Collaborative approach to dealing with potential impacts of COVID-19

Taking well-established concepts and principles from alliancing contracting models, a collaborative clause balances risk between the parties with a number of 'shared objectives'.

From the outset, the parties acknowledge that there is the potential for the performance of their contractual obligations to be detrimentally impacted by COVID-19 and the collaborative model provides that parties will act in good faith to overcome the impacts through a number of shared objectives, including:

• Making decisions and adopting processes and systems consistent with a 'best for project' approach with the objective of achieving Practical Completion by the Date for Practical Completion, with such approach being both consistent with the relevant project requirement and the parties' obligations under the contract
• Developing a culture of communication and transparency, both in respect of dealings with each other as well as regarding the costing and programming impacts of COVID-19.

What are the Contractor's continuing obligations in respect of COVID-19?

Though the impacts of COVID-19 are recognised, the principal under such a contract is still provided with some level of comfort regarding the contractor's continued performance (to the extent possible), as it is incumbent on the contractor to:

• Proactively monitor the potential impacts of COVID-19 on their obligations under the contract and actively advise and consult the principal on these potential impacts
• Implement all necessary mitigation measures to lessen these potential impacts
• Sequence the works and employ construction methodologies and practices that minimise the impacts of COVID-19.

What about delay and suspension?

The effects of COVID-19 can constitute a delay event. However, prior to any extension of time to the Date for Practical Completion, the parties must meet to discuss the delay with the objective of avoiding or minimising delays. The contractor must also submit a 'Mitigation Strategy', which sets out how it intends to avoid or minimise the delay or potential delay to the works.

This type of collaborative model also contemplates and provides for a situation where works are required to be suspended because either:

• The principal cannot provide sufficient access to the site
• The contractor is unable to carry out the whole of the works, due to a reason which is beyond the reasonable control of either party (e.g. if government issues a mandatory lockdown). In such a situation, the obligations of the parties will be suspended until such time as they are able to perform their obligations.

This approach, and the increased transparency brought with it, puts the parties in a position to proactively address the impacts of COVID-19. Specifically addressing COVID-19 in the contract also avoids the potentially murky waters of whether the disease (or any actions taken by local or foreign governments as a result of the disease or any other related, relevant event) constitute a 'Force Majeure Event', an issue which has and will be pertinent in construction contracts which are already on foot or which do not directly address COVID-19.

With such a degree of uncertainty surrounding the continued impacts of COVID-19 on the relevant works, such as the various local and foreign government responses to the disease, supply chain shortages and delays, and resourcing shortages, a balanced risk approach and collaborative mindset allows for the parties to see COVID-19 as a problem to be overcome together to allow both to reap the benefits of the proposed deal rather than as an opportunity for gain or as a defence mechanism for non-performance.

Conditions precedent approach to dealing with potential impacts of COVID-19

Given the continued uncertainty surrounding the immediate and long term impacts of COVID-19, it is also possible to rely on conditions precedent when finalising a deal. Under this approach, it will only be when these conditions are fulfilled before performance under the contract is due by each party. This provides the parties with a relative degree of certainty, the point at which they are willing to accept and fulfil their obligations under the contract, taking into account the societal, commercial, and legislative impacts of COVID-19.

What could an example conditions precedent look like?

The conditions precedent themselves can be decided at the discretion of the parties but will likely revolve around the impacts and major effects of COVID-19 having dissipated. This can include conditions precedent tied to external events such, for example:

• The World Health Organisation declaring COVID-19 is no longer a 'pandemic';
• The 'state of emergency' announced by many States being lifted; and/or
• Relevant lockdown and social distancing laws being lifted;

Conditions precedent can also include obligations which each party must fulfil, such as:

• Specific measures which the contractor must implement to alleviate the impacts of COVID-19
• The parties' employees and relevant subcontractors being allowed to legally return to work and when it is safe and reasonable to do so.

It is also possible to implement a second step to this approach, where the conditions precedent must not only be met, but the principal must also notify the contractor of its intention to commence the project (and receive the contractor's confirmation) prior to the project commencing. This affords the principal a greater degree of control and alleviates some of the uncertainty regarding when the relevant works will begin (as discussed below).

What are the risks in the conditions precedent model?

In applying such a model it is important to understand that the model itself can create uncertainty, in that the parties have no certainty as to when these conditions precedent will be met, especially if they are tied to external events. This creates uncertainty as to when a project will be completed and uncertainty for each party in readying their resources, supply chain, and finances given they do not know when their obligations begin.

For a contractor, holding its pricing for an undefined period may also be a strain, which may lead to discussions around time-limiting the period for satisfying the conditions precedent. The difficulty with imposing time limits is the duration and extent of COVID-19 on the industry is largely unknown at this point in time. Parties can either impose an arbitrary time period with some flexibility to extend that time period by mutual agreement or otherwise build in a price adjustment mechanism into the agreement which allows incremental increases in the bid price on a tiered basis as the period of time for satisfying the conditions precedent period drags on.

It is important to accommodate for the uncertainty of the fulfillment of the relevant conditions precedent by providing for the requisite flexibility in the final completion date of the project and the relevant milestones. This can be accommodated by making these dates and milestones with reference to a specific number of years or months following the fulfilment of all conditions precedent as opposed to a fixed date.

This conditions precedent approach is also not as flexible as the collaborative approach in the event that there is a further outbreak of COVID-19 after the initial conditions precedent have already been achieved and the parties' obligations have commenced.

How can you prepare?

Regardless of the uncertainty of when the conditions precedent will be fulfilled, the parties can utilise any delay in the commencement of actual works to conduct necessary preparatory work, so that the project can be expedited once the conditions precedent are fulfilled.

Preparatory work can include:

• Preparing the relevant technical documents, a book of work and other necessary project documents
• Thoroughly planning their individual and joint approaches and timelines for the project once it does commence
• Obtaining necessary approvals and certifications
• Obtaining any necessary agreements (such as parent company guarantees), security, equipment or resources required for the project.

When can works commence?

Parties will be able to immediately commence works upon fulfilment of the conditions precedent, eliminating the usual time lag between the signing of a deal and the beginning of the actual works.

Which approach is best and how do we move forward?

Given that some of the problems raised by COVID-19 are unprecedented, there is no uniform best approach as to how to deal with the associated risk. There are measures which can be taken that are common to any approach, such as a relaxation of time bars on a temporary or permanent basis. A measure such as this can also be implemented in construction contracts which are already on foot.

The collaborative approach allows for works to begin whilst the effects of COVID-19 are still impacting the works, and is adaptable enough that in the event a party simply cannot perform its obligations due to the impacts of COVID-19, that party is not unduly punished.

Though not as immediately adaptable as the collaborative approach, the adoption of conditions precedent provides the parties with some level of certainty as to the landscape of society and the impacts of COVID-19 at the time which their obligations are set to commence. Given the conditions precedent are at the complete discretion, innovative and bespoke conditions precedent can be set by the parties.

As with any risk which can cause disruption, it is a matter for the parties to decide the best and most commercially viable option given their individual circumstances and the requirements of the particular project.

COVID-19 is not only unique in the impacts and effects it is having on society, but unique in that there is no pre-established and tested model or guidance as to how to deal with such an issue contractually.

In finalising a deal in the age of COVID-19, there will always exist an element of uncertainty, and that uncertainty is just as likely to detrimentally effect the principal as it is the contractor. A balanced, collaborative and flexible approach is required, no matter what form that ultimately takes in the wording of the contract.

Our team is available to support you with any queries.