The impact of COVID-19 on contract law

The impact of COVID-19 on contract law

The COVID-19 pandemic may have various impact on contractual rights and obligations under construction law, such as the lack of workers and materials. As an example, contractors may have the right to extend the construction period and each of the parties to a construction agreement may have the right bring additional claims under the agreement. 

It is important to keep in mind any force majeure clauses, i.e. with regards to any uncontrollable and unpredictable external events, which can release the contracted parties from their contractual obligations. or postpone their commitments. if certain conditions are met.

Furthermore, it is important to notify the counterparty of any events that may lead to non-performance of contractional obligations and the effect it may have on the  respective agreement.

Evaluation of force majeure

When evaluating force majeure clauses in light of the COVID-19, there are mainly two factors that is key to consider. Firstly, whether the pandemic can be considered to be a force majeure event, and secondly, whether the relevant consequences of the pandemic can be classified as such.

In order to trigger a force majeure clause, there are also other issues that need to be considered as well, including  the following.

  • Is it impossible for the contractor to satisfy its obligations under the agreement due to the pandemic?
  • Is there a direct cause between the pandemic and the impossibility of satisfying the obligations under the agreement?
  • Has the contractor applied any  measures to limit the pandemic in respect to its operations, and if so, are they reasonable and in line with good market practice?

Where there is doubt about whether the event in question is considered a force majeure event, the provisions of Article 36 of Act no. 7/1936 on contracts, agency and void legal instruments may in certain cases be applied. The provision provides that a contract may be set aside in whole or in part, or amended, if it would be considered unfair or contrary to good business practices to maintain it.

Extension of project timeframe

According to Article 5.2.2 (c) of the IST 30/2012, general terms for tenders and contracts on construction work, a contractor can claim an extended time frame for a project that is severely affected by an uncontrollable external event that is not the fault of the contractor. It is clear that the COVID-19 pandemic could fall under this definition, as well as the measures put in place by the government in response to the pandemic, but this needs to be assessed on a case by case basis. With regards to such assessment, the actions of parties to construction agreements, due to the pandemic, may be subject to dispute.

Amended cost of project

According to Article 5.1.13 of the IST 30/2012 terms, parties to construction agreements may submit additional claims if there has been an amendment of legislation, general administrative guidelines or other changes that affect the cost for either of the parties, whether increased or decreased, for the duration of the agreement, which is not reflected in the provisions of the respective agreement.

Should you require any assistance, please contact Benedikt Egill Árnason, Erlendur Gíslason or Hjördís Halldórsdóttir, partners at LOGOS.

Benedikt Egill Árnason

Benedikt Egill Árnason

Erlendur Gíslason

Erlendur Gíslason

Hjördís Halldórsdóttir

Hjördís Halldórsdóttir