Resolving construction disputes arising from the COVID-19 pandemic
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As governments across Europe begin to ease lockdown restrictions, the impact of COVID-19 on the construction industry is starting to reveal itself.
Commercial construction and civil engineering activity plummeted overnight when infection control measures came into force throughout Europe, delivery times lengthened due to transport issues, customs restrictions and supply shortages, and self-isolation, sickness and repatriation of migrant workers have all taken a major toll on productivity.
Construction was one of only a handful of sectors not subjected to blanket shutdowns by governments – a decision that created problems for site operators and contractors who were expected to continue working, despite lacking labour and materials.
At the start of the lockdown, many sites closed temporarily to allow for risk assessments to be conducted, and for employers and site operators decide how, if at all, they could continue to operate.
As the direct impacts of the pandemic on contracts became apparent, the focus shifted to mitigating delays and costs.
Generally, issuing claims for contractual breaches has so far not been a priority for parties involved in construction projects who have mostly been dealing with more immediate issues, but it is anticipated that disputes will start to emerge as the dust settles.
Force majeure
The ability of parties to rely on force majeure clauses in construction contracts has been widely discussed since the outbreak of COVID-19.
Although it is difficult to predict what approach courts and arbitrators will take, it is likely that force majeure will apply to delays and costs caused by COVID-19, and that the associated risks will fall on purchasers of construction services.
While this will be a bitter pill for many purchasers to swallow, it relieves supply chain of a significant burden of liquidated damages and other financial penalties which otherwise would have been largely borne by construction companies.
However, force majeure is unlikely to apply to additional costs incurred as a consequence of ancillary COVID-19-related delays, such as hold-ups caused by limiting the number of staff on site to enable social distancing.
This may prompt parties to try to categorise future costs as caused by something other than COVID-19. For example, contractors may argue that employers have imposed unnecessarily onerous health and safety measures or misinterpreted official guidance.
Extending working hours to compensate for reduced staff numbers may be a cost that purchasers need to bear under force majeure. This is because, generally, while supply chains have a duty to mitigate loss, this is unlikely to encompass an obligation to spend more money to make up for lost time.
There may also be litigation around the rights and obligations of insolvent parties in relation to construction claims, where a party's insolvency is due to COVID-19.
Arbitration and interim measures
While litigation is a habitual route for resolving construction disputes, most international construction contracts will also have arbitration clauses.
The use of interim measures in arbitration proceedings has grown in tandem with the popularity of arbitration as an alternative form of dispute resolution.
Interim measures are popular because they protect a party’s rights pending the outcome of disputes and, in the wake of the COVID-19 crisis, may help preserve parties' cash flow and balance sheets.
Parties may request interim measures to ensure payments continue in return for work performed and the preservation of key evidence relevant to the dispute. They can also be used to prevent parties from calling bank guarantees or performance bonds.
Both arbitration and litigation provide procedural safeguards, which may cause delays in obtaining urgently required relief, which is where interim measures can be advantageous.
Where to apply for interim measures
Interim measures take the form of orders or arbitral awards preventing imminent or further damage by preserving a factual or a legal situation.
They are usually requested and ordered immediately prior to, or during the course of arbitral proceedings, and can also help in pushing for settlement.
To obtain interim measures, parties can apply to one of three different fora:
- Arbitral tribunals constituted to hear the dispute;
- State courts; or
- Emergency arbitrators.
Tribunals
The advantages of applying to the tribunal are that it is usually aware of the case and the requesting party may benefit from demonstrating willingness to defer to the tribunal's jurisdiction, while putting pressure on the opposing party to do the same.
However, where contracting parties require measures that target third parties to the dispute – for example, a bank they wish to prevent from making payments under the letter of guarantee – tribunals have limited power to make orders.
National courts
National courts, by contrast, can make binding orders to third parties and may be more efficient when urgent relief is required.
National courts can also order interim measures on an ex-parte basis (i.e., make an order without the other party being made aware of it).
This is especially helpful if there is a risk the opposing party may destroy or remove information relevant to the outcome of the dispute, or if there is a risk the opposing party may seek to call a performance bond, before the interim relief is granted.
Emergency arbitrators
Applying to appoint an emergency arbitrator is possible provided the applicable arbitration rules allow this.
Emergency arbitration is very common in construction and infrastructure disputes, and has the benefit of speed (the appointment can take up to a couple of days and the order may be issued within five to 15 days, depending on the arbitral institution involved), confidentiality and perceived neutrality compared to national courts.
In pending arbitrations, parties are not usually prevented from also applying to state courts, as most arbitration laws recognise their concurrent jurisdiction.
Standards for granting interim relief
To obtain interim relief, applicants must demonstrate risk of serious or irreparable harm to the petitioner if interim measures are not ordered, and evidence the urgency of their request.
Some tribunals also consider likelihood of success on the merits of the parties' respective claims and defences when deciding whether to approve applications.
In all cases, parties should think about what they want interim measures to protect and how to demonstrate the necessity of emergency relief.
Types of interim measures typically granted in construction disputes include:
- Orders to preserve the status quo or to perform contractual obligations;
- Preventing the call of performance bonds;
- Anti-suit or anti-arbitration measures;
- Provision of interim payments;
- Application of delay penalties (astreintes); or
- Ordering security for costs.
In these cases, arbitrators should look to the law in the seat of the arbitration for the assistance of local courts, although in some jurisdictions, arbitrators may impose financial penalties for delays in complying with orders.
Renegotiation clauses
Renegotiation clauses in construction contracts are likely to play an important role in dealing with disruption caused by COVID-19, but invoking them is unlikely to be straightforward.
Whether the effects of COVID-19 fall within the scope of a renegotiation clause will depend on how the contract is drafted.
Assuming COVID-19 is covered, parties are left in a predicament where, if nothing is agreed as a result of the renegotiation, for the clause to be valid, there will need to be a mechanism to determine the final outcome.
This leaves both parties hostages to fortune, unless there are clear guidelines in the contract as to the principles the arbitrator should apply in redrafting the contract.
However, such clauses provide a useful device for making parties focus on resolving disputes through negotiation to avoid the risk of an order being imposed.
Construction industry bodies have called on parties to show flexibility in negotiations and it is likely to be in parties' interests to resolve disputes amicably, given the mounting pressure on courts and arbitrators and the probable backlog of cases in the construction sector.
This article was authored by David Thorne, construction partner at Fieldfisher in London, and Marily Paralika, international arbitration partner at Fieldfisher in Paris.