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Coronavirus alert

Coronavirus epidemic and its impact on performance of obligations arising from construction works agreements

18.03.2020

The SARS-CoV2 (“Coronavirus”) epidemic might lead to numerous problems in performance of construction works agreements.

Our clients point to conflicting signals coming from the market:

• in some investment projects (e.g. large construction projects), investors insist that works should be continued, while construction companies would like to modify schedules, realizing that certain limitations will arise from distorted supply chains and lower availability of subcontractors/employees, e.g. as a result of: (i) a large number of medical leaves (estimates indicate that this might concern 10-20% of employees); and (ii) closing of the Ukrainian border;

• in other projects (e.g. renovation or office fit-out projects at levels that are partially occupied by tenants), construction companies might be willing to perform works but entities occupying the areas intended for renovation ask for the suspension of works due to guidelines issued by the Chief Sanitary Inspectorate, so that they don’t need to share space with the contractors’ employees.

In view of the Regulation of the Minister of Health of March 13, 2020, announcing the state of epidemic threat in Poland (the “Regulation”), and the fact that it does not specify any restrictions related to construction works, it might be difficult or even (in some cases) impossible to invoke a force majeure event.

Under specific (individually assessed) circumstances, however, it may be justified to claim that we are experiencing: (i) a force majeure event; and (ii) extraordinary circumstances that make it possible to amend the agreements that have already been executed (rebus sic stantibus). This situation gives rise to a number of questions and doubts related to further implementation of construction projects.

It is important now to analyze construction agreements in order to examine the possibility to suspend works and change schedules, as well as to assess the impact of the adopted solutions on costs, with a strong focus on arguments related to potential emergence of force majeure.

1. Force majeure

Construction works agreements often include “force majeure clauses” with specific definitions. We need to keep in mind that anyone seeking to invoke force majeure will be obliged to prove: (i) that the current situation is categorized as force majeure in light of a given agreement; and (ii) that the current situation made it impossible to perform an obligation in accordance with the agreement for objective reasons. Not every single non-performance or improper performance of an obligation will be justified. Only non-performance or improper performance resulting from factors that none of the parties could predict or influence can be excused.

It might turn out to be insufficient to evidence the above on the basis of contractual provisions and the Regulation. In order to modify the project schedule, a party to an agreement will need to provide a broader range of arguments. It will be necessary to embark on claim management processes.

Entities whose agreements do not contain force majeure clauses are in a completely different situation. They will not be able to “automatically” use contractual provisions, and their defense against the creditor’s claims related to non-performance or improper performance of an obligation (article 471 of the Civil Code) will need to be based on challenging the existence of: (i) fault on part of the debtor; or (ii) damage on part of the creditor. The agreement’s provisions will also play a vital role here. However, instead of the existence of force majeure (which will be examined by a competent court on the basis of applicable laws), the key issue will be to determine whether an entity invoking force majeure bears fault-based liability or whether its liability has been defined otherwise.

A special situation will occur in infrastructure projects and others based on FIDIC, where invoking force majeure might not lead to the fulfillment of the contractors’ goals. In case there are no binding crisis regulations that limit construction activities, contractors will be aware of additional difficulties, potential delays or increased costs, and will (in order to continue works) seek a reliable basis for submission of claims, especially ones for extension of deadlines and for Costs. It needs to be noted here that FIDIC offers a range of regulations that (when applied correctly) might produce better results than attempts at invoking force majeure.

2. Contractual penalties

In case the parties have included a contractual penalty for non-performance or improper performance, the creditor will be exempt (as a general rule) from the obligation to prove that it has suffered any damage.

The crucial issue is to check whether the agreement stipulates that the creditor is entitled to demand a contractual penalty irrespective of whether the debtor is at fault for untimely performance of an obligation, i.e. whether the delay is culpable or not.

If the parties link the debtor’s obligation to pay a contractual penalty with a culpable delay, courts (after determining that the current circumstances indeed affect the performance of obligations) will tend to release debtors from liability due to lack of their fault.

In case a contractual penalty applies to a non-culpable delay, it will not (as a general rule) cover a force majeure event, unless the agreement clearly specifies that the debtor’s liability has been extended to include force majeure. Needless to say, in case of any litigation, item 1 above will apply, i.e. it will be necessary to prove the emergence of force majeure and its impact on the delay.

3. Contractual amendments

The Coronavirus epidemic can also serve as a reason for which parties to an executed agreement will need to modify its contents. Such amendments could be introduced through negotiations of contractual provisions or litigation (in case of failure to reach an amicable solution).

If, due to an extraordinary change of circumstances, the performance of an obligation involves excessive difficulties or exposes one of the parties to a substantial loss (which was not expected by the parties when entering into the agreement), the court may – having considered the parties’ interests in accordance with the principles of social conduct – determine the manner in which the obligation will be performed, define the value of a payment due, or even terminate the agreement.

Given the current version of the Regulation, invoking a clause that permits amendments to the agreement in case of a fundamental change of circumstances (rebus sic stantibus) will pose a challenge in which an adequate technical and legal analysis will play the key role.

Since a court’s interference with the contents of the agreement might be extensive (e.g. the court will be able to modify the contractual provisions related to the fee, scope of works and project completion date), we need to keep in mind that such court-enforced amendments to the agreement can only take place when the performance/payment is not due yet (meaning that such lawsuit has to be filed before the maturity date) and specific criteria have been met, incl. a fundamental change of circumstances (which was not expected by the parties upon agreement execution) has occurred and excessive difficulties (that have a cause-and-effect relation with non-performance) in performance of an obligation have emerged, or there is a threat of a substantial loss for one of the parties to the agreement.

Judicial practice shows that in relations between business entities, it is relatively difficult to get courts to modify contractual provisions.

Given the fact that the situation might keep changing rapidly, an entity wishing to have an agreement modified by court needs to start by submitting a motion for interim relief (limited operations of courts in relation to the current state of epidemic threat do not apply to interim reliefs; motions in that respect are examined at closed-door sessions), followed by a statement of claim which needs to be filed within two weeks. The list of interim relief forms is non-exhaustive; for instance, the court might forbid the creditor to charge contractual penalties or set them off against the fee specified in the agreement.

Recommended actions:

1. Analysis of construction works agreements in terms of: (i) force majeure; (ii) contractual penalties.
2. Monitoring the submission of interim relief motions with competent courts.
3. Monitoring notices/letters from business partners – potential pre-trial notices with demands related to modification of contractual obligations.

Contact:

Marek Wojnar
+48 601 379 610
marek.wojnar@actlegal-bsww.com

Katarzyna Marzec
+48 603 112 225
katarzyna.marzec@actlegal-bsww.com

Piotr Giżyński
+ 48 665 667 455
piotr.gizynski@actlegal-bsww.com

Magdalena Banaszczyk-Głowacka
+48 503 575 012
magdalena.banaszczyk@actlegal-bsww.com

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