exposure in order to best protect their position.

Practically, contractors should proactively manage subcontractors, review supply chains and communicate regularly with your employer/subcontractors/suppliers.

Know your contract!

Carefully review and administer the terms of your contract (and any subcontracts) – what are your entitlements / obligations, are there any notice requirements?

Lastly, keep accurate and detailed records – the best chance for success of subsequent claims is if they are supported by persuasive contemporaneous documents.

Our webinar COVID-19: The Impact on International Construction is now available on demand.

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¹ Article 91 of the UAE Labour Law requires that “The employer shall provide the workers with the adequate protection means against hazards of occupational injuries and diseases that may occur during the work…The employer shall also adopt all other safety measures set by the Ministry of Labor and Social Affairs”.
² The UN Conference on Trade and Development (UNCTAD) cited that the China Manufacturing Purchasing Manager’s Index (PMI) fell to 37.5 - a drop of about 20 points – the lowest reading since 2004, and highlighted a decrease in the number of container ships leaving Shanghai in the first half of February (from around 300 a week to 180), which implies a 2% drop in overall exports resulting in a “ripple effect” worldwide “to the tune of a $50 billion fall in exports”: https://news.un.org/en/story/2020/03/1058601
³ Clause 13.7 stipulates: “The Contract Price shall be adjusted to take account of any increase of decrease in Cost resulting from a change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws) or in the judicial or official governmental interpretation of such Laws, made after the Base Date, which affect the Contractor in the performance of obligations under the Contract.
If the Contractor suffers (or will suffer) delays and/or incurs (or will incur) additional Cost as a result of these changes in the Laws or in such interpretations, made after the Base Date, the Contractor shall give notice to the Engineer and shall be entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to: (a) An extension of time for such delay, if completion is or will be delayed… (b) Payment of any such Cost, which shall be included in the Contract Price.”