After several years of economic retraction, 2019 was a year of optimism for the construction sector in Brazil, with new concessions and privatisations being implemented by the federal government.
These required more construction activity and a consistent decrease of the interest rates, creating a favourable scenario for new private investments in this sector.
As 2020 began, rumours of a new virus were being heard in Brazil, but no one expected what was about to come.
The covid-19 pandemic has hit several Brazilian states hard and created an unprecedent impact on the Brazilian economy, due in large part to the restrictions imposed by the public authorities on some economic activities.
Even though construction was considered by some state laws (such as São Paulo, Minas Gerais and Rio de Janeiro) as an essential activity and not subject to temporary restrictions during the pandemic of the covid-19, the fact is that the construction sector is severely affected by the current situation.
The ultimate impact of the covid-19 pandemic in the Brazilian construction sector remains unknown as the rates of new cases and deaths are still growing fast, despite measures taken by the public authorities. It is still unclear when things will return to normal (if ever).
What can be verified at this point is that owners (public and private), developers, contractors, lenders, buyers and all other players in the construction market are being affected directly or indirectly by this unprecedent event.
In these challenging times, construction lawyers have an essential role to play in supporting the construction sector, providing the market with fast and effective alternatives to overcome the obstacles created by the covid-19 pandemic.
Construction projects involve a multitude of contracts, players and legal issues. Because of this diversity, the field of construction law brings in to play many legal disciplines, such as corporate; real estate; insurance; taxation; environment; health and safety; labour and employment; and dispute resolution.
With broad spectrum covered by construction law in mind, this article will discuss some alternative approaches the main problems being presented to the construction industry by the the covid-19 pandemic.
Construction projects are very prone to conflict and even more in some countries like Brazil, where large projects that do not end up in litigation or arbitration are the exception.
As Brazilian construction lawyer and arbitrator, what I was able to notice during my career is that construction disputes are largely caused by the lack of a collaborative approach by the contractual parties on trying to solve the problems caused by unforeseen conditions, variations, quality of technical specification, availability of information, administration and management, among others.
As mentioned above, the covid-19 pandemic is having an impact on all players of the construction industry; the full impact is still not clear. The pandemic has created an unprecedent scenario where all parties are affected, for reasons that are unique to these circumstances; and there are no established precedents, as litigation on this issue is still at the early stages and there is no clear direction provided by case law.
In Brazil, one of the pandemic’s main impacts on the construction sector concerns the real estate market. With several people losing their jobs or having their companies shut down by the public authorities, sales of most real estate developments have stopped, and a significant number of purchase and sale agreements are being cancelled by buyers.
Without a clear understanding of when and if this scenario will change, developers are dealing with the tough challenge of deciding what to do with the construction works (and contracts) that are already under way in order to avoid or mitigate their losses, considering that most or all of their projects are being affected at the same time.
On the other hand, even though some Brazilian states have not imposed restrictions on construction-related activity yet, contractors are also affected by the covid-19 pandemic. Problems include the transportation of workers; employment; civil and criminal liabilities in connection to contamination at a worksite; strikes by workers who do not want to be exposed to the contamination risks at a worksite; financial impacts caused by the termination of contracts from other projects; and many others.
In this situation, when parties turn to the construction contract, the applicable law and/or precedents established by the Brazilian courts, they encounter uncertainty, as this is an unprecedented situation that parties, lawyers, legislators and judges could have never foreseen.
For instance, even though most construction contracts have force majeure clauses – and Brazilian law in certain specific cases may grant a contractual party the right to suspend, review or terminate an agreement due to unforeseen and extraordinary events – the current case law provides that a decrease in sales, or the termination of purchase and sale agreements of real estate development units, are generally insufficient grounds on which to grant the developers that same right. Nonetheless, in light of the extraordinary and unprecedented circumstances surrounding the pandemic, there is some question as to whether or not case law will remain unchanged.
The same can be said about the impact of the pandemic on contractors in Brazil. Usually, the contract provisions establish that the contractor is exclusively liable to all risks arising from problems in the transportation of workers; employment; health and safety issues; and any financial difficulties on the part of the contractor. However, will the courts review such provisions, by request of the contractors, due to this unprecedented pandemic?
There is no doubt that in the current situation – wholly unprecedented, and with effects that remain unpredictable – self-composition will likely be the best alternative for dispute resolution. Aside from the savings made in costs and time, self-composition is usually much more flexible in addressing parties’ needs: paramount in a scenario of uncertainty where case law is not yet clear.
In this sense, construction law offers collaborative alternatives to dispute resolution, such as negotiation and mediation, to support the parties in overcoming the problems affecting the project and the parties’ ability to comply with its contractual obligations.
