June 17, 2020

Unknown Territory: Allocating Risk in International Construction Contracts in the Time of COVID-19 and Beyond

COVID-19 has impacted international construction projects in historic and largely unanticipated ways. Construction workforces have evaporated under enforced stay-at-home orders and concerns about worker and societal health and welfare. Projects are slowed by new and unforeseen safety precautions. Supply chains have been disrupted on a global scale. While these issues arise in a unique context, certain mainstay contract principles can help fairly allocate risk. Here are some key considerations for interpreting contracts now and for drafting contracts going forward.

What scenarios and circumstances “beyond the control” of the parties’ impact performance sufficient to address reallocation of risk?

The principle of force majeure is commonly used to excuse performance under a contract for causes beyond the control of the party with the performance obligation (generally, the contractor). In the U.S., some jurisdictions will not allow a party to excuse non-performance unless the scenarios are contemplated in the contract, even when the clause contains “catch-all” language. Careful drafting of contract language allows both parties to consider and plan for events that will excuse non-performance. International contracts typically include force majeure event scenarios such as war, civil unrest, labor problems, acts of government and human illness. These scenarios, however, are oftentimes not defined in a clear and uniformly understood manner. Not surprisingly, understanding and defining “human illness” as a force majeure event has become a significant question in contract interpretation as the world grapples with COVID-19. This analysis necessarily contemplates classic contract interpretation principles surrounding force majeure, such as foreseeability, avoidability and fault. In addition to contemplating scenarios which could disrupt business, the parties should also reference the process and specific remedies that will be allowed in such event.

What happens when an event constituting force majeure occurs?

Beyond considering what might constitute an event “beyond the control of the parties,” a prudent construction partner must also address what to do if such an event occurs. The standardized form(s) the parties use from the start of negotiation can provide useful insight into who carries the risk in the event of force majeure. Some of the most widely used and accepted contract forms in international contracting are the standard documents provided by the Federation Internationale des Ingenieurs-Conseils (FIDIC) and the American Institute of Architects (AIA). When read closely however, both of these standard forms only grant the contractor an extension of time to complete the project in a force majeure (or Exceptional Event as described in the FIDIC forms) and do not allow any financial remedies under a construction contract. Notwithstanding the foregoing, it has become apparent during the COVID-19 pandemic that additional time does not adequately capture the risk and gravity of the project impacts of the unforeseen event. For example, many construction projects continued during the mandatory lockdowns and quarantines issued during COVID-19. This has resulted in significant cost overruns for contractors in attempts to comply with new public health regulations and adhere to best practices and common sense. These costs are only compounded by the need to modify project schedules. Among other things, these expenses relate to increased cleaning, disinfecting and project safety measures. Going forward, these additional cleaning costs are known risks and will necessarily be included in the cost of the work. Under these circumstances, parties must continue to consider how to address costs arising from force majeure events on pending and future project.

Consider discussion and reasonable risk allocation.

What these circumstances reveal is that COVID-19-related changes in project costs and delays were likely never contemplated by parties in negotiating construction contracts and allocating project risks. Gaining consensus on allocation of these risks may, in certain instances, be a futile endeavor However, if COVID-19 has taught parties to a construction contract anything, it is to be a diligent and reasonable negotiator and to realize that the purpose of careful drafting and negotiating is not necessarily to predict the unpredictable, but rather to come to a mutual understanding about how to fairly address unforeseen circumstances. Many work to avoid vigorous disputes regarding the allocation of unforeseen risks, as predicting how the courts will interpret these concepts post COVID-19 could be a costly and time-consuming pursuit. This is particularly true for owners with multiple ongoing construction needs and contractors who are heavily immersed in international projects.

Careful planning of force majeure impacts is essential for adequately assessing and managing risk for projects in the days of COVID-19 and beyond.

This article summarizes content from Bruner & O'Connor on Construction Law. For more information on this topic, or for additional citations, see § § 20:2

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