Covid-19 and Offshore Construction Contracts

Introduction

The Covid-19 pandemic has caused authorities all over the world to take measures in an attempt to keep the spread of the virus under control. Some of these measures have been in the form of laws and regulations and other have been advice, recommendations and guidelines for people and businesses.

As several countries both in Europe and elsewhere now are seeing a rise in the numbers of infected, the authorities are implementing new mitigation measures. As the pandemic is not likely to be over anytime soon, it is critical that you review your existing contracts as well as pay particular attention when entering into new contracts, to how the contracts respond to delays and increased costs caused by the pandemic or the measures implemented by the authorities. Typical provisions in the offshore construction contracts that are relevant in this context, are change in law provisions and force majeure provisions. Here we shall in particular focus on change in law.

A Range of different Solutions for Change in Law

The rationale behind including a change in law provision in a construction contract, has generally been that the contractor will have provided a price and schedule offer based on certain factors, including the applicable laws. Should certain of these factors change in a way that affects the contractor’s cost or  schedule, the contractor would expect some form of compensation and schedule adjustment.

Whether a change in law will entitle the contractor to such cost and schedule adjustments, will depend on what the contract provides for. The majority of the contracts typically used in the construction industry includes some form of regulation of which party shall carry the risk of changes in law. The various standard forms or agreed documents used in construction provide different solutions, as do the bespoke contracts used in this industry.

Some important factors to consider when reviewing the change in law provisions are:

  1. i) after what date must the change in law have occurred?

Some contracts will set the relevant date for such changes to the date the contractor’s offer was submitted – or even a date prior to this, while other contracts will operate with the date the contract is signed. In some international tenders, we see that if the contractor is awarded the contract, he is bound to contract on the terms attached to the tender package. Unless the contractor has an opening for revising the offer after the date of submission, we strongly recommend making the date of submission the relevant date in the change in law provision.

  1. ii) what are considered “laws”?

The contract may contain a definition of “law” or of “applicable law”. In some contracts, the scope of the change in law clause extends only to changes in laws that are applicable to the contractor himself, potentially leaving the contractor exposed to changes in laws that apply only to his subcontractors or employees. The latter may become relevant where the laws apply to individuals, but have an impact on the employer, such as quarantine rules for workers returning from other countries. In other contracts, the “law” refers only to the law applicable at the worksite, the country where the contract object is intended to be used and/or the countries having jurisdiction over the contractor.

Whether ‘law’ is a defined term or not, a question that is likely to arise is whether the change in law offers any protection to contractors where the authorities have opted for a more voluntary adoption of measures by introducing guidelines and recommendations. This has been the case in many countries, such as in the United Kingdom and Norway.

iii) what types of “changes” are covered?

In some contracts, the change in law will have to necessitate a change to the work or the performance of the work in addition to having a cost or schedule impact for the contractor to be entitled to cost or schedule adjustments.

Other contracts give the contractor a right to an adjustment where the change in law has an impact on the contractor’s cost and/or schedule. Under these contracts, the contractor would be entitled to an adjustment even if the change could not be said to necessitate a change to the work or its performance. This may make a difference for contractors who have had to implement Covid-19 related measures around their workers that may have a cost impact, without necessarily constituting changes to the work, such as quarantine requirements, additional cleaning measures, providing for extra space for their workers or additional facilities for meal breaks.

  1. iv) right to schedule adjustment?

It should also be noted that there are contracts, including industry standards, that do not include the right to an adjustment of the schedule in the change in law provision. These contracts instead provide a right to seek relief for force majeure if performance is delayed or prevented due to the change in law.

Force Majeure

Ensuring that your business is not considered to be in breach of its obligations, if it is prevented or delayed in performing due to Covid-19, remains an important issue, and how the contract’s force majeure regulations are drafted, is critical. As the pandemic now is known, it is worth reminding that it may not be possible to rely on the standard force majeure provisions of the contract in the event the effects of the pandemic hinder performance.

Change in Law and Force Majeure

When entering into new contracts, we recommend that you consider including bespoke provisions regulating the risk division of the impact and effects of the Covid-19 pandemic to the parties’ performance, cost and schedule. The contract should set out both the risk allocation of additional cost and schedule impact the Covid-19 pandemic or new mitigating measures imposed by the authorities may have for the parties, as well as providing relief where a party is delayed or prevented from performing due to the effects of the pandemic.