COVID-19 and construction contracts in Oman
Government measures enacted to limit the impacts of COVID-19 and the impacts themselves continue to have a significant negative effect on the Oman economy and its construction sector in particular.
Whether the pandemic can be qualified as force majeure is inevitably a question of fact and will depend on the circumstances of each case and, as such, the defence of force majeure may not always be available. Therefore, in a situation of default of a party’s obligations, perceived to have been caused by COVID-19, other remedies such as termination, suspension or pacing of works could, and should, be considered.
It is very common for construction contracts to regulate any situation of default or failure of a party to perform its obligations. Such failure could be expected where the contractor is facing an interruption in the supply chain as a result of the shortage of resources caused by COVID-19 related travel restrictions. Failure of the employer to perform its obligations could also arise where, for example, the contractor faces difficulties in securing due and outstanding payments or fails to issue variations in a timely fashion or at all.
Omani law recognises termination of contracts for both convenience and default:
Termination for convenience
The Civil Transactions Law, or Civil Code, expressly allows a party to terminate for convenience, if agreed between the parties. Such agreement should be express, allocating the right of termination for convenience to one or both parties and setting out the consequences or effect of such a termination.
Termination for convenience is unilateral and need not happen as a result of default. Such termination can be expected in the case of COVID-19 when the contractor has just completed a major milestone or stage in the project, but is unable to initiate the works associated with further stages, such as in mixed use developments, where the works are to be performed by way of a ‘waterfall’ methodology.
Termination for default
This is also recognised in bilateral agreements where one party fails to perform its contractual obligations. Parties usually set out in their contract a list of events which, if failed to be performed, entitles one or both parties to terminate the contract. This is otherwise known as termination for cause, requiring the creditor to demonstrate the debtor's default and the reasons for it.
It is yet to be seen whether the failure to perform an obligation as a result of COVID-19 will be considered a reason justifying termination for cause. It may be the case that, in such a scenario, the failure to perform is considered justified by considering COVID-19 an event of force majeure, an extraneous cause or an oppressive circumstance
It is worth noting that a notice of termination, whether for convenience or default, is required to be properly served on the other party.
The effect of termination for cause is that the parties will return to their respective pre-contractual situations. If this is no longer possible, which is inevitably the case in complex construction projects, the party in default will be required instead to pay relevant compensation to the other.
In cases of termination for convenience, the consequences are usually prescribed in the contract and will generally include: payment of outstanding amounts; payment of some or all of the lost profit; return of documents and performance security; and demobilisation from the site.
Where the terms of the contract excludes the effects of a pandemic as being a force majeure event, a party facing a default as a result of COVID-19 could, instead, resort to suspending the performance of its obligations.
Parties can also consider part suspension as opposed to full suspension. Part suspension, as an interim remedy, will maintain marginal activity on site and hold the lenders (if involved) in reserve of any unwanted reaction. Equally, any progress of the works should be reflected and thoroughly emphasised in contractors' monthly reports to the employer and the lenders.
Instead of suspending all or part of the works, a contractor could proceed to pace the works in the event of an employer's default. The contractor would do so by informing the employer of its intention to optimise its resources during rectification of the critical delay, resuming back to the original (reprogrammed) schedule of works once the delay event has been rectified. Pacing could also allow the contractor to protect its entitlement for an extension of time although this would, most likely, be argued as a defence when/if subsequent delay analysis shows the employer’s sole delay being critical to the progress of the works.
This is so because, although pacing measures are prescribed in some construction contracts, the Oman standard forms of contract (which are widely used throughout the Sultanate) do not. Reliance on a pacing argument will, therefore, be required to be demonstrated by developing and implementing a risk management and control plan for and during the affected period.
Pacing measures can also be demonstrated in the contractor's monthly reports. Crucially, the contractor should be able to demonstrate an intention to pace in reaction to an employer delay event showing the actual effect of its pacing measures.
Partial suspension or pacing (or both) could be sufficient to mitigate an event of delay. Whether these remedies are convenient or appropriate in COVID-19 situations will depend on the parties' attitude to such events and the impact of the pandemic on the performance of the parties' respective contractual obligations.
Parties should carefully review their contractual terms, objectively assess whether COVID-19 has had any direct impact on the performance of their respective obligations, consider ways to mitigate the event taking into account the above and balance the legal, contractual and commercial remedies before deciding on what course of action to pursue and proceed accordingly.
Importantly, the parties should continue to maintain detailed records of such events and effects as these will become a crucial element for demonstrating their respective claims against the other.