The highly contagious coronavirus pandemic has struck a heavy blow against the world economy as it forces countries into lockdown and close businesses, wreck-havoc on tourism industry, and driving stock markets into its lowest level for 30 years. The spread of Covid-19 around the world will impact significantly on construction activities during the course of the coming weeks in the form of delay and disruption to on-site activities and project supply chains.
It follows that a cost will be incurred by projects and ultimately that will have to be borne by one or other of the main contracting parties or sub-contractors, so it is critical that parties with potential liability for the delays, disruption and associated liquidated or delay damages take steps to protect their interests Equally, parties should take steps to protect their entitlement to recover additional time or loss and expense. The COVID-19 pandemic is taking its toll on construction businesses necessary for building and maintaining critical infrastructures such as that used to transport essential goods and services, deliver clean water and electricity, and protect national security, among other things.
COVID-19 Economic Aftermath No. 1 – The Supply Chain in Peril
The impact on the industry’s supply chain, consisting of multiple layers of businesses, many of them of SME’s with a significant amount of self-employed workers, will be catastrophic and unavoidable. The Covid-19 outbreak will affectsupply chains and disrupt manufacturing operations around the world which is increasing daily. But the worst is yet to come. The impact of Covid-19 on global supply chains has occurred already in that thousands of companies have throttled down or temporarily shut assembly and manufacturing plants in China. The industry in Malaysia is vulnerable as there is a heavy reliance on factories in China for parts and materials. The activity of Chinese manufacturing plants has fallen in the past month and is expected to remain depressed for months. The vast majority of companies have no idea of what their risk exposure to what is going on in Malaysia actually is; that’s because few, if any, have complete knowledge of the locations of all the companies that provide parts to their direct suppliers.
COVID-19 Economic Aftermath No. 2 – The High Price of Materials
China provides or refines around 70% of the steelmaking ingredient manganese metal and a large slice of silicon and other key raw materials. Prices of these resources rose sharply in January, when the spread of the novel coronavirus hampered refining and distribution of steelmaking ingredients in China. For Contractors that rely on Chinesemade goods or materials, this could mean higher material costs and potentially slower project completions. The impact of the virus is impossible to predict with certainty, but any prolonged slowdown in Chinese or global economic and manufacturing activity is likely to have significant ramifications for construction costs.
Delays are expected on constructions of building projects, as sourcing of these materials are anticipated to be difficult for up to six months – but should ease in the long-run. Reduced construction activity due to virus containment efforts causes a major reduction in demand for materials from China, and this reduction in demand offsets or outweighs the upward price pressure.
COVID-19 Economic Aftermath No. 3 – The Labor Force Quarantine
The impact of the novel coronavirus is rippling through the global economies, but it could take a few months to fully see the fallout in data that tracks economic performance around the world. By late-April, construction workers in Malaysia will have no choice but to be laid off as a consequence of the coronavirus. Another large amount will have their hours significantly reduced. A shortage of materials from mainland China is to blame. Supply chain delays caused by the impact of China’s aggressive containment measures could impact construction in Malaysia long after COVID-19 is neutralized.
While many businesses offer employees options for work-from-home, construction companies typically require healthy workers to be on-site. And for anyone not feeling 100%, staying home isn’t always a viable option, especially for hourly workers or anyone without paid sick days. Beyond a worker’s sickness, emergency protocol within the community can trigger a variety of challenges.
COVID-19 Economic Aftermath No. 4 – Delay Costs
As the coronavirus spreads around the world, its impact on many businesses and industries, including the construction industry, is increasing. The construction industry in Malaysia relies heavily on foreign labor, suppliers and manufacturers of goods for construction materials, including steel, millwork, electrical and lighting equipment, plumbing fittings and fixtures, flooring tiles, and ACMV equipment. With many companies closed due to quarantines, production lines having stopped, shipping containers remain in their ports, and there is no transportation of goods from these affected areas. In the coming months, contractors may have to find alternate, and likely more expensive, sources of goods and materials which could lead to project cost overruns.
These supply chain issues are also likely to cause project delays which could lead to potential claims by owners for the delay, including liquidated damages claims. Who bears the risk and the loss for resulting construction delays or increased construction costs due to the coronavirus?
This will likely be determined by the controlling written contract and, in particular, whether the outbreak constitutes an excusable delay under the contract’s force majeure clause extending the completion date, excusing the contractor for liability for any damages and providing for additional costs.
Contractors concerned that they could face delays or increased costs as a result of the COVID-19 outbreak would be well advised to consider whether they have any express entitlements to relief under their contract. Entitlement to Extensions of Time / Loss and Expense For example, a contractor may seek an entitlement to extensions of time and/or additional payment in the event that: shortages of labor arise as a result of preventative measures to alleviate the outbreak spreading and/or due to infection, or potential infection, and the resulting quarantine, or self-isolation, required; shortages of plant and materials arise due to delays in their importation or transportation; the site is closed or access is restricted as a result of measures to contain the COVID-19 outbreak; and/or the contractor is not able to carry out the works as a result of action by governments to prevent the spread of the outbreak.
COVID-19 Economic Aftermath No. 5 – Litigation and Legal Implications
It is worth remembering that there is no general legal right to cancel a contract once it is signed and effective unless there is an express contractual right to do so or one of the common law grounds such as frustration of contract applies. Frustration will be hard to argue because it is a much higher threshold than simply suffering financial hardship to deliver their project. However, all the circumstances must be reviewed in the context of any particular project. Declaring a force majeure provision is included in many contracts and it relates to the occurrence of an event which is outside the reasonable control of a
party prevented from performing its contractual obligations. There is no general concept of force majeure in common law and standard contracts such as the PAM and JKR suites do not provide a definition of same. The term “force majeure” was used with reference to all the circumstances independent of the will of man, and which it is not in his power to control… thus war, inundations, and epidemics, are causes of force majeure …” This suggests it is very likely that COVID-19 Economic Aftermath would be considered to be an event of force majeure. The test for whether a force majeure event has occurred will require three issues to be considered:
Is the event beyond the control of the affected part?
Is the affected party’s ability to perform its contract hindered or prevented by the event?
Has the affected party taken all reasonable steps to avoid or mitigate the event or its consequences?