COVID-19 AND THE CONSTRUCTION INDUSTRY
On 18 February 2020, the Singapore government announced that it would support Singapore firms and workers with some S$4 billion dollars in view of the impact of COVID-19 on the global and domestic economy. This article focusses on some of the problems COVID-19 may cause in the construction industry in Singapore.
I. Background
As at 25 February 2020, some of the measures put in place by the Ministry of Manpower (“MOM”) in view of the COVID-19 situation include:
1. The rejection of all new work pass applications for foreign workers from mainland China until further notice;
2. The quarantine of all returning employees with Hubei travel history within 14 days prior to arrival in Singapore; and
3. A 14 days leave of absence for all employees arriving from mainland China (excluding Hubei province) between 31 January 2020 1800 hrs and 18 February 2020 2359 hrs; and
4. All employees arriving from mainland China (excluding Hubei province) on or after 18 February 2020 2359 hrs are required to remain in their place of residence at all times for 14 days.
In China, extra precautions have also been put in place. As reported by the South China Morning Post on 14 February 2020, the Chinese authorities have imposed measures such as shutting down factories and blocking roads.
These and other measures taken both domestic and overseas have many implications on the Singapore construction industry. Two immediate implications that sub-contractors are likely to face (or are already facing) are (i) a shortage of labour due to tighter labour regulations, and (ii) delays to the production, shipment and receipt of factors of production for and by the construction industry.
These will, in turn, likely delay or disrupt the progress of sub-contractor’s works. So will a sub-contractor be held liable if the sub-contractor cannot complete the works on time due to a shortage of labour and delays to factors of production?
II. Legal issues
There are a few legal issues that need to be considered when asking if a sub-contractor can be held liable for delays. This article will briefly touch on the following:
1. Force majeure;
2. Extension of time; and
3. Frustration.
Force majeure. In Singapore, when we speak of force majeure, the term “force majeure” is “… really no more than a convenient way of referring to contractual terms that the parties have agreed upon to deal with situations that might arise…There can therefore be no general rule as to what constitutes a situation of force majeure. Whether such a (force majeure) situation arises, and, where it does arise, the rights and obligations that follow, would all depend on what the parties, in their contract, have provided for.” (See Magenta Resources (S) Pte Ltd v China Resources (S) Pte Ltd [1996] 2 SLR(R) 316 at [60]).
Depends on the contract. So whether an event constitutes force majeure depends on what the parties had provided in their contract. In addition, the consequences that follow (be it a discharge of further performance under the contract, the grant of an extension of time, etc.) would also depend on the contract. As the Singapore Court of Appeal (the “SGCA”) RDC Concrete Ptd Ltd v Sato Kogyo (S) Pte Ltd [2007] 4 SLR(R) 413 (“RDC v Sato Kogyo”) held at [54], “the precise construction of the clause is paramount as it would define the precise scope and ambit of the clause itself”.
To give an example, consider Clause 14.2 of the Public Sector Standard Conditions of Contract for Construction Works 2014 (the “PSSCOC”), which deals with “Extension of the Time for Completion”. Clause 14.2 spells out various events which entitles a contractor for extension of time, with Sub-Clause 14.2(a) being “Force majeure”. So, what would constitute “force majeure”?
Since Sub-Clause 14.2(b) deals with adverse weather conditions, Sub-Clause 14.2(c) deals with industrial action by workmen, Sub-Clause 14.2(d) deals with “Fire, storm, lighting, high winds, earthquake or flooding”, none of those events would constitute “Force majeure” under Sub-Clause 14.2(a) as they are covered under other clauses. This is even though one would have thought that earthquake would be a force majeure event.
Beyond control? In addition, some contracts may provide that the force majeure clause can only be relied on if the situation arose from circumstances beyond the control of the sub-contractor.
This is significant as while (on first blush) it seems uncontroversial that a delay in production, shipment and receipt of, say, steel rebars from China due to COVID-19 leading to a shut-down of factories in China, is a circumstance beyond the control of any sub-contractor, would the sub-contractor be entitled to invoke the force majeure clause if it turns out that steel rebars can be sourced from any country, albeit at a higher price?
Can the sub-contractor rely on (as reported by the South China Morning Post on 25 February 2020) the “force majeure certificates” that a Chinese government backed agency known as the China Council for the Promotion of International Trade has issued (which certifies that the applicants were victims of unexpected external circumstances, preventing them from fulfilling their contractual obligations) to say that because the sub-contractor’s supplier has been affected, the sub-contractor can invoke force majeure?
In this regard, usually, the starting position would be that just because the contract between the parties have becomes more onerous for a party to perform, it does not mean that the circumstances constitute an event of force majeure within the meaning of the clause in the contract (See RDC v Sato Kogyo [70]). However, the situation may (and we emphasize may) be different if the contract specifically identifies a specific factory to source the steel rebars from, and that factory is located in mainland China and has a “force majeure certificate” issued.
So, at the end of the day, very much would turn on what the parties had actually provided for in their contract and how the sub-contractor was actually affected by COVID-19.
Extension of Time. Flowing from the above, it bears highlighting that under the PSSCOC, one of the grounds for extension of time is that found in Sub-Clause 14.2(e), “Compliance with the requirements of any law, regulation, by-law or public authority or public service company as stipulated in Clause 7.1”.
We highlight this because firstly, at least on a first blush basis, if there is a delay necessitated by compliance with the requirements of new regulations imposed due to COVID-19, there is an argument that the sub-contractor can obtain an extension of time.
Secondly, it is important to note that (at least for most local contracts) there would not be a specific clause (whether for extension of time or force majeure) that will say “COVID-19” or refer to an infectious disease. However, there may be potentially other clauses available in the contract that can cover the situation.
Frustration. But what if the contract does not have a force majeure clause or an extension of time clause? In such situations, the doctrine of frustration may potentially be applicable.
At the expense of over-simplification, this doctrine applies when something renders the performance of the contract physically or commercially impossible, or transforms the obligation to perform into a radically different obligation. It is a high threshold.
Further, a key difference between force majeure and frustration is that “whereas a force majeure clause is an agreement as to how outstanding obligations should be resolved upon the onset of a foreseeable event, the doctrine of frustration concerns the treatment of contractual obligations from the onset of an unforeseeable event” (See RDC v Sato Kogyo [56]). This effectively means that if there is a clause that can cover the event in the contract, it is very unlikely that frustration can apply.
However, it again turns on the contract. The observation in Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd [2014] 3 SLR 857 at [49] that “Where the source is referred to in the contract, and that source fails through no fault of either party, the contract is generally discharged by the doctrine of frustration…” can potentially mean that if, as our earlier example, parties have identified that the steel rebar is only to be sourced from one factory and that factory is shut down as part of a government’s regulations due to COVID-19, then the doctrine of frustration may be invoked to discharge performance under the contract.
III. The contract matters
For frequent readers of our blog, they will know that a constant refrain has been that the contract matters. This refrain remains applicable even when it comes to COVID-19.
While some contractors may want to avoid having long contracts with lengthy boilerplate clauses, these boilerplate clauses typically are there for a good reason. Force majeure is one of these boilerplate clauses, which comes to the fore when we discuss COVID-19.
As for parties who are presently in the process of negotiating the terms of their contracts, they should give careful thought as to whether the contract should address COVID-19, as well as how the performance of obligations under the contract should be structured in light of COVID-19.
Tags: COVID-19; Force majeure; Extension of time; Frustration
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication..