06 April 2020 - Article
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On 30 January 2020, the World Health Organization (WHO) declared that the coronavirus disease 2019 (Covid-19) outbreak constitutes a public health emergency of international concern and, at the time of writing, has spread to more than 25 countries outside China. These numbers would have been a lot more if not for China’s aggressive responses in countering the infections, including the locked-down of major cities at the outbreak’s epicenter in Hubei province, effectively isolating more than 50 million people.
Many countries have since restricted flights to and from China, and anyone arriving from China will very likely be subjected to at least 14 days of quarantine, or even denied entry.
On 7 February 2020, in response to the evolving situation, Singapore raised the Disease Outbreak Response System Condition (DORSCON) from Yellow to Orange. This indicates that the disease is severe and spreads easily from person to person but has not spread widely in Singapore and is being contained.
Numerous measures have been implemented to contain the spread. With public health as paramount, we note that some of these measures could cause labour constraints at construction projects, notably:
1. quarantine orders have been issued to individuals with a recent travel history to the Hubei province;
2. a 14-day leave of absence (LOA) to be implemented for Singapore residents or long-term pass holders returning from mainland China (outside of Hubei);
3. new work pass applications for foreign workers from China will be rejected;
4. approvals for existing work pass holders, who have recently been to mainland China, must be granted by the Ministry of Manpower (MOM) before they are allowed to re-enter Singapore. The number of approvals has also been limited to approximately 200 a day; and
5. from 18 February 2020 (2359 hrs), all returnees with recent travel history to China (outside Hubei) within the last 14 days will be subject to a “Stay-Home Notice” (SHN). Under SHN, they must remain in their place of residence at all times during the 14-day period. The SHN will also cover returning workers from mainland China on work passes.
What are we seeing?
Most industries in Singapore are feeling the impact of COVID-19, especially the construction industry. With our finger on the pulse, we have received numerous enquiries during this period, with the most common issues being:
1. Delays in completion and slowdown of projects in Singapore due to subcontractors from China where productions and deliveries have completely stopped.
2. The projects’ workforce mostly hailing from China, and the Chinese workers who went home for the Chinese New Year have not and cannot return.
Extension of Time (EOT)
Each case will have its own facts and circumstances, but essentially most parties are looking at potential EOTs to complete their projects.
In three of the more common unamended standard form contracts used in Singapore, [(i) Real Estate Developers Association of Singapore Design and Build Conditions of Contract, 3rd Edition, 2010 (REDAS Conditions), (ii) Singapore Institute of Architects Articles and Conditions of Building Contracts, 9th Edition, 2010 (SIA Conditions), and (iii) Public Sector Standard Conditions of Contract for Construction Works, 7th Edition, 2014 (PSSCOC)], force majeure is included as one of the grounds for EOT.
Generally, force majeure is raised at the occurrence of an unexpected event that is beyond the control of any of the parties to the contract. The objective of the party raising force majeure is to “enable parties to provide for discharge, or some other form of relief, on the occurrence of any event” in meeting the obligations laid out in the contract.
Singapore courts have held that the most important principle with respect to force majeure clauses is that the precise construction of the clause is paramount as it would define the precise scope and ambit of the clause itself.
The REDAS Conditions expressly defined force majeure, and the only possibility of invoking force majeure is arguably to rely on clause 18.2.4 and argue that the measures of the Singapore government can be construed as embargoes:
“18.2 Force Majeure event” means the following:
18.2.4 Industrial action by workmen, strikes, lockouts or embargoes affecting directly the Works.”
Both SIA Conditions and the PSSCOC, however, do not explicitly define force majeure. Parties can make their arguments to invoke force majeure based on the following:
1. The scope and particular instances where force majeure can operate;
2. The steps taken by the party seeking to rely on the clause to avoid having to do so (whether by preventing the occurrence of the force majeure event or by mitigating its effect); and
3. Depending on the language of the force majeure clause, whether the event constitutes a foreseeable event.
Apart from force majeure, there are two other possible grounds that may arguably be used to apply for an EOT relating to COVID-19.
Under clause 14.2( c ) of the PSSCOC, one of the grounds is “embargoes” similar to the REDAS Conditions. However, here it is limited to an embargo in Singapore. This means that while the Chinese workforce issue may succeed with this clause, the issue with Chinese subcontractors/suppliers will not be able to rely on this clause.
Under clause 14.2(e), the event for EOT is stated as: “Compliance with the requirements of any law, regulation, by-law or public authority or public service company as stipulated in Clause 7.1.” There seems to be no restriction to any law, and it is arguable that stoppage of productions in China were mandated by Chinese laws and regulations.
Similar to the PSSCOC and REDAS Conditions, the SIA Conditions provide for force majeure and “embargoes” as grounds for EOT.
In addition, SIA Conditions include two more grounds relating to clause 23(1)(l) “shortage of labour resulting from domestic or foreign government actions” and clause 23(1)(m) “shortage of goods or materials … resulting from domestic or foreign government actions, embargoes or regulations”
Unfortunately, most employers typically delete these two clauses from the contract. If they are not deleted, however, they could potentially be grounds for EOT arising from governmental actions in response to COVID-19.
Whether or not the arguments for EOT may succeed, parties involved in contracts with such disruptions and intend to apply for EOT should preserve their right to EOT by the following actions:
1. Comply with the condition precedent for EOT. In the case of REDAS Conditions making the EOT application within 28 days of the cause of delay. In the case of PSSCOC, giving written notice of the delaying event within 60 days, and in the case of SIA Conditions, giving written notice of the delaying event within 28 days.
2. Collate supporting evidence for the application under the various grounds. For example, the China Council for the Promotion of International Trade announced that it would offer force majeure certificates to protect Chinese companies that may be in breach supply contracts. It remains to be seen what legal effect and weight will be given to such certificates within and without China. Force majeure certificates may nevertheless go towards proving unforeseen foreign governmental action. Recently, a manufacturer based in Zhejiang province was issued a force majeure certificate as it faces the risk of defaulting on its contractual obligations with Peugeot’s African plant, and could face claims for damages of up to 30 million yuan (US$4.27 million).
Employers who are suffering the delay and intend to resist the invocation of a force majeure clause may have the following arguments:
1. Given the other recent outbreaks of public health crises in various parts of the world (e.g. swine flu, zika, ebola), the outbreak of another global health emergency which may disrupt supply lines is therefore not unforeseen, and there not a force majeure event. While this is certainly true, it is also important to note that the scale and speed of the present lockdowns in China are virtually unprecedented.
2. Currently, many countries are only beginning to experience a community spread of the virus. The same can be said of most regions in China other than Hubei province, in which more than 90% of the deaths have been reported. Accordingly, it is arguable that the impact is not as global as presented, and contract obligations can still be fulfilled.
It is easy to overlook the financial impact on the industry in light of the public health focus. Already, major Chinese Liquefied Natural Gas importer China National Offshore Oil Corporation (CNOOC) has begun to declare force majeure in response to commercial disruptions. In the building and construction industry, travel restrictions and locking down of manufacturing plants in China will impact the global supply chain and construction projects.
With no end yet in sight, stakeholders in the building and construction industry should review their present contracting arrangements and take early steps to protect their interests in both the operational and legal front.
Click here to read more insights on how we can weather the coronavirus outbreak with you.