COVID -19 Implications for Project Owners, Contractors and Lenders


As the Covid-19 pandemic persists around the world, its effects continue to have far reaching implications on global healthcare systems, businesses, economies and public sector service delivery.  In Kenya, the government introduced various restrictions of movement measures, as well as certain fiscal measures in an attempt to curb the spread of the disease and minimise its impact on individuals, businesses and the economy.

The imposition by governments around the world of mandated state or region wide lockdowns and the restrictions on international travel, has constrained the production of goods, provision of services, movement of cargo and mobility of workers with the natural consequence of disrupting global supply and distribution chains.  It is therefore difficult and in certain instances impossible for existing and new projects to access the required goods, materials, equipment and workforce. 

 Below, we address some of the issues that may be of particular concern to project owners, contractors and lenders:

A. Contractual Considerations

You should review contracts in detail and evaluate your ability (and those of your customers and suppliers) to carry out existing contractual obligations.  As a general rule, a failure to perform obligations under a contract will result in a breach and one must therefore assess the terms of each contract to determine how best to either enforce its terms or obtain relief, as necessary.

Force Majeure: Force Majeure (FM) commonly refers to the occurrence of a significant unavoidable event that is likely to prevent or impact on the performance of a party’s contractual obligations under an agreement (FM Event).  Under Kenyan law, there is no statutory doctrine of force majeure.  Rather, the availability of force majeure as a relief is a matter of contract and will depend on the specific wording in the agreement and the governing law of that agreement. 

Most FM clauses require that:

  • the event or circumstance must be beyond the reasonable control of the affected party;
  • the event or circumstance could not have been reasonably foreseen by the affected party;
  • the affected party could not reasonably have been expected to prevent or avoid the event or circumstance or its consequences; and
  • the event or circumstance must have affected performance .

Typically, FM clauses have non-exhaustive lists of events or circumstances that would qualify as FM Events with the effect that such clauses allow for other events or circumstances to be considered as FM Events.  However, it is important for you to carefully assess your contract to determine if your agreement has an exhaustive (closed) FM Events list, if it excludes specific events or if it limits the scope of the FM in any manner.

Epidemics and pandemics may specifically be included as FM Events, in which case one has to evaluate the effect COVID-19 has had on the party’s performance obligations.  If the imposition of laws or actions taken by a government or public authority is also expressly stated as an FM Event in your agreement, you can determine if any governmental restrictions that have been introduced negatively affect performance.  The inclusion or exclusion of these FM Events in your agreement does not automatically include or exclude FM relief.  For the affected party to successfully rely on an FM clause, it must show that it was able to perform its contractual obligations except for the occurrence of an identifiable FM Event.

Once the specific FM Event has been ascertained, the party seeking to rely on FM relief must demonstrate that the procedural requirements set out in the agreement have been satisfied, including:

  • notification requirements – FM clauses often impose an obligation on the affected party to notify the other contract parties of the occurrence of the FM Event within a specified period.  The notice will often be required to have sufficient detail about the FM Event and its impact of the affected part’s ability to perform its obligations under the agreement.  Moreover, the FM clause usually also requires that the affected party provide the other contract parties with regular updates;
  • mitigation – Additionally, FM clauses often require the affected party show that it could not mitigate the consequences of the FM Event for the claim to succeed.

Finally, one must also consider the consequences of an FM claim under the agreement.  FM clauses ordinarily provide for the suspension of performance obligations for a specified period of time and thereafter, for the termination of the agreement.

Frustration:  Other relief from performance of a contract can be found under the common law doctrine of frustration.  Frustration can be relied on where an event occurs that leaves the original contract physically or commercial impossible to perform.  To rely on this relief a party must satisfy itself that it can prove the following:

  • that the event occurred after the agreement had been entered into;
  • performance is impossible on account of physical impossibility (e.g. delivery of equipment), illegality or it would be fundamentally different from what the parties intended;
  • the event was not contemplated under the agreement;
  • non-performance cannot be attributed to any of the parties.

A successful frustration claim results in the agreement being cancelled going forward and consideration needs to be given to the effect cancellation would have on matters such as advance payments.

