Data Hub

How Covid-19 will affect big ticket projects

road

A road construction project. FILE PHOTO | NMG

Summary

  • Kenyans have been in a state of panic since the outbreak of the novel Coronavirus disease 2019 (Covid-19).
  • From a projects perspective, contractors have been a particularly worried lot, seeing as the pandemic has affected supply chains and their ability to meet their contractual obligations.
  • The impact on projects is already being felt with funding, project delays and even requests for contract variation.

Kenyans have been in a state of panic since the outbreak of the novel Coronavirus disease 2019 (Covid-19).

From a projects perspective, contractors have been a particularly worried lot, seeing as the pandemic has affected supply chains and their ability to meet their contractual obligations.

The impact on projects is already being felt with funding, project delays and even requests for contract variation. With the Kenya shilling also coming under pressure, there is a risk that some of the contracts denominated in foreign currency (which is the case for most large infrastructure contracts) could also go into payment default. The real question for contracting parties therefore, is whether their contracts are robust enough to withstand the effects of the Covid-19 pandemic.

Legal teams across the globe have been busy analysing contracts so as to determine the best way forward in instances where the Covid-19 pandemic affects performance by a party.

The options available to parties will depend on their specific contracts but the hitherto unknown term “force majeure” is very widely being bundled around at the moment. Force majeure relief is simply defined as relief where a party to a contract is prevented from performing its obligations on account of supervening events outside its control. The contract would need to allow for such relief, in which case a number of considerations would come into play.

First, the affected party must promptly issue a force majeure notice to the other party. The notice must set out in enough detail the nature of the force majeure event, how it affects performance of its obligations and an estimation of the expected duration of the force majeure event. The notice should also be clear, as to the relief sought by the affected party.

The party receiving notice will want to assess the claim and could agree to proceed on the basis of force majeure. In the case that it does not, a dispute may arise and the contractual provisions would guide on the steps that the parties should take to resolve the dispute.

Assuming no dispute, the affected party shall need to mitigate the effect of the force majeure event. This could mean partial performance where that is possible and where not possible, taking steps to minimise any loss until such time as the force majeure event is cleared or cured.

If for example, a contractor was relying on labour resources or equipment to be shipped from an affected country, there would be an expectation for the contractor to try and seek alternative sources that are comparable in terms of quality and cost, where those exist.

The affected party should provide regular updates on the state of the force majeure event and any action that it is taking to remedy the situation or mitigate losses. It would be unacceptable that after issuing the notice of force majeure, an affected party goes mute leaving its counter party in the dark as to how and when the situation is expected to normalise and for how long the relief extended should continue.

It follows that the affected party should also provide prompt notice to the other once the force majeure event falls away, as it would be unfair for a party to continue enjoying relief when there is no longer a hindrance to performance. Subject to the specific terms of the contract, in cases where the force majeure event prevails for an extended period of time, parties may want to explore an extension of the period allowed for performance under the contract or to terminate the contract as a last resort.

The Covid-19 outbreak poses a unique set of challenges. It has been declared a pandemic. Many force majeure clauses will have envisaged acts of God, epidemics, endemics, plagues, among others and the question will be whether a pandemic or resultant acts of government such as closing its borders thereby affecting transport to and from affected countries, fit within such criteria so as to qualify for relief.

One must also presume that even as contractors get to the point where they have to issue the force majeure event notices, they will also be in turn receiving similar notices from their subcontractors where they have subcontracted portions of the work. It will therefore require a delicate balancing act to arrive at a middle ground that works for all parties.

One of the takeaways from the Covid-19 pandemic is that going forward, parties need to take a fresh look at the force majeure clause to ensure that it is robust enough to cover developing situations. In the current circumstances, and considering that the Covid-19 pandemic is expected to affect parties across the board, it is high time they conducted a thorough review of their contracts to understand the implications on them and engage with their counter parties on the best approach.

It is worth noting that the Kenyan government and the Central Bank of Kenya have taken measures to help affected businesses in a stimulus package which includes concessionary tax rates, temporary suspension of listing on the Credit Reference Bureau (CRB) for entities whose loan account falls in arrears from April 1, among others. Hopefully this will go some way towards helping affected businesses ride the storm.

Beatrice Nyabira, Partner and Head, Projects, Energy & Restructuring Practice, IKM Advocates

Eunice Mwikali, Associate, Projects, Energy & Restructuring Practice, IKM Advocates