COVID-19 and its impact on offshore construction

July 1, 2020
Offshore projects are being delayed or postponed indefinitely and companies along the supply chain are facing substantial difficulties.

Although the disruption caused by the COVID-19 pandemic has started to ease in some parts of the world, associated legal and practical issues are emerging at the same time. Offshore projects are being delayed or postponed indefinitely and companies along the supply chain are facing substantial difficulties.

As the recent wave of legal notes and briefings relating to Force Majeure (FM) under English Law have all made clear, there is no set definition of FM in this legal system. In other jurisdictions, such as France or China, the concept could be implied into the contract without being expressly mentioned. Things will therefore turn, as is so often the case, on the precise wording of the relevant contract and the applicable law. Under English Law, the difference between the standard wording in two of the most commonly used forms makes this point clear:

  • The standard form LOGIC contracts, including the recent 2018 General Conditions of Contract for Offshore Decommissioning, all contain an exhaustive list of possible FM events which does not include ‘pandemic’ or anything relating to illness and disease. As such, unless the wording has been amended, COVID-19 and its consequences will not be sufficient to trigger this clause (subject, however, to the change in law provision dealt with further below).
  • The 1999 Edition of the FIDIC Yellow Book, the version used most commonly for offshore wind projects, contains a non-exhaustive list which is likely to include events arising from COVID-19.

One point to consider is whether the contract permits a party to argue that new regulations put in place due to the pandemic amount to a change in law and thereby allow a claim for payment arising from any extra costs incurred. Both the LOGIC standard forms and the FIDIC Yellow Book contain wording that may cover such a situation.

Due to the complexity of the legal situation, it is possible that clients, other contractors of clients (i.e. fabrication yards), or subcontractors involved in a project may have claimed FM incorrectly. Under English Law the effect of a possible FM event on a party’s contractual obligations will depend on several points, all relating to whether performance has actually been prevented. In particular:

  • What is the specific obligation that has been hindered by the FM event?
  • The FM event must be the “sole effective cause” of the inability to perform (see the 2018 decision of the English High Court in Seadrill Ghana Operations Limited v Tullow Ghana Limited, in which Haynes and Boone acted for the successful party). Should an equipment malfunction arise which also delays performance, it may well not be possible to rely on FM for that delay.
  • If there are alternative methods of performance, these should be considered and used where possible. A party cannot simply ‘down tools’ during the pandemic without investigating alternatives.
  • Some contracts may require a party to exercise reasonable endeavors to overcome a FM event. What is deemed ‘reasonable’ will be fact-specific and will depend on the wording of the relevant contract. The burden of proof will be on the party seeking to rely on the clause to demonstrate it had exercised reasonable endeavours to avoid or circumvent the force majeure.
  • Has compliant notice been provided in accordance with the terms of the contract? 

If a party declares FM but is not contractually entitled to do so, it is potentially in breach of contract. And should such a declaration amount to evidence that it does not intend to perform the contract, that could allow the other party to terminate and claim damages. It is vital, therefore, that any response to a FM notice is carefully worded to ensure it is not deemed a waiver of your rights to challenge the validity.

The current crisis has not only highlighted potential lacunae in existing contracts but will need to be taken carefully into account when entering into new contracts and subcontracts for execution over the months ahead. Several key points should be considered:

  • Most FM clauses require that the relevant event was unknown, or could not have been predicted, at the date of execution of the contract. Unless these standard terms are modified, and COVID-19 is handled explicitly, it may prove difficult to demonstrate that the crisis and its consequences are caught by the FM clause. The current and future impact therefore needs to be discussed by the parties and incorporated into the relevant wording.
  • Ensure there are no gaps between the provisions in any subcontracts and those in the main contract. Be careful of any local law definitions of FM: should these permit a subcontractor not to perform, make sure that this excuse is passed up the chain. 
  • The contract should address explicitly the extent to which a party is entitled to recover costs relating to delays incurred, or an inability to perform, arising from either COVID-19 or any measures put in place to combat it.

There are also assorted practical issues that the industry is currently facing - notably, is entry of the relevant vessel permitted to the area? Many countries have introduced lockdowns and restricted entry, but exemptions may apply to oil and gas or wind projects. However, the position may change rapidly and will therefore need to be carefully monitored.

Problems affecting the crew or other personnel are also substantial, in particular:

  • Are there travel restrictions on specific nationals to the relevant jurisdiction, and are exemptions in place for specific types of workers?
  • Which checks are necessary during crew/personnel changes?
  • Are quarantine provisions in place on-board, and also rules to safeguard the crew/personnel (including cleaning and personal distancing)?
  • How can safe minimum staffing levels be maintained in the event of an outbreak, and what happens if this requires crew/personnel to stay on-board for longer than contractually required? And are there employment regulations in the relevant jurisdiction that set a maximum number of days that individuals can remain on-board?
  • If additional crew/personnel must be sourced at short notice via agents, can this be compensated under the contract with the client? What provisions exist to expedite this process in order to mitigate any delay?

Will such issues leave a contractor liable for liquidated damages due to delay, despite exercising due diligence and acting prudently? This will all depend on the wording of the contract itself and whether reasonable practical steps were taken to mitigate the impact.

In this complex and fast-moving situation, it is vital to ensure a COVID-19 taskforce is in place to monitor the situation and respond quickly to changes and that detailed records are kept. Communication with employees, governments, subcontractors, and contractors is critical. Relevant industry associations may also provide assistance to facilitate the safe continuance of operations, particularly where the wellbeing of workers is at stake.

Thinking outside of the box may prove to be a highly beneficial strategy during the current global turmoil. Each situation, and each contract, will be unique and should be carefully reviewed before any steps are taken.

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