COVID -19 Pandemic And Commercial Contracts

Often, pandemic outbreaks – whether completely of unforeseen or reasonably- anticipated – are geographically-independent and experienced by only a few regions or countries. They also tend to be time-dependent, working themselves out – usually due to the availability of a cure or the development of ‘herd mentality’ – after a certain period of time has elapsed. The COVID-19 pandemic is an exception to both these general rules of history due to its geography- and time-agnostic trajectory. With dozens of countries declaring national lockdowns and emergencies, several areas of citizenship as we know it have been affected – from political and legal to medical, educational, and even social. In this blog, we focus on the pandemic’s effect on commercial life, specifically on contracts and their non-performance in the present economic and human crisis. In particular, we analyse the significance and impact of the COVID-19 crisis on commercial contracts with respect to Employer, Engineer and Contractor responsibilities across the spectrum.

Commercial Contracts reiterate that the impossibility of performance of the contracted work by a contractor will not, in general, relieve him from liability in damages for breach of performance, save and except under certain agreed-upon exemptions. If, however the impossibility to perform his contractual duties arises from a cause that neither party could have reasonably contemplated when the contract was made and agreed, and the terms of the contract made no provision for unforeseen circumstances, he will not be bound by the terms of the contract or held liable for non-performance.

An Employer is governed by the clause[s] “Employer Risks, Determination, Variation and Dispute Resolution”. Employers cannot be insulated by the outbreak of a pandemic which was reasonably not foreseen by him or within his control. Engineer, normally an Employer-appointed impartial representative, shall be governed by clause[s] “Engineers Authority, Engineer Determination and Variation”. A Contractor is governed by clause[s] “Engineer Notification, Setting out of Works, Schedule of Works, Delay in Works, Contractors Risk, Variation, Dispute Resolution and Arbitration”.

Here, some principal questions arise: whether an Engineer is liable to accept any or all notices received the notice notified under the outbreak of a pandemic, whether Engineer has the authority to determine notification under a pandemic, whether Engineer is delegated with powers to certify non-performance, determination, variation of works, and whether Engineer can seek for clarification and/or justification from either Contractor or Employer. Further, a question arises whether Employer is liable to pay for non-performance during a pandemic either under service or manufacturing contracts. The final question is whether the Contractor can claim for unforeseen surge market prices or extravagant costs or whether he even qualifies for underperformance prior to the outbreak under the pandemic.

Impossibility is a result that the performance of the specified work in the manner contemplated by the contract becomes impossible to proceed with work or further. The Contractor should have performed (or substantially performed) his obligations under the contract prior to outbreak of pandemic, thereby achieving certain milestones under the schedule of works. Mere notification invoking Employer Risks, Determination, Force Majeure, or Impossibility to perform under Frustration shall not be qualified and entitled for applicable implied or explicit remedy. The Engineer shall have to rely on his delegation of powers not to err. During a crisis like the one we are currently experiencing, it’s important that parties prove beyond any reasonable iota of doubt the “impossibility” to proceed with scheduled works. In the event of such impossibility, parties should follow their respective notification / determination clauses of contract. The notification and determination of impossibility is not an automatic mechanism to undo the faults of the parties prior to impossibility.

A final word of caution: not all the contracts are similar or alike, even if they appear to be so. The Employer, Engineer and Contractor must understand their respective contracts and utilise their legal acumen to interpret its techno-commercial meaning. If deemed necessary, legal assistance for legal interpretation of the contract’s contractual clauses, particularly with respect to its techno-commercial aspects must be sought to understand the specific clauses for that specific project and to determine the impossibility to proceed with works due to the outbreak of a pandemic.