Legal Alerts/23 Mar 2020

Force Majeure and Hardship in Construction and Infrastructure Projects (COVID-19)

The spread of the coronavirus COVID-19 has already had an impact on construction and infrastructure projects. Mandatory measures imposed by governments in many countries, voluntary measures to contain the virus and the uncertainty in the market place has made it increasingly difficult to fulfil construction contracts as intended. Projects may face delays for instance due to difficulties in the distribution of building materials and in work force management due to e.g. quarantines and illnesses. In these circumstances, it is advisable to consider inter alia the following:

Review the contract carefully

The COVID-19 coronavirus cannot automatically be considered a force majeure event in itself. Force majeure usually refers to a situation where a contractual party is temporarily freed from their contractual obligations without repercussions due to an unexpected and unforeseeable impediment. The application of force majeure is quite strict. Therefore, a significant rise in costs or delays due to a pandemic does not typically constitute a force majeure event.

Force Majeure clauses can nevertheless be drafted to cover a broader spectrum of events than the basic contract law concept would entail, which is why it is important to review the contract carefully in order to ascertain the scope of the clause.

Force majeure or hardship  ̶  same but different

The Finnish General Conditions for Building Contracts (YSE 1998), for instance, has a broader definition of a force majeure event, and also lists exceptional circumstances referred to in e.g. the Finnish Emergency Powers Act (1552/2011; valmiuslaki, beredskapslagen) or comparable circumstances as force majeure events.

It also refers to hardship in fulfilling a contract and not a total impediment, which means that an event that will not fall within the traditional concept of force majeure nevertheless might entitle a contractor to additional time or other remedies.

Communicate openly

Regardless of how the impact of the coronavirus manifests itself in a certain project, the parties should work together and communicate openly to minimize any unnecessary disturbances. If a party wishes to establish its rights by invoking a force majeure clause and convincing the other party to grant it the remedies it is seeking, such party should attempt to document the impact of the adverse circumstances in detail. Inaccurate and hyperbolic statements will likely have an opposite effect on a contracting party. Candid and open communication between the parties is therefore paramount in avoiding litigation.

Invoking a Force Majeure or Hardship clause usually also requires a party to present a notification in a timely manner and the notification should usually contain information on the impediment for the other party to review. Special attention should be paid to the effect on the critical path of the project and other considerations of causality.

Time extensions and alternative remedies should be examined

The primary remedy for a delay caused by a force majeure or hardship event is a time extension. However, depending on the pricing structure, responsibilities of the parties and the delays of other parties on the site, other remedies might also become relevant when examining the impact of the circumstances on the contract. A party might also be entitled to terminate the contract if certain prerequisites are fulfilled. Parties are also under a general obligation to mitigate the harmful effects of the circumstances that constitute a hardship or force majeure event. Neglecting such mitigating actions may later be considered grounds for liability.

In a potential dispute, the party who invokes a force majeure or hardship event bears the burden of proof for the impediment and its impact on the project. Efforts to fulfil the burden of proof should be undertaken immediately in order to safeguard the interests of the party concerned.

Borenius’ lawyers are available to assist in addressing any questions you may have regarding your situation.

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