Illegality:  Parties also need to consider if a change in law (whether in Kenya or abroad) has the effect of rendering performance of an existing contract, illegal.  If that is the case, then Kenyan law requires that the contract is terminated.

Extension of time: Certain contracts e.g. construction contracts impose liquidated damages on the contractor for not completing the construction by a stated period.  Such contracts often provide relief to a contractor from paying liquidated damages if certain events known generally as Delay Events, occur.  The contractor is then allowed to claim for an extension of time to perform the contract.  Typically Delay Events include:

  • changes in law;
  • delays by authorities;
  • force majeure events; and
  • delays by the employer or other contractors.

If successful, the contractor will be granted an extension to perform the contract and no delay damages will be paid.  If not successful, the contractor will continue to pay the liquidated damages until they reach a pre-agreed cap, and thereafter, the employer will be entitled to terminate the contract.

Change of Law: Some contracts also have change of law relief provisions.  If applicable, a party can seek relief from performing its contractual obligations if compliance with a change in law causes a delay in performance or an increase is costs.

B. Lenders/Borrowers Considerations:

Project lenders should review their finance documents to determine when and if they can trigger any material adverse change clauses.  Borrowers, mindful of the representations it has given to its lenders and the terms of the events of default provisions should approach their financiers at the earliest opportunity to re-negotiate terms or shore up any security already given so that they avoid being in default.

C. Insurance Claims

Project sponsors and contractors should carefully review existing policies to determine what business interruption coverage, if any, they carry today, and what coverage they may want to acquire for the future.  Typically, business interruption insurance is provided together with property insurance and becomes operative where an insured’s business is interrupted as a result of  physical damage to the insured property at the insured’s premises.

Contact your insurance carriers and carefully look through existing policies to see what coverage, if any, you have today, and what coverage you may want to purchase for the future

D. Operational Considerations

You should consider the impact COVID-19 will have on your project and its operations, particularly where lockdowns and movement restrictions have been instituted.  Issues you should consider include:

  • How will you deal with occupational health and safety measures including public health orders that have now been put in place? What precautionary health and safety practices will you put in place (e.g. social distancing, mask wearing)?  Ensuring employees comply with curfew orders all the while observing employee rights will require adjustments in work schedules or even suspension of works and may necessitate additional spending. There may also be human resource challenges stemming from employee absenteeism, abscondment or desertion from work or even workers contracting the pandemic.
  • What aspects of the project can be managed remotely?  While certain meetings can be held remotely – on phone, internet/video conferencing, will you be able to undertake project site meetings and inspections?
  • Do you and your stakeholders have the necessary IT capabilities to do so?
  • How will you manage logistics and associated costs?  Will you be forced to halt certain stages of the project (e.g. construction), on account of supply chain disruption, lockdowns and stay-home orders? 
  • How will you keep regulators, lenders, investors, contractors, employees and other stakeholders informed on the effect COVID-19 has had on the project and any mitigation plans you have put in place?  With the situation being fluid, constant communication with stakeholders is extremely important.

What should affected parties do?

  • identify provisions which are likely to be breached as a result of the Covid-19 outbreak;
  • assess possible relief under the contract terms and or the law;
  • consider the granting of waivers;
  • notify their counterparties of any potential or actual breaches;
  • re-negotiate contractual terms to avoid terminations; and
  • create mitigation plans.

It is prudent for parties to infrastructure agreements to seek expert advice regarding breaches or defaults of the contractual terms and how they may legally resolve any disputes arising from such breach or default. 

Given that the situation is fluid and rapidly evolving, parties should keep abreast of all developments affecting their projects.

Article by Waringa Njonjo and Monica Engola

Waringa is Partner, MMAN Advocates and also heads its Commercial, Construction, Energy and Infrastructure practice groups while Monica is a full-time Legal Consultant at MMAN Advocates.

 

 

 





1st Floor, Wing B, Capitol Hill Square, Off Chyulu Road, Upper Hill, Nairobi, Kenya.
P.O. Box 8418 Nairobi 00200 / T: +254-20-2737572/5/8 +254-20-2596994 / M: +254 718 268 683

Dropping Zone: No 62, Revlon Plaza

mman@mman.co.ke