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How will the epidemic affect meeting obligations from construction contracts? (PART II)

In our first article about construction contracts during the current epidemic, we focused on construction contracts that employ FIDIC contracts. The following article presents the legal consequences the epidemic can have on “traditional” construction contracts. Read on for a short overview of the legal institutes that could be used to solve potential legal complications that may occur as a consequence of the coronavirus epidemic.

Imagine a situation in which a contractor was unable to supply sufficient employees or material due to the epidemic and therefore could not fulfil its obligation. Or was able to fulfil its obligation, but with delay (despite adjustment measures). In such a case, can a contractor demand an extension time for the completion of the works? Is the employer entitled to claim contractual damages? Is there any liability for damages arising from such a breach of contract? On the other hand, the employer might be interested in the options for changing the contractual price as a consequence of an extraordinary event that is an epidemic.

In principle, it could be concluded that the measures taken to contain the spread of the CoVID-19 virus (closing schools and kindergartens, closing country borders, the general quarantine of the entire population, etc.) constitute elements of force majeure that affect the contractual relationship between clients. In such situations, the legal order mitigates the position of the party that has found itself in a disadvantageous situation through no fault of its own and whose completion of an action is affected by an event that could not have been foreseen, avoided, or averted (i.e. force majeure).

General provisions of the Obligations Code (OZ)

The general provisions of the OZ list several institutes governing situations in which a contracting party is unable to fulfil its obligation or completes it with delay. The most applicable are:

  • Argument of vulnerability (Article 102 of the OZ), which states that in the event in which the material circumstances deteriorate to the extent that it is uncertain that the party will be able to perform its obligations, the other party can defer performance until the affected party performs the obligations or provides sufficient security that the obligations will be performed;
  • release of debtor’s liability (Article 240 of the OZ) for damages if it is shown that the party was unable to perform the obligation or was late in performing the obligation owing to circumstances arising after the conclusion of the contract that could not be prevented, eliminated, or avoided;
  • exclusion of liability for contractual penalties (Article 250 OZ) if the non-performance or delay occurred for a reason for which the debtor is not responsible; and
  • impossibility of performance (Article 116 of the OZ) in cases in which the performance of obligations of a party becomes impossible (for objective reasons), the other party’s obligation also expires and the rules are used on the return of that which was acquired unjustly.

Special Usages for Construction

Another relevant source regarding construction contracts are the Special Usages for Construction (PGU), which are used even if the parties have not agreed on their use, as some aspects are regulated in more detail here than in the general rules of the OZ.

The Usages regulate in more detail than the OZ the following sets of rules that (can) apply in determining the potential consequences of an epidemic:

According to Article 23 of the PGU, each contracting party (both the contractor and employer) has the right to demand changes to the contract price, if extraordinary events occur that affect its amount, wherein extraordinary events are regarded as circumstances that could not have been predicted upon the contract conclusion and could not have been avoided upon their occurrence, not their affects alleviated. Some examples of this are listed below.

While the list of extraordinary events does not include an epidemic, it does include measures introduced by orders of competent authorities, price changes for materials and services of others on the market, and shifted costs of living. This indicates that the epidemic itself probably will not constitute a justified reason to alter the contract price, but an extraordinary event that comes as the consequence of the epidemic could constitute such a reason, if it actually affects the agreed upon contract price.

On the other hand, extreme natural events, which undoubtedly includes an epidemic, are listed as a reason in Article 42 of the PGU giving the contractor the right to demand an extension of the time for completion, but only if the altered circumstances prevented the contractor from performing works. The PGU expressly states measures that have been implemented with orders by the competent authorities are a justified reason for an extension of the time for completion.

It should be emphasized here that despite the declared epidemic, works in the construction sector continued on in many cases, which alleviated the effects of the coronavirus consequences. The Ordinance on the provisional prohibition on the offering and sale of goods and services to consumers in the Republic of Slovenia1 , which entered into force on 16 March 2020, prohibited only those service providers from performing construction works who were offering construction services to consumers. The Ordinance was amended on 3 April 2020, allowing construction work in uninhabited constructions sites, houses, or apartments; the performance of the works had to ensure there would be no contact with the consumers. Many contractors adapted to the situation by ensuring the proper health and safety measures, thus handling an extraordinary event that legally does not constitute force majeure.

In this case, the contractor must submit the request for an extension of the time for completion to the employer as soon as the reason justifying the extension has been determined.

Pursuant to Article 47 of the PGU, force majeure has a direct effect on the contractor’s introduction into the works. The time for completion is extended if the contractor was unable to perform the works in time due to force majeure. The time for completion is extended for the period of the duration of force majeure and as long as is necessary for its consequences to be resolved.

It should be noted regarding all of the stated provisions, that an analysis will need to be made for each individual case as to whether the contractor could have avoided the extraordinary event or mitigated its effects.

Mega Corona Act

Construction contracts concluded between private entities and public sector entities will be governed by a different legal regime, as legislators have already projected the epidemic will impact the time for completion and the institute of contractual penalties. An analysis of whether the contractor could have avoided the extraordinary event of alleviated its effects will not be necessary in these cases. The Act Determining the Intervention Measures to Contain the COVID-19 Epidemic and Mitigate its Consequences for Citizens and the Economy2, also known as the Mega Corona Act, stipulates in Article 91 that construction contracts concluded by private entities with state bodies or self-governing local communities, public agencies, public funds, public institutes, public service agencies, and other public sector entities that are indirect budget users of the budget of the Republic of Slovenia or of a local community budget (and which do not pertain to supplying goods constituting protective equipment necessary in the fight against the epidemic) will not use the provision on contractual penalties due to delay during the duration of the epidemic and that the contractually agreed upon times for the completion are extended for the duration of the epidemic.

1. Official Gazette of the Republic of Slovenia, no. 25/20, as amended.
2. Official Gazette of the Republic of Slovenia, no. 49/20 and 61/20.