Covid crisis and construction – the global response
Covid-19 has hit the infrastructure sector hard. Here, FANNY DASTUGUE looks at how various countries across the world have handled the impact of the crisis on their construction industry.
The Covid-19 pandemic has detrimentally affected the world economy, but surely one of the most affected sectors is the construction industry. Some countries have handled the sanitary crisis putting in place exceptional measures and developing pragmatic initiatives to avoid massive chain insolvency. Confronted to an unprecedented situation, governments’ reactions are diverse and evolving. Many countries have elaborated health and safety guidelines and protocols allowing the continuation of construction works but generating important additional costs and delays to projects in the process.
To balance the negative impact of Covid-19 in Europe, in addition to general economic revival packages, many countries implemented measures in direct support of companies, for example anticipated payments, access to financing, price adjustment mechanisms, tax rebates or deferral. In Germany for instance, in addition to federal guidelines about how to deal with disruptions in the construction process under contract law, Covid-19 pandemic is to be classified as force majeure in future construction measures, so that execution deadlines are automatically extended. Also, to maintain the necessary liquidity of the companies, prompt payment of partial and final invoices is required. In the Netherlands, a government framework for fast payments of construction companies has also been implemented.
In France, the professional organisations lobbied the Ministries of Economy and Housing to benefit from the sliding effect of the state of health emergency and obtain legal protection over a period during which contractors’ liability cannot be engaged and delays penalties cannot be applied. For state public procurement, employers are encouraged to bear a part of extra-cost directly linked to the worksites interruptions and to sanitary requirements. Another measure is the neutralisation until 2023 of the decrease of turnover to appreciate the economic and financial capacity of a company when tendering for public works. In Italy, public works contracting authorities are allowed to increase to 30% the amount of the advance payment, compatibly with the available resources.
From Ankara, Cigdem Cinar, deputy secretary general at the Turkish Contractors Association, explains that the Turkish government introduced an ‘Economic Stability Shield’ allowing for example that principal and interest rate payments of companies having cashflow problems are postponed for three months at least, the Credit Guarantee Fund limit is increased and loan priority channelled to the companies in need of liquidity. Besides, companies that may default in April, May or June due to the measures taken against the spread of Covid-19 will have a force majeure note on their credit record. The payment terms of the Turkish Eximbank loans and the commitment closure period for short-term loans have been extended. And, contractors, under certain conditions, can request for termination or extension of the projects in public tender contracts.
In Latin America the situation has a reserved diagnosis, according to Sergio Torretti, president of the InterAmerican Federation of the Construction Industry. In the private sector, initiatives to renegotiate the construction contracts can be observed. However, this willingness appears mainly in largescale projects. In local or smaller projects, conflicts are beginning to be resolved via judicial or arbitral procedures, but not through contractual agreements implemented in good faith between the parties.
This notwithstanding, local chambers of commerce developed initiatives to support an understanding between owners and contractors. The Arbitration and Mediation Centre of the Chamber of Commerce of Santiago de Chile stands out. It has made available to the public the possibility to develop up to 1,000 free mediations to deal with disputes related to the pandemic. In the public sector, in most cases, public works were declared as a strategic activity. Companies must continue executing the works and cannot invoke force majeure despite mobility limitations and sanitary measures decreed by the authorities affecting the economic balance of the contract.
According to Alex Wagemann, chairman of the Construction Contracts Working Group of CICA, contractors tend to issue direct claims to the authority or, initiate judicial or arbitration procedures based on the government acts and, in some cases, the “théorie de l’imprévision” or hardship. However, although the hardship has been generally accepted by the doctrine, it is not normally accepted by the courts in Latin America and many times, the “Governement Act theory” is not fully accepted either. This has been raising legal discussions which may result in significant judicial and arbitration conflicts within the region, considering the historical inflexibility of the Latin American states to seek negotiated solutions with contractors. As an exception, the state of Sao Paulo implemented a mediation system to face the disputes related to Covid-19, available for public works contracts.
From Tokyo, Yoshihiro Yamaguchi, vice president of the Overseas Contractors Association of Japan explains that for ODA projects supported by the Japanese government and JICA (both Yen loans and grants projects), under JICA General Conditions of contract, the pandemic is not listed as a force majeure. The project owners are not sure to admit extensions of time and extracost to cope with the changes of policies. Nevertheless, the parties are on the way to have a mutual understanding, said Yamaguchi.
On the contrary, the China Council for the Promotion of International Trade has issued a record number of “force majeure certificates” to exempt Chinese companies from their contractual obligations. Similarly, the Russian Chamber of Commerce and Industry is issuing force majeure certificates related to Covid19. But, what will be the value of such certificates in an international dispute?
The debates on the sharing of risks and costs induced by the pandemic are ongoing, often finding answers at local level. The issue of additional costs resulting from the stoppage of construction sites, the implementation of health recommendations or the new operating mode generating productivity losses is still at the centre of all discussions. All players in the sector should benefit from a cooperative and balanced approach.