Impact of epidemics and pandemics on infrastructure projects

April 2020  |  SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2020 Issue

Global infrastructure spending shows no sign of decreasing, with governments investing heavily in infrastructure projects to boost economies and introduce much needed connectivity to millions of people around the world. The People’s Republic of China’s much discussed Belt and Road Initiative (BRI), which involves an estimated 132 countries, with most projects related to infrastructure development, is only one facet of the global picture – there are plans for significant investment in infrastructure around the world.

Impact of epidemics and pandemics

The outbreak of the COVID-19 acute respiratory disease and the steps taken by various government and corporate entities to stem the outbreak, including widespread quarantining and travel and visa restrictions, has drawn into sharp focus the vulnerabilities that businesses face in a world that is increasingly ‘connected’.

In forecasting the likely effect of COVID-19, it is natural to look to similar events such as Severe Acute Respiratory Syndrome (SARS) and the Middle East Respiratory Syndrome (MERS), which emerged in 2003 and 2012 respectively and both of which had a detrimental effect on global markets. Can we expect something similar, or perhaps worse, with COVID-19? The key difference between the impact of SARS and what we might expect to see with COVID-19 is China’s role in the global economy and supply chain. In 2003, China accounted for one twentieth of world trade; today it accounts for one seventh and plays a pivotal role in many, if not most, global production chains. On best estimates it appears that the impact of COVID-19 on the global economy may therefore exceed the SARS and MERS outbreaks.

Why are infrastructure projects so vulnerable?

COVID-19 is expected to have a deleterious effect on a number of infrastructure projects around the world. While an epidemic or pandemic can undoubtedly have a detrimental impact on a wide range of sectors, it seems that the construction and infrastructure sectors may be particularly vulnerable due to globalised supply chains and in many instances the supply of labour and key personnel from outside the country in which the project is being developed.

Contractual rights

From a contractual perspective, the most obvious impact will be on your rights and obligations under key contracts and, given the possibility of a long-term impact, how certain contractual rights might protect you or be used against you by a counterparty.

As most international construction contracts will contain a force majeure clause of some type, if a project or contract suffers interruptions or delay as a result of COVID-19, parties would be well advised to consider whether the applicable force majeure clause is engaged since, depending on the wording of the contract, an event that amounts to force majeure may excuse one or all parties from performance of their contractual obligations, or suspend performance of contractual obligations for the duration of the force majeure event. That is the position under English law, which is the focus of this article.

It is worth noting that absent a force majeure clause, a contract may be discharged if it has been ‘frustrated’. Frustration is a common law doctrine whereby, if unforeseen events occur after the formation of the contract that make it physically or commercially impossible to perform the contract, or which change the obligation to perform into something radically different, a contract is ‘discharged’ and parties to the contract are excused from performing their future obligations. However, the doctrine of frustration will not typically apply when a force majeure provision is included in the contract which covers the situation which has occurred, where there is an alternative method of performance, where the contract is simply more expensive to perform or simply because economic conditions have changed.

Does COVID-19 constitute a force majeure event?

Force majeure clauses typically contain a list of events that will constitute force majeure, with some clauses including wording such as ‘outbreak of disease’, ‘epidemic’, ‘civil emergency’ or similar. If the force majeure clause does not contain specific wording applicable to COVID-19, the party seeking to rely on the force majeure clause will need to consider the wording of the clause carefully to determine whether any COVID-19 related disruptions might constitute a force majeure event. For example, does the contract contain wording such as ‘or any other causes beyond our control’ after the list of specific force majeure events, or are there government decisions or actions that might fall within the scope of any political interference or potential change in law wording?

Demonstrating that COVID-19 falls within the contractual definition of force majeure is, however, only the first step. In order to rely upon such a clause, it will also be necessary to show causation – for example, that, as a result of COVID-19, a party was prevented, delayed or hindered from performing its contractual obligations, and that non-performance was due to circumstances beyond its control. Again, parties should refer to the precise wording of the clause in order to understand whether the force majeure clause is applicable.

