Introduction

As a contractor, if your suppliers cannot deliver materials on time due to border closure or quarantine restrictions, what should you do? Make a complaint to the supplier? Find another local supplier immediately? Inform the architect and the employer about the potential delays? Consult your trusted legal advisor? Or wait and hope for the best?

This article aims to provide insights into what a contractor should do or (could have done) under such circumstances.

Mechanisms for the contractor to recover its losses

To begin with, you should check whether there is any extension of time clause in your contract. If the answer is yes, then you need to consider whether the concerned delay falls within one of the grounds for time extension. Then you can consider whether it amounts to a variation and if possible recover the losses and expenses which have been incurred.

The following mechanisms may help the contractor to recover time and/or money due to delays caused by COVID-19.

Force majeure

Force majeure is not a common law concept. You cannot rely on it unless it is written in the contract. In practice, it is included in some of the standard form contracts, e.g. clause 25.1.3(a) of the standard form HKIA Building Contract (2006) and core clause 60.1(19) of the NEC 4.

However, even if there is a force majeure clause in your contract, whether it covers COVID-19 or not depends on how the clause is drafted. Does it include pandemic? Does the force majeure event need to render the obligation impossible to perform? Further, there may be requirements or conditions precedent to fulfil before you are entitled to any reliefs (e.g. mitigation of loss).

Another important factor to consider is whether COVID-19 was foreseeable by the parties at the time when the contract was signed. As COVID-19 was declared a pandemic by the World Health Organization on 11 March 2020, if the parties sign an agreement today, it is very likely that COVID-19 or its associated delays may not be considered as a force majeure event as the effects were foreseeable by the parties at the time of the contract.

For the sake of clarity, the parties should, before entering into the contract, agree on the exact scope of the force majeure clause and include a contractual mechanism to account for the impact of COVID-19 and its related measures.

Special circumstance

If force majeure is not available, is there any provision which covers “special circumstances”? But what makes the circumstance “special”?

In the absence of Hong Kong legal authorities addressing this issue, the Project Administration Handbook for Civil Engineering Works 2020 of HKSAR Chapter 7, section 8.1.2 provides some helpful guidelines on what constitute special circumstance:

1.        it does not include the employer’s breach of express or implied terms of the contract

2.        it is out of ordinary or uncommon

3.        it is not reasonably within the contemplation of the parties at the time of tender

4.        it is not self-induced by or arising out of the fault of the contractor

5.        the contractor has taken reasonable steps to avoid the occurrence of the event or alleviate the problem

If the particular delay fulfils the above requirements, the contractor may consider relying on the ground of special circumstances to claim extension of time.

Changes in law

Alternatively, the contractor can rely on “change in law” if it is available under the contract. For instance, NEC 4 Option X2 allows the contractor to claim compensation due to change in law.

However, one should always pay attention to the definition of “law” in the contract. In particular, whether it includes:

1.        Cap. 599G Prevention and Control of Disease (Prohibition on Gathering) Regulation or other relevant regulations;

2.        Guidelines on Prevention of Coronavirus Disease 2019 (COVID-19) for the General Public published by various governmental bodies.

Furthermore, the contract may specifically provide that the contractor shall bear the risk of any change in law. For example, under the HKSAR General Conditions of Contract for Building Works (1999), the contractor bears the risk of change in law during the works with no compensation to be awarded.

Variation

How about variation?

Whether various preventive measures at site implemented by the Employer constitute variation depends on the following factors:-.

1.        Do you receive any formal instructions? What amounts to an instruction under the contract? Always clarify with the architect when in doubt.

2.        Do the alleged changes amount to a variation under the contract? There is not any universal principle as to what constitute “changes” under the contract. While change in quantity may be a change in a contract, change in work methodology or sequence of work may not be.

3.        Is the contractor duty-bound to make such changes under the contract anyway? For example, if the contractor is obliged to follow any laws in force during the contract or ensure health and safety of its workers, even if the employer instructs the contractor to follow the social-distancing measures, this would not necessarily amount to a variation.

Suspension

Due to the various governmental measures, the contractor may experience shortage of labour and hence cannot carry out works on site properly. Under this circumstance, does the contractor have the right to suspend work? According to clause 35.1 of HKIA Building Contract (2006), suspension without good cause by the contractor constitutes a ground for termination.

While different contracts may define and address “suspension” differently, if you have difficulties in carrying out work due to shortage of labour, you should consult with your employer immediately and re-sequence the work to minimise the impact on progress as much as possible.  

Open discussion between the contractor and the employer is certainly encouraged during this unprecedented time. Hopefully, issues can be resolved by amicable discussion and collaboration.

Common law remedy – frustration

However, if the above contractual mechanisms do not help, common law remedy such as frustration may be relevant.

Frustration applies when an event occurs, after contract formation, which is beyond the parties' control, rendering it impossible to perform the contract or where the relevant obligation is transformed into a radically different obligation from what was contemplated at the time the contract was entered.

Nevertheless, hindrances and difficulties in conducting business do not constitute a ground to frustrate the contract.

Upon frustration, the contract will come to an end automatically and the parties are released from future performance. As such, careful consideration shall be made before evoking the doctrine of frustration, especially when you still wish to maintain a commercial relationship with your employer.

The good news is if your employer is the Hong Kong Government, according to an announcement from the Development Bureau on 14 March 2022, for all government works contracts in progress, the Government will flexibly handle requests from contractors for extension of time due to the impact of the current wave of COVID-19 pandemic, for up to a maximum period of six months. That said, some clarifications will be needed, such as, at what point has the 5^th wave begun? What constitute an impact? How about the direct loss and expense incurred?  

Conditions precedent for making a claim

In any event, no matter which mechanism you are going to rely on, strict compliance of the claim notification requirements under the contract is required. For example, there may be conditions precedent (e.g. timing and/or notice of contractual basis of the claim) for making a claim. Failure to comply with any of the conditions precedent will affect the contractor’s ability to advance a claim under the contract and also in the arbitration down the road. In Maeda Corporation and China State Construction Engineering (Hong Kong) Limited v Bauer Hong Kong Limited [2020] HKCA 830, it was held that the defendant had no right to claim loss as it had failed to strictly comply with the conditions precedent for making a claim under the contract.

What could have been done? A lesson to be learned

Indeed, there are many different ways for the contractor to recover losses from delays and it really depends on how the contract is drafted (and importantly whether those mechanisms still remain available after the commercial negotiations between the parties). This is exactly why the constructor should be allocating more time and resources to review, identify and assess the potential risks before signing the contract. This will definitely eliminate a lot of problems in the long run.

Furthermore, in order to minimise and control risks in a construction project, a contractor should:

1.        provide sufficient training for workers on site to handle project “hiccups” with care before it turns into a dispute;

2.        be familiar with the contractual claiming procedures, for example, by drawing up flow charts to avoid claims being time barred;

3.        if in doubt, seek legal assistance immediately. An experienced lawyer can identify fundamental problems in a relatively short period of time, probably quicker than a rapid antigen test.

A contractor should also closely monitor the health of its project by checking its CT value regularly:

If either C or T or both are causing problems to your project, you should speak to your lawyer as soon as possible and hopefully prevent your project from getting “infected”. Otherwise, you may need to go through an “arbitration therapy”, an expensive and tortuous process, which involves further costs and time.