Effects of the emergency situation determined by the Covid-19 pandemic on construction contracts
Oana Albota, Monica Ginea and Bogdan Roscaniuc, Albota law firm

Authors: Oana Albota, Monica Ginea and Bogdan Roscaniuc, Albota law firm

General considerations

In the actual context of the Covid-19 pandemic, some contractors notified their commercial partners and issued extension of time claims and additional money claims supporting such actions on the argument that the pandemic represents a force majeure event. 

Other companies grounded their extension of time claims on the unforeseeable lack of personnel or goods, due to epidemics or government actions.

In both situations mentioned above, the contractor’s claims generally stand on arguments concerning labour shortages (either due to home isolation of certain employees or due to a lack of workers determined by the governments’ measures for suspending flights and closing borders) and disruptions in the supply chains for construction materials and equipment. 

In this situation, in order to check whether an extension of time and/or additional money should be granted, the analysis should regard the particular factual circumstances affecting the contract performance as well as the contract provisions dealing with force majeure events, unforeseeable lack of personnel or goods, due to epidemics or government actions and their impact on the parties’ obligations. 

Moreover, it should be noted that force majeure is also a general legal concept regulated by the Romanian Civil Code and such legal provisions may be employed to further help the analysis in case of insufficient contractual provisions.


Force Majeure contractual provisions 

In principle, a force majeure clause in construction agreements will usually relieve a party from its non-performance liability when such non-performance is prevented by an exceptional event or circumstance which: 

  1. is beyond the party’s control, 

  2. could not have reasonably been provided against before entering into the contract, 

  3. could not reasonably have been avoided or overcome, and 

  4. is not substantially attributable to the other party. 

Usually such clause provides a list of specific events (usually non-exhaustive), such as fire, flood, war, earthquakes and so on, as examples of force majeure events (note that such events quality as force majeure only provided they also meet all the above criteria).

Thus, considering the contractual provisions and the fact that, under Romanian law, the party making a claim must also substantiate/prove such claim, the party claiming the occurrence of force majeure must cumulatively prove the following: 

  1. it is prevented from fulfilling its contractual obligations due to circumstances which are outside its control (i.e. caused by the pandemic). Being “prevented” to perform the obligations means that the performance must be physically or legally impossible. Therefore, the mere fact that performance is more difficult, more expensive (e.g. higher costs in sourcing alternative supplies of materials or labour), or less profitable does not justify a force majeure claim and a request to be excused from contract performance. 

  2. it could not take reasonable measures for avoiding the event or reducing its effects.

In the case at hand, an aspect that needs to be considered is that the Romanian authorities have decided to close certain commercial facilities (e.g. restaurants, cafes, hotels, shopping malls, dental clinics, gambling activities, etc.) but the activities performed on constructions sites are currently allowed to be carried out and the supply activities are not suspended. The only condition imposed to the employees is to present a certificate from the employer attesting the fact that the activity cannot be performed remotely and that the employee’s activity is essential for the respective company. 

Consequently, taking into consideration that the construction activity has not been directly limited or suspended by the authorities, it may be difficult to demonstrate the causality link between the Covid-19 pandemic and the impossibility to perform the obligations resulting from construction contracts, especially if the contractor had alternatives to find personnel or materials. 

Procedural aspects 

Most of the construction contracts set up a certain procedure to be followed in order to invoke force majeure, respectively sending a notice to the other party indicating the event or circumstances constituting force majeure and specifying the impacted obligations. Such notice must be provided within a certain term as of the moment the party has become aware of the relevant event or circumstance constituting force majeure. The contract may also require updates to be provided as well as granting of notice when the force majeure ceases to affect the respective party.

It is very important to note that, depending on the contractual wording, a failure to give adequate notice may result in a loss of entitlement to relief.

Documents required to substantiate the force majeure event 

Most of the construction contracts provide that the party affected by a force majeure event has to obtain a certificate ascertaining/confirming the force majeure event issued by the Chamber of Commerce or by another competent public authority and to deliver it to the other party. Thus, the Chamber of Commerce needs to analyse the commercial circumstances and endorse or not the existence of the Covid-19 pandemic as force majeure event, regarded exclusively from the perspective of its effects and influence over the performance of obligations resulting from that particular construction contract.

The application submitted to the Chamber of Commerce should comprise a detailed presentation of the event, its impact on the contract performance, legal and contractual arguments that the event represents a force majeure event and evidence of the causality link between the force majeure event and the impossibility to perform the obligations. 

The affected party could also make use of the recent legal provisions of Order no. 791/2020 allowing it, subject to certain conditions, to obtain from the Ministry of Economy a „state of emergency certificate” (SEC) to support its force majeure claim. 

In respect of the force majeure related certificates, we note that even if such were to be obtained (i.e. an SEC and/or a certificate from the Chamber of Commerce), they would at most bring additional credibility to the party’s claim but would not represent an absolute proof of force majeure’s existence.  It would be up to the other party to acknowledge or reject such a certificate or any other arguments and evidence provided in support of the impossibility to perform the contractual obligations; in case the other party would choose to challenge the force majeure claim, the court shall have the final decision in the matter.

Consequences of force majeure

The main consequence of force majeure occurrence is for one of the parties to be excused from its obligations and/or liability under the contract, with no damages due. Force majeure clauses usually provide for an extension of time, suspension of time, or even termination in the event of continued delay or non-performance exceeding a certain time period. A right of termination could be commercially important, as it may provide leverage to renegotiate contractual terms.

The contract may also provide that the affected party is entitled to additional costs incurred due to the inability to perform or delayed performance. However, the standard contract terms might not explicitly list a pandemic along those events linked to a cost recover right, case in which the pandemic will be treated as a neutral delaying event (i.e. allowing for an extension of time (and protection from delay damages) but no right to claim additional costs).

As a general conclusion, we would hold that the existence of Covid-19 pandemic could not be deemed sufficient for supporting a force majeure claim in a construction contract because the measures imposed by the authorities in relation to this pandemic do not prevent the contractors to totally/partially fulfil their obligations.

Nevertheless, parties seeking to rely on a force majeure clause should take the following measures:

  • Analyse in detail the precise wording of such clause and its relation to the contract as a whole as well as the specific effects of the Covid-19 pandemic on the contract performance.

  • Explore alternative means of performing the affected obligations, minimizing delay or any loss to the other party. This may require considering alternative suppliers, or alternative methods of delivery, even if at higher cost.

  • Consider the procedure that needs to be followed for claiming force majeure, including the need to notify the contractual partner within a certain term and the requirement to procure a certificate from the Chamber of Commerce (or any other competent authority).

  • Identify clearly the contractual obligations that cannot be performed and monitor the potential and actual impact on the works in progress. 

  • Keep a documentary record, particularly of: the reasons preventing performance, the steps taken to find alternatives and mitigate loss and the service of any notices. Such actions shall be particularly important in case the contractual partner challenges the force majeure claim and a litigation arises.



April 07, 2020 12:26
article by Roxana Dudau, Associated Partner, Alexandru Dan, Senior Associate a...more »
 
January 17, 2020 15:08
The property, located at 21 Tudor Arghezi Street, in the vicinity of Universit...more »
January 13, 2020 11:56
Dentons advised Romanian investor Ideal Projects Services on title insurance for...more »
*
Govnet Next Events