Coronavirus – delay in construction projects
15 March 2020
According to the Danish general conditions for building and construction works and supplies (AB rules), all parties to construction contracts are required to loyally promote the time-critical activities of building and construction projects, if possible. However, delays may occur in various ways as a direct or indirect consequence of the coronavirus pandemic. Such delays must be properly dealt with from the outset in accordance with the provisions of the contract for the purpose of determining the financial liability.
BackgroundConstruction contracts and other contracts for building and construction works, including the AB rules, still apply even though the COVID-19 coronavirus has hit Denmark and may cause delays on construction sites.
On 11 March 2020, the Danish Prime Minister announced a range of measures against COVID-19. These measures include, among others, instructions to send home public-sector employees who do not perform critical functions, advising them to work from home where possible. At the same time, it was pointed out that “prolonged case processing times do not imply that the functions are considered critical”.
In addition, private-sector employers are encouraged to ensure that as many employees as possible work from home, but “subject to the maintenance of contractual obligations, such as the delivery of goods and provision of services”. On 12 March 2020, in keeping with these measures, the Danish Parliament enacted in an accelerated procedure Bill no. 133 concerning amendments to the Danish Epidemic Act for immediate entry into force.
There is no doubt, therefore, that a pandemic has struck and we are dealing with an exceptional occurrence which is without the fault and beyond the control of both clients and contractors.
Delay and extension of timeIt is not certain, however, that the pandemic will imply the right to an extension of time and/or financial compensation for the parties to a construction contract. Under the AB rules, it must be specifically assessed in the situation at hand whether the pandemic has an impact on a time-critical activity in the construction project per se, whether the impact can be averted and whether the impact is only indirect, for instance in connection with a regulatory approval or consent that has not been issued as a consequence of work-from-home orders.
In accordance with the rules of clauses 24 and 26, the party who has an immediate need for and feels entitled to an extension of time must inform the other party as soon as possible of its intention to claim any such extension of time and is required, on request, to prove that the delay is due to these circumstances.
The force majeure rule applying to construction works is described and exemplified in clause 24(1)(3).
CompensationAll parties should be aware that if a party, for the purpose of claiming an extension of time, invokes clause 24(1)(3) or some of the words contained therein, such as “circumstances beyond the control of the party”, “acts of God” or general force majeure, this will also imply that the party in question takes that view that no damages or compensation is payable between the parties for the delay. This follows from, inter alia, clause 27(3).
However, the announcement by the Danish Prime Minister’s Office that the measures are “subject to the maintenance of contractual obligations” implies that the parties are obliged to ensure timely performance where possible and to the same extent as generally applicable under the AB rules.
The right and documented reasonWhere an extension of time is notified, it means in financial terms that a party must carefully and immediately analyse whether the delay in activities is actually time-critical and whether the delay is actually due to the circumstances of the other party (clause 24(1)(1)(2)), public orders and mandatory injunctions (clause 24(1)(5)), delayed regulatory approvals and consents (clause 24(1)(6)) or any other delay on the part of the contracting parties of the client (clause 27(1)(2)). In such cases, the contractor is entitled to receive damages or compensation for the delay.
There is an obligation for the contractor, on request, to provide documentation to prove the reason for the delay, and it is therefore important to ensure that this documentation is provided immediately.
The measure instructing all public-sector employees to work from home and the subsequent prolonged case processing times are the result of a mandatory injunction. In addition, delays in the issuance of regulatory approvals and consents explicitly fall within the scope of a provision that provides a basis for financial compensation. The same is true in a number of other situations where the delay could lead to financial compensation from the other party.
Check right away and follow upAt this point, hardly anyone has a financial interest in requesting an extension of time for reasons associated with the obstacles COVID-19 presents to the party’s own fulfilment of a contractual obligation unless documentation can be provided to prove the immediate necessity of such a measure, i.e. that the party is actually forced to do so and can prove this, also on an ongoing basis in the future.
There is every reason to check whether the party’s reason for requesting an extension of time is valid and can be proved, both before the extension is implemented and also on an ongoing basis. Not doing so poses a wrongful termination risk and a loss risk.
Feel free to contact us – we have tested time requirements, even before the coronavirus outbreak.