Such alternatives are in line with the principle set forth in article 422 of the Brazilian Civil Code, which establishes that the parties shall negotiate and act in good faith for the duration of the agreement, as well as with some recent decisions from the Brazilian Courts dealing with the impacts of the pandemic.
Also, relevant courts – such as the Court of Appeals of the State of São Paulo – are issuing statutes supporting the use of conciliation and mediation to deal with the effects of the pandemic.
By proposing the use of such alternatives, which are supported by Brazilian law and courts, construction lawyers can offer their clients a solution that may solve the problems affecting the parties and the construction project, but which does not incur the risks and costs of a litigation or arbitration. This will help to preserve the commercial relationship between the client and the project.
Contracting parties usually spend lots of time and effort negotiating construction agreements, but quite often neglect to properly administer their contracts.
In normal conditions, construction lawyers always encourage their clients to undertake proper contract administration for the duration of the agreement – this is a must for the success of any construction project.
An efficient contract administration seeks not only to control the fulfilment of the contractual obligations and requirements, but also to anticipate and mitigate any negative impact that may occur within the duration of of a construction agreement.
In this new scenario, with an unprecedented pandemic, the recommendation to focus on precise contract administration should be reinforced.
The basis of proper contract administration is “know your contract”. Although this seems obvious, in this author’s experience one of the main causes of problems and disputes in construction projects is the lack of knowledge by the contracting parties about the details and provisions of the construction agreement (after all, most people only reach for their contracts when things start going bad). Such documents give the parties several obligations and proceedings to be followed on time and in an appropriate manner. Intimate knowledge of the contracts also allows parties to ascertain the risks they have undertaken via the contract, which is essential when planning mitigation strategies in the context of the pandemic.
With the effects of the covid-19 pandemic escalating, and with all the current and potential impacts on the contracting parties and the construction project, a thorough knowledge and understanding of all contract provisions and proceedings that may apply is key.
It is very common in construction agreements to have proceedings and requirements dealing with unforeseen conditions and force majeure, which may set forth details of notices, deadlines and prescribed actions from the parties. Knowing and understanding these provisions may preserve the party’s contractual rights, as some contracts establish that if the notices, deadlines and actions are not followed, the party loses the right to claim: suspension or termination of the contract; additional time to fulfil their obligations; or compensation for losses incurred.
It is important to note that keeping proper records of the fulfilment of all contractual requirements and proceedings, as well as any evidence of any external impacts on the situation, is also essential to protect the party’s rights in times like these. So, it is recommended that all communications in this respect are saved in writing, and seen by a construction lawyer, and that any major impacts are recorded in daily reports and meeting minutes.
Maintenance of proper records has been, in this author’s experience, one of the main factors for success in litigation, and one of the main drivers of settlements that occur before litigation takes place. With proper records, a party will be in a much stronger position to negotiate their claims and to obtain a positive settlement without incurring the costs of time and money associated with litigation.
Finally, proper contract administration during the pandemic also requires the parties to anticipate possible negative impacts that may be suffered, and to take the necessary measures in order to mitigate the existing and potential impacts, in line with the duty to mitigate losses principle (that derives from the good faith principle established in articles 422 and 187 of the Brazilian Civil Code) and with contractual provisions that impose such obligation to the contracting parties.
There is no doubt that acting diligently, in good time and an appropriate manner, and in good faith, and following the best practices of contract administration, will improve the chances of a contracting party overcoming the obstacles created by the pandemic.
The covid-19 pandemic affects not only the construction agreements that are under way, but also new agreements that are being carried out.
For new construction agreements created during these times, the challenge for the contracting parties and their lawyers is to find the appropriate provisions and proceedings that will allow the project to be built on time and within budget – even with all the existing restrictions and impacts, as well as the continued uncertainty regarding the future.
In this sense, it is strongly recommended that the contracting parties negotiate the contractual provisions that directly or indirectly deal with this unprecedent situation, including extension of time provisions, changes in the law, force majeure, unforeseen conditions, mitigation of losses and insurance, among others, in order to address the issues currently having an impact on existing construction agreements.
Moreover, the usual structure of risk allocation shall be carefully evaluated, considering the ongoing climate of uncertainty.
Finally, it is recommended that the contracting parties establish contractual collaborative methods to address the impact of the pandemic, such as parties’ committees, negotiation and mediation.
There is no doubt that construction law will be more essential than ever to support the construction industry in these challenging times, providing viable solutions to overcome obstacles that sometimes look insurmountable. By properly applying and administering the construction contract, parties will be able to solve or mitigate most circumstances arising from this unprecedented crisis. By employing collaborative methods of dispute resolution, parties can better tailor a solution to a given dispute before it devolves into litigation, preventing unnecessary costs of time and money, as well as preserving the contract and/or relationship between the parties.