This article was co-authored by Lewis St John, Litigation Assistant.
As COVID-19 spreads, the impact on the construction industry is increasing. The construction industry in the Commonwealth Caribbean relies heavily on European, Asian and American suppliers/manufacturers for construction materials and labour. In these areas, many companies are closed due to quarantines and production lines have stopped. Accordingly, there is no transportation of goods from these areas to the Commonwealth Caribbean.
In the near future, contractors will have to find alternative sources of services, goods, materials and debt which will lead to project cost overruns. This will prove problematic in the Commonwealth Caribbean given that this jurisdiction consists of mostly small island states which is significantly reliant on imports and cannot resort to local suppliers. Such supply chain issues will also cause project delays which will inevitably lead to claims by owners for delay, including liquidated damages claims.
Financial measures introduced by the banks
Recently, the European Central Bank (ECB), and the Bank of England have introduced extra measures to shield their economies from the lockdown and to inject some liquidity into the markets. The ECB has launched a €750 billion bond buying programme which may lead to the lifting of the current self-imposed limit to not buy more than a third of the eligible sovereign bonds from any single country and to purchase sovereign bonds in proportion to the weight of each country’s capital investment. The Bank of England announced an emergency cut in interests rates from 0.75% to 0.1%, £330 billion in loans, £20 billion in other aid, business rates holiday and grants to shore up the economy amid COVID-19.
The Commonwealth Caribbean has also introduced various measures to shield their economies from the lockdown. To name a few, the Central Bank of Jamaica has launched a US$26.3 billion bond buying programme. The Central Bank of Trinidad and Tobago has reduced the rate at which it lends to commercial banks to 3.5% and lowered the primary reserve requirement on commercial bank deposits to 14%, which will amplify system liquidity by US$2.6 billion. The Central Bank of Barbados has also introduced a moratorium on loan payments for firms and individuals directly impacted by the pandemic and resulting economic downturn for up to six months. It has eliminated the 1.5% securities ratio for non-bank deposit taking licenses.
Risk and loss resulting from construction delays or increased costs because of COVID-19
Risk and loss will most probably be determined by the contract. Precisely, whether COVID-19 is an excusable delay/loss under the contract’s force majeure clause extending the completion date, excusing the contractor for liability for any damages & providing for additional costs.
Force majeure clauses
Force majeure events are those which fall outside the control of a party and which prevent a party from performing its obligations under a contract. The term force majeure has its origins in French Law and the Commonwealth Caribbean has no general concept of force majeure except for the doctrine of frustration. However, force majeure clauses are recognised and enforceable in the Commonwealth Caribbean. Thus, a party’s ability to claim relief for a force majeure event depends on the terms of the contract, and particularly the force majeure provision. Force majeure provisions are express terms and will not be implied into contracts.
Companies who want to rely on a force majeure clause have the burden of proving the following requirements:
- The event falls within the scope of the force majeure clause.
- The event prevented performance of the contract.
- The event was not reasonably foreseeable at the time of entry into the contract.
- The company had taken all reasonable steps to avoid or mitigate the event or its consequences.
- The company had complied with all notice requirements set out in the contract relating to the invocation of a force majeure clause.
Practicable steps – insured
- Record and document the steps taken to prevent or mitigate the impact of COVID-19 on its ability to perform its obligations under the contract.
- Consider the consequences that flowed from COVID-19.
- Comply with any condition precedents or warranties.
- Notify all actual or potential losses.
- Provide ‘proof of loss’ to insurers describing nature and amount of losses suffered.
- Understand the legal and contractual obligations to ensure compliance.
- Anticipate loss of staff and accordingly prepare contingency plans.
- Forecast cash flow issues.
In conclusion, the construction industry in the Commonwealth Caribbean will incur significant losses as a result of COVID-19. Much like the UK, the governments and the banks in the Commonwealth Caribbean are implementing varying measures to cushion the impact of COVID-19. Insurers should also be prepared to negotiate policies which include provisions for COVID-19 for a higher premium.