COVID-19 and Renewable Energy Construction Contracts
09 April 2020
The spread of the coronavirus (COVID-19) was officially declared a pandemic by the World Health Organisation on the 12 March 2020.
For renewable projects under construction, delays in the delivery of key components (either in transit or as a result of manufacturing plants being shut down) are inevitable. This will have the effect of key dates being missed and the corresponding financial penalties. The question as to whether contractors will be entitled to additional time and/or money will depend on the specific factual circumstances and the terms of the particular contract(s) in question.
If a construction contract lacks an express term allocating the risk of infectious disease outbreaks, such as COVID-19, parties will need to rely on other provisions, such as extension of time and loss and expense clauses, to understand who bears the risks of such an event.
Force majeure can be described as matters that are outside the control of the parties, which could not reasonably have been foreseen at the time of the contract being entered into and whose effects prevent performance of the contract. However, the term ‘force majeure’ is not defined under Northern Irish (or UK) law, so any relief available to the contractor will be limited to that contained within the contractual force majeure clause. Not all contracts offer the same relief in respect of force majeure, some contracts entitle the contractor to additional time (but not money), while others provide a mechanism to adjust the commercial terms or even terminate the contract. Parties will also be required to mitigate the effects of the force majeure. Contractors may have to source components from alternative, unaffected suppliers (if possible) even where that requires additional cost.
Statutory Powers/Change in law
In addition to force majeure, the construction contract may include provisions relating to change in law. Again, the terms of the individual contract will dictate as to what relief the contractor is entitled in such circumstances (i.e. whether the contractor is entitled to additional time and a change in the prices to reflect its increased costs, or just the revision of key dates) where there has been a change in the law as a consequence of or in response to the COVID-19 outbreak.
Frustration is where something occurs after the formation of the contract which "strikes to the root of the contract" rendering it physically or commercially impossible (or illegal) to fulfil the contract. The courts are, however, usually
reluctant to find that a contract has been frustrated. As a result, the threshold for proving that COVID-19 has rendered a contract frustrated is likely to be higher (and more difficult for parties to demonstrate) than for force majeure.
Points to remember
Parties currently in negotiations as to the forms of construction contracts for renewable energy projects should consider including amendments expressly allocating the risks, (including programme delay and any associated additional costs), arising as a result of COVID-19. For projects with debt finance, lenders are likely to be wary of committing funds unless the implications of COVID-19 can be properly assessed, quantified and mitigated.
For projects currently underway and contracts already in place, parties should carefully review the terms of their contracts, particularly any amendments to the standard form contracts, in order to determine the rights of both parties in relation to extensions of time and entitlement to additional payment. This will include any obligations in respect of notification and mitigation on the part of the contractor (and the employer, if applicable).
For further information about this or any other construction matter please contact Gavin Kerr at Carson McDowell’s Construction Law team.
*This note reflects the position as at 9 April 2020.
*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.