The outbreak of the corona virus, referred to as Covid-19 below, has had significant impact on the world economy, and the construction industry is no exception. As the virus continues to spread, construction projects will face Covid-19 induced hindrances and disruptions, causing delays, reduction in productivity, and financial losses. Parties are therefore well advised to consider what steps to take in order to safeguard their legal rights. For projects governed by the Swedish standard construction contracts, known as the AB Agreements, timely and substantive notifications for time extensions will take centre stage.
Pursuant to AB 04/ABT 06, Chapter 4 § 3, the contractor shall be entitled to any necessary extension of the contract period, if he is prevented from completing the contract works within the contract period due to inter alia:
2nd item decision by an authority resulting in general shortage of facilities, materials or goods or in limitation of the supply of labour,
3rd item epidemic, strike, blockade or lockout, with the exception of strike or blockade resulting from the failure of the contractor or of any of his sub-contractors to fulfil their obligations to their employees, and
5th item other circumstances which are not the fault of the contractor and which he could not have been expected to anticipate and the detrimental effect of which he could not reasonably have been able to eliminate.
With respect to Covid-19, the third item may be of special interest as epidemics are directly referred to as a circumstance that could entitle the contractor to an extension of the contract period. However, all the mentioned items could plausibly be applicable as a result of impacts of Covid-19, as is further discussed below.
It is not unlikely that, due to the on-going Covid-19 outbreak, the authorities will adopt measures that may result in a general shortage of facilities, materials or goods, and/or the supply of labour. For a shortage of supplies to be “general” it is likely that a large part of the national construction industry must be impacted by the shortage, rather than just a few companies. That said, it will depend on what type of facility, material or good that has become unavailable. For custom items, a shortage may arise quite quickly, as opposed to off-the-shelf goods.
As concerns shortage of labour, it is no longer inconceivable when looking abroad, that entire cities become forcibly quarantined, preventing workers from reaching construction sites.. Considering the current limitations on international travel, it may also be impracticable to get labour from abroad.
It is surely no doubt that the global Covid-19 outbreak is an epidemic (it is even a pandemic, as recently concluded by WHO). However, the mere existence of an epidemic is not in itself sufficient in order to grant an extension of time pursuant to the third item of AB 04/ABT 06, Chapter 4 § 3. The epidemic needs to pose a hindrance for the contractor to perform its works. That may for instance be the case if the contractor’s personnel have succumbed to the virus, or the contractor’s personnel has been put into quarantine, or where the construction site itself is quarantined due to the epidemic. Also, it cannot be ruled out that even the risk that the contractor’s personnel could be exposed to the virus at the site, could pose a hindrance to perform the contract works. It is also conceivable that the third item of AB 04/ABT 06 Chapter 4 § 3 can apply where the Covid-19 outbreak has indirect effects on the contractor’s ability to perform its works in an efficient manner. That may e.g. be the case where workers face difficulties in travelling to and from the site due to downsizings/shutdowns of public transportation.
The catch-all general clause in the fifth item of AB 04/ABT 06, Chapter 4 § 3 may be invoked where the second and third item fall short of providing the contractor the necessary extension of the contract period due to the Covid-19 outbreak. Considering current events, several situations may arise which are neither caused by a decision of an authority nor sufficiently linked to the epidemic, yet they still prevent a contractor from completing its works in a timely fashion. If the cause for the hindrance in question is not the fault of the Contractor, and it was not foreseeable, and the contractor has no reasonably viable way to overcome or mitigate the negative effects of the hindrance, the contractor is entitled to an extension of the contract period.
If the contractor is faced with a hindrance to perform the works, the contractor shall notify the employer without delay pursuant to AB 04/ABT 06, Chapter 4 § 4. Should the constructor fail to notify the employer, the constructor may not rely on the circumstance as grounds for a time extension, unless the employer was aware or ought to have been aware of the circumstance in question and that it could affect the completion date. In light of the fact that the current Covid-19 outbreak and its general impacts is public knowledge, it could of course be argued that the employer knows, or in any event ought to know, that the completion date of any given project may be affected. However, we still recommend that contractors ensure that (written) notifications are made as soon as possible to their employers of the impact that Covid-19 has on the project in question. It should also be noted that, as the situation develops, additional notifications may be advisable in order to ensure that the employer is continuously notified and updated. Also, written notices are a means of ensuring contemporaneous documentation on developments, and we also advise that both parties ensure that any and all records and documents are consistently saved, in the event a dispute would arise.
Employers are recommended to actively monitor the situation and secure their own contemporaneous records of how the Covid-19 outbreak does and does not affect the contractor’s work. Moreover, with a continuous and proactive dialogue with the contractor, steps might be taken to minimise the effect by for instance altering work.
Because of hindrances, it is more than likely that contractors also will suffer reductions in productivity, and thereby increase the cost. Especially for fixed price contracts, or where the contractor’s remuneration is based on agreed unit prices, such productivity losses may pose a substantial financial risk for the contractor. This can give rise to complex legal issues, especially since the effects of the hindrance (e.g. an epidemic) may interact with the effects of other employer risk events.
Cederquist Senior Associate, Oskar Gentele has authored a comprehensive book in Swedish on disruption claims, titled Samlade störningskrav, published by the leading Swedish construction publishing house Svensk Byggtjänst, where these issues are dealt with in-depth – a must-read in light of current events. To purchase the book, click here (available both in hard-copy and e-book).
Get in touch with our experts on Construction in order to obtain legal advice on how to best navigate when dealing with the impacts of Covid-19 on your construction projects.