If a clause provides that the force majeure event must ‘prevent’ performance, the English courts have held that the party seeking to rely on the force majeure clause must be able to demonstrate that performance of the contract is “legally or physically impossible and not just difficult or less profitable”. Alternatively, words like ‘hinder’ or ‘delay’ have a wider scope and will generally be satisfied if it can be shown that performance is significantly more arduous. For example, if ‘key personnel’ are being denied entry to the country in which the project site is based, perhaps because work permits for Chinese personnel are no longer being granted, the affected party may be able to show that performance of the contract would be physically impossible without such people being present on site. By contrast, if the persons being denied entry are not ‘key personnel’ or similar, establishing a case for force majeure may not be as straightforward.

Further, recent English court decisions suggest that the event of force majeure must be the only or sole cause of the non-performance, meaning that if there is another event or circumstance that would have caused non-performance in any event, the force majeure clause cannot be relied upon. This may be difficult for a party to show on a large-scale construction project where there may be multiple competing causes of non-performance.

Practical considerations

If your project has been impacted by COVID-19, there are some practical points to be aware of. These are addressed only briefly here. If your project is affected by COVID-19, you would be well advised to seek legal guidance from your international legal advisers.

Careful analysis. Check the force majeure clause in your contract and consider whether delays or interruptions arising as a result of COVID-19 fall within the scope of the clause.

Notice requirements. Check whether there are any notice requirements in relation to an event of force majeure (since giving timely and contractually compliant notice is essential) and what the consequences of giving notice will be, this will ordinarily be set out in the force majeure clause, and can range from suspending the claiming party’s obligation to perform to conferring upon the counterparty an entitlement to terminate the contract.

Consider the wider impact. Consider your wider network of contracts. If you are an engineering, procurement and construction (EPC) contractor who is sourcing part of your scope of works in China, what are the shipping arrangements for those materials, equipment, modules and so on? Are shipping contracts in place and do you need to review those transportation agreements and give appropriate notices under them?

Mitigation. While the continuing impact of COVID-19 is difficult to predict, the affected party must be able to show that it has used reasonable endeavours to prevent or mitigate the effects of the force majeure event.

Investigation. Determine if there are any other factors that may have impacted performance of the contract. While it will depend on the wording of the clause in question, it is often the case that a force majeure event must be the only effective cause of default by a party seeking to rely on the force majeure clause.

Another party invoking force majeure clause. Be careful of suppliers or subcontractors who seek to invoke a force majeure clause when they are, in fact, not seriously affected by COVID-19, where you might have an argument that the element required for their works can be sourced from a country other than China, or where the claiming party is already in very serious delay due to matters that are their own responsibility.

Record-keeping. It is important to maintain good records of both the impact of the force majeure event on specific activities and associated mitigation measures, and additional costs incurred. Record-keeping can be overlooked in times of a crisis but can prove critical to substantiating a claim, particularly if formal dispute resolution proceedings are required in order to resolve the matter.

The impact of COVID-19 upon infrastructure projects, particularly in Asia, is likely to be far reaching, and it is unlikely to be the last epidemic or pandemic in our lifetime.

Parties who find their projects or contracts impacted by COVID-19 should therefore familiarise themselves with the relevant provisions of their contracts, particularly any force majeure clauses, in order to have greater clarity on their rights and obligations, and any steps that must be taken to preserve their rights.

Marc Rathbone and Sarah Grenfell are partners and David Wright is a senior associate at CMS. Mr Rathbone can be contacted on +65 6720 8278 or by email: marc.rathbone@cms-cmno.com. Ms Grenfell can be contacted on +44 (0)20 7367 3549 or by email: sarah.grenfell@cms-cmno.com. Mr Wright can be contacted on +65 9634 9388 or by email: david.wright@cms-cmno.com.

© Financier Worldwide

BY

Marc Rathbone, Sarah Grenfell and David Wright

CMS

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