Companies may consider force majeure in contracts as coronavirus spreads
As the coronavirus outbreak shows no signs of abating any time soon, construction experts say some companies may be considering the legal defense of force majeure.
They stressed that the presidential directive for a lockdown has impacted on contracts and poses danger for the construction industry.
Force majeure refers to unexpected external circumstances that prevent a party to a contract from meeting their obligations. Declaring force majeure may allow a party to a contract to avoid liability for non-performance.
According to them, although a well-drafted force majeure clause can be a critical safety net to help contractors deal with unforeseen events, the nature of the pandemic, which was never envisaged, and the presence of a poorly-drafted one as well as absence of it in some cases can result to litigations from inconsiderate parties.
The difficulties in meeting obligations could manifest in a number of ways, such as staff shortages or difficulties with the supply of materials because of self-isolation or restriction of movements or social distancing requirements in accordance with government guidelines.
Painting a graphic picture of the complexity of the situation and its impact on construction, the President, Nigerian Institute of Buildings (NIOB), Kunle Awobodu, said most of the existing contracts did not really envisage COVID-19 and therefore the force majeure clause may not be relevant.
He stressed that force majeure that will even be applicable maybe something like earthquake and other acts of God which are often mentioned carelessly as nobody ever assumes that a virus could become an act of God or create force majeure.
According to him, invariably, if you come across a stubborn client, he will still go to court based on the signed contract agreement and still refused to accept claims.
Awobodu said the Quarantine law 2020 issued by the president on March 29, 2020, in pursuant to Quarantine act of 1926 has created a problem in many contract agreement because when the contracts were signed there are obligations between clients and contractors.
“In every building project, there are three major targets, namely that projects must be kept within the budget. In most of the contracts signed these days, it is categorically stated that fluctuations are not palliated that is you cannot come back and review the price.
“This means that contractors must stay within budget. The other one is duration or timeliness. That is, if you say, you are rounding up in nine months time, let it be nine months, any extension of time can lead to increase in cost, which the client does not want to entertain,” he said.
Presenting another perspective, President, Nigerian Institute of Quantity Surveyors (NIQS), Alhaji Mohammed Abba Tor, said for contracts that do not have force majeure clause, risk allocations are done in contract framing, may suffice.
According to him, “there is this contemplation between project managers and contractors to consider risk management plan by looking at the uncertainties, as they cannot be too sure of what will happen in the future. Parties identify risk and carry out some assessment and also provide for them. Through that you can do risk allocation, that is how it is resolved, otherwise, claims and dispute will arise in that situation and could only be resolved by the interpretation and terms of the contracts.”
At the projects level, Tor said, it is beyond the control of the parties in a contract, for instance, employers/clients and contractors.
He said the phenomenon referred to as force majeure impedes the discharge of duties and obligations by the parties under the contract.
According to him, the implications cut across the various spectrum, including employers and clients, contractors, consultants, professionals, banks and private sectors.
Due to the total or partial lockdown or in some cases restricted movements and social distancing rules brought about by the pandemic, contractors, he said cannot perform as planned to leave great burdens like inability to meet deadlines and financial obligations.
They can, however, seek protection under the force majeure clause where it forms part of the conditions of the contract. “As construction project cost experts, quantity surveyors do incorporate risk management plan into their cost structures and it could be used to mitigate the effects of the pandemic.
“For contractors handling road projects, the idle time of plant and equipment such as quarries, asphalt plant and earthmoving equipment are rather expensive. New jobs are on hold during this period and that affect the growth and profitability of construction companies. For contractors that obtained facilities from banks and other financial institutions, the pressure will even be more severe.
It is relieving though that some banks announced a measure of reliefs for various debtors and we are hopeful that such gesture is extended to the construction sector.
As matters stand, private consultants cannot be paid for jobs already delivered. It is also difficult to prospect for fresh engagements involving conceptualization and planning due to the lockdown.
Some professionals, he said that embraced design on the digital environment such as Building Information Modelling might, however, perform relatively well in this regard. The Nigerian Institute of Quantity Surveyors is at the forefront of popularizing the BIM technology.
Tor urged government to consider extending the bailout package to the construction Industry.
Major players like contractors and consultants, he said, should be supported to remain afloat, thus retaining their works force.
He also advocated a stakeholders’ summit to discuss and work out a rapid recovery roadmap for the construction sector.
Also, consulting engineer and former president Nigerian Institute of Structural Engineers (NISTRUCTE), Eddy Atumonyogo said the government must recognize the importance of the construction sector in the economy.
He noted that some developed countries classified some aspects of construction activities as part of essential services, and therefore allowed some level of construction to continue while maintaining all the safety and social distancing rules.
Some others, he said, have come up with clear guidelines on how to return people to work in phases.
According to him, the total lockdown has had the double effects of altering the delivery dates of critical infrastructure and also slowing down the economy.
Whereas clauses in the contractual agreements can deal with the delayed delivery dates, the damage to the economy will take a while to mitigate.
This pandemic, he said, has exposed the state of our infrastructure, most especially in the health sector. It has also shown that when the push comes to shove, every nation will be forced to cater only to their citizens.
Atumonyogo said the virus pandemic, coupled with the lockdown order by various governments, qualify as one of such force, which can only serve to prevent lawsuits as a result of a delay in project delivery.
He, however, urged government at all levels to look inwards, challenge, patronize, and develop local manpower for infrastructure development.
For the second vice president of the Nigerian Institute of Architects, Enyi Eboh, it is regrettable that the construction industry is one that is not classified as very essential so that everybody has to down tools.
He stressed that the lockdown will definitely affect the industry; hence most contracts will definitely be renegotiated. “If contracts are planned to be completed in six months, if you are not able, definitely those contracts should be recalibrated; if it cannot work because of the penalty clause.
“It will affect agreements, as it all depends on the person at the other ends, but it can go all the ways to court then the court will make a decision on it because everybody knows that it is an act of God, nobody envisaged it and nobody can really do anything about it,” he said.
According to him, the Central Bank of Nigeria has given a directive for a moratorium for repayment of loans like three months because people cannot even work to pay back the loan.
The renegotiation of contracts, he said, will be post COVID-19 because nobody really knows when it is going to end until the coast is clear.
“Because relaxation is a gradual thing and not all sectors will be relaxed at the same time at the point where the construction sector is enabled to start, then you can start for renegotiation.
“ Like cement is a major raw material, if the factories are not working, there will be a shortage of cement, even when it is relaxed, it will take a while for supply to meet up with demand.
If you do not wait for the price will be higher than what you negotiated, so at the point where the situation has normalized you now begin to make a case of that period you could not work because some jobs is that you finance after you finish, they now pay you.
“If you have collected a loan to finance it and you are supposed to repay in six months when you thought you would have finished the job and you are in the 8 months and you are not sure when the job will finish, those things will need to be looked into”, he added.