The Coronavirus - force majeure in construction contracts
The spread of the coronavirus and the authorities' measures to stop the spread cause several problems in the construction industry.
The authorities' measures to stop the spread cause problems in the construction industry.
Is the corona virus the basis for force majeure?
Most Norwegian construction agreements are based on the Norwegian Standards (NS) 8405 Norwegian building and civil engineering contract, NS 8406 Simplified Norwegian building and civil engineering contract or NS 8407 General conditions of contract for design and build contracts, or the corresponding subcontractor standards, NS 8415, NS 8416 and NS 8417. The standards provides a balanced framework for the individual building contracts. The general rule of the contracting standards is that each of the parties bears the risk of their own performance. An exception to this principle is where the parties' performance under the contract is affected by extraordinary external circumstances, so-called "force majeure". The ongoing coronary pandemic can be such an extraordinary circumstance under the individual contract. Please note that the general content of the term "force majeure" may vary in different jurisdictions and in the individual contracts.
NS 8405 section 24.3, NS 8406 section 20 and NS 8407 section 33.3 give the parties the right to extend the performance deadline in the event that force majeure is deemed to exist.
The terms for extension of time on a force majeure basis are somewhat rough that:
- Progress is impeded.
- The consequences of the impediment cannot reasonably be overcome.
- The impediment should not have been taken into account (was unforeseeable) when the agreement was concluded.
- The impediment is beyond the party's control.
Progress is impeded
The first condition means that the pandemic situation must lead to an impediment. This may be the case if key personnel or several of the contractor's employees are sick or quarantined, and therefore unable to attend work to perform the contractor's performance. The same can be the case for the builder's services, for example for deliveries of the design basis or material for which he is responsible.
The consequences of the impediment cannot reasonably be overcome
The second condition, that the impediment cannot reasonably be overcome, indicates a "sacrificial limit". The condition is fulfilled if fulfillment of the performance under the contract will require a disproportionate effort. We will give two examples:
1. The first example is related to the contractor's own circumstances.
If only a few employees are sick or quarantined, the impediment most often can be overcome by redeployment of personnel or extra effort by remaining personnel. If all or a large part of the contractor's workforce is sick or in quarantine, it becomes more difficult to overcome the obstacle. The hiring of other personnel is conceivable, but this requires that personnel are available in the market and that it is not disproportionately expensive. It is also conceivable that some employees may work longer days than expected.
2. The second example is related to the contractor's subcontractors or suppliers.
Another practical situation is that your subcontractor or supplier is affected by the corona virus, which in turn can make it difficult or impossible for you to fulfill your obligations to your client. The general rule is that each of the parties are responsible for any delays caused by their own subcontractor. The condition for the existence of force majeure in such a case is that both the contractor and the subcontractor experience an impediment beyond their control, that could not reasonably be foreseen or overcome. It is conceivable that the contracting party has the opportunity to overcome the obstacle by engaging another (replacement) subcontractor that is not affected by the pandemic. This will especially apply to the period before start-up or at an early phase of the construction project. In situations where an entire industry is affected quite similarly, the realistic possibilities for the solutions mentioned above can be rather small.
In some cases the main contract is based on the Norwegian standards, while the subcontractor agreement is based on a foreign standard. In these cases there could be a breach in the back-to-back regulation provided for in the Norwegian standards. The regulation under the subcontract, however, is the main contractors responsibility. If the subcontract provides for a possibility to terminate or cancel the contract that is different from the Norwegian standards, there is a chance that any extra costs will be at the risk of the main contractor when assessing whether the "sacrificial limit" is met or not.
The impediment should not have been taken into account when the agreement was concluded
The third condition is that the impediment should not have been taken into account at the conclusion of the agreement. Generally, one cannot expect the parties to take into account events that occur very rarely when entering into the agreement. It is arguably so that the corona pandemic, as it is affecting our society now, is beyond what one should have taken into account at the time of signing the agreement. However, this may be different in cases where an agreement is made after the pandemic has become known. In particular, agreements entered into in February / March 2020 must be considered separately .
 On 25 March 2020, The Norwegian Public Road Authority ("Statens Vegvesen") announced that they were reviewing their agreements for projects to come. In the new templates, it would be made clear that the corona-situation would not be considered force majeure.
The impediment is beyond the party's control.
If the first three conditions are met, the fourth condition will often also be fulfilled. The coronary pandemic and its effects will at least be beyond the control of one party in most contracts. Note, however, that it is not the case that every event that results from, or is attributable to, the pandemic is automatically beyond the control of a party. We mention two examples:
1. Employees cancel their assignments in the middle of a rotation period and leave home at their own expense; or
2. Employees refuse to return to a project after a rest period
In both cases, the employees justify their actions by referring to fear for the consequences of the pandemic. In such circumstances, the relevant contracting party is, in principle, closest to carrying the risk. It cannot, however, be ruled out that the assessment will be different where the employee's absence is due to a justified security risk associated with the corona pandemic.
Overall, there is much evidence that the corona pandemic is a force majeure event. However, this must, as stated above, be assessed on the basis of the individual contract and the pandemic's influence on the individual contracting party.
What claims can be made?
It is worth noting that the standard contracts give the right to an extension of the execution deadlines in case of force majeure, but not claims for additional monetary compensation.
This means that the delay cannot be met with a claim for a daily fine or liability. The increased costs incurred by the extended construction period cannot be claimed, and each party must therefore bear its own costs due to the delay.
The length of any deadline extension will, according to the standard contracts, be based on the impact of force majeure conditions on the progress. Important factors could be the type of impediment (personnel shortage, material shortage, closed building site, etc.) and the extent of the impediment (how many are sick or in quarantine, how long, etc.).
Duty to notify
The general notification rules also apply to deadline extensions due to force majeure. This follows from NS 8407 section 33.4 and NS 8405 section 24.4. In the absence of or too late notice, in principle, the requirement for extension of time is lost. We recommend that you give a general notice early, and follow up with a specific notice as the consequences occur. This will contribute to overview, dialogue and as proof of evidence in the event of a future conflict.
Our advice – how to manage
The spread of the corona virus affects both builders and contractors alike. We therefore recommend that the parties engage in dialogue on the situation as soon as possible, including by notifying them of a deadline extension, and jointly try to identify the consequences of the pandemic on the parties and the specific construction project. Thereafter, it is important that the parties keep each other continuously informed of developments.
According to what we are aware of, no previous case law is directly comparable to the situation we are in. The result of a court decision based on the contract standards is thus uncertain. In our view, in most cases, the parties will be best served by good dialogue along the way, and in this connection, an attempt is made to find a common ground and agree on how the time and cost burden should be distributed between the parties.