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Beware the Knock-on Effects of COVID-19

The outbreak’s impact on construction projects today and in the future

As the worldwide spread of the coronavirus continues, so does the level of uncertainty and concern about its impacts. The focus of the response has been not only to protect individual health, but also to anticipate and mitigate the knock-on effects on companies and economies. The experience of China, the first to deal with COVID-19, is instructive.

The effects of the virus have rippled through nearly every business sector – and in many cases the entire global economy because of China’s key role in it. First, let’s look at some knock-on effects, and then considerations for assessing risk, with special attention to contractual obligations and force majeure events:

There was a sharp rise in the prices of household goods and food due to panic buying. China saw a steep jump in prices in both in January, as the virus spread. The same may be expected depending on the extent to which the virus spreads elsewhere

Oil production – and prices – declined as demand dropped in response to closed factories and travel restrictions. China is the largest importer of crude oil, and crude prices dropped 15 per cent month-on-month at the end of January.

Airlines have seen a decrease in activity in both passenger travel and cargo. Forbes magazine reports worldwide cancellations in meetings, incentives, conferences and exhibitions (MICE), a growing pullback in corporate travel and a drop-off in leisure travel. Further demand declines are anticipated.

Shipping has also been disrupted. China accounts for 35 per cent of seaborne dry bulk imports and 30 per cent of container exports. Some cargo ships with China connections have been denied entry into ports.

Factory closures and disrupted cargo shipments have slowed or stopped supply chains, especially in major manufacturing hubs in China, the world’s largest exporter of manufactured goods, including steel, mechanical and electrical components that are critical to the construction industry. The combined impact of lowered production and interrupted shipments could result in delayed or stalled construction projects.

With Asia-based developers involved in many projects across Canada, the impact of travel bans and business disruptions in Asia could factor into reduced international development.

Force majeure and assessing COVID-19 risk to your business

As I write, COVID-19 is still classified as an outbreak and a global emergency, but more than 1,600 force majeure certificates have been issued in China to protect companies from damages arising from contracts due to the COVID-19 outbreak.

Force majeure is usually defined as a range of items that are not anticipated as of the contract’s date, are beyond the party’s control, not caused by or due to negligence by the party seeking relief, and which prevent or delay it from meeting its contractual obligation(s). Epidemics and sometimes pandemics are often specified as events of force majeure.

When and if COVID-19 is declared an epidemic or pandemic, the language in a specific agreement will determine if protection under force majeure applies. Many construction contracts in Canada specifically include epidemics as a force majeure event. They could provide some relief for impacts of COVID-19 but these may be subject to the local contractual language, whether the challenged party is located in a high-risk area, and whether it has met the threshold of obligation to mitigate for the impacts of the virus.

There is an old saying that it’s an ill wind that blows no good. The threat of COVID-19 presents an opportunity to conduct a risk assessment exercise regarding the exposure of your business whether it is declared an epidemic or not.

Here at BTY, we are providing public and private sector clients developing property and infrastructure assets scenario analyses to determine impact on material costs, labour availability and mobility, and project schedules.

One sure thing amid the uncertainty surrounding the outbreak is that everyone has a chance to learn from the experience. For many businesses this outbreak has set new precedents for risk mitigation going forward, especially the importance of diversifying supply chain sources, design alternatives and distributing location risk. It also invites us to take a closer look at contractual language in current negotiations and future agreements.

If you would like to learn more about how this impacts your project, please connect with us.