The clock is ticking to avoid mass construction disputes, as many contractors will have the ability to terminate coronavirus-disrupted contracts this summer, says consulting firm Accuracy
Accuracy explains that ‘force majeure’ notices have been triggered, stopping work on numerous construction sites in recent weeks. Under one of the standard forms of contract – FIDIC model contract – used by many multinational contractor groups, both the project owner and the contractor can choose to terminate the contract once work has stopped for 84 days due to an exceptional event.
This 84-day period will expire for many projects this summer, as early as 31 May depending on geographies, which could give rise to a significant increase in the number of construction disputes.
Project owners may seek to use this as an opportunity to remove contractors on projects that had previously suffered delays and cost overruns and contractors could look to exit projects that have become unprofitable.
However, where termination occurs, it often signals the start of a dispute that may only be resolved through a time consuming and costly litigation or arbitral process, adding to the delays caused by Covid-19.
Accuracy warns that to prevent contractors walking away from projects that have become unprofitable, project owners should consider whether to make additional payments to contractors.
For example, payments on items such as increased prelims incurred because of Covid-19, this would make it sustainable for them to continue working on projects where they have performed well.
Both project owners and contractors should be looking to engage in open discussions in order to avoid costly construction disputes down the line.
Hervé de Trogoff, partner at Accuracy, commented: “Time is running out on many construction projects for owners and contractors to prevent disputes in the near future.
“If they don’t negotiate pragmatically, they risk getting caught up in arbitrations and litigations that could have been avoided.
“Project owners need to look at the big picture of the repercussions of these disputes on their organisation’s goals and also the long-term effects on the delivery of the project.
“Negotiating revised terms that take account of the negative effects of Covid-19 on the contractor’s productivity or that provide contractors with advances on payments could be the surest way to ensure the works are completed in an acceptable timeframe.”
Take a pragmatic approach
Stephen Lee, senior manager at Accuracy, added: “At the moment only a small percentage of project owners are taking the pragmatic approach of offering some financial relief to their contractors.
“The lockdown restrictions mean that some projects will have been on hold for weeks already, we would strongly advise that parties make a deal as quickly as possible to stop projects falling even further behind and being funnelled into a route of costly and time-consuming arbitration and litigation processes.”