Now that the coronavirus COVID-19 is making its presence felt in the Netherlands, the question has arisen as to who should bear the financial consequences in the construction industry - contractors or their clients? Jan Hein Meerburg discusses the legal aspects of this question, and addresses it in terms of the Uniform administrative conditions for the execution of works and technical services 2012 (UAV 2012) and the Uniform Administrative Conditions for Integrated Contracts 2005 (UAV-GC 2005), both frequently used in the construction industry. In doing so, he distinguishes three scenarios:
- due to the outbreak of the disease, the contractor cannot meet its obligations;
- the client cannot meet its obligations;
- neither the contractor nor the client can meet their obligations.
1. The contractor cannot meet its obligations
The illness of employees (including sub-contractors), suppliers and/or other parties who the contractor depends on to realise a project may result in the contractor failing to complete that project in a timely manner and/or incurring additional costs. For example, replacement employees need to be brought in for sick workers and materials potentially purchased elsewhere than usual, resulting in additional costs and lost time. The contractor may also be confronted with delays or cancellations of certain deliveries (e.g. from China or Italy) due to restrictions.
The relatively brief statutory provisions concerning contracting work (Title 7.12.1 of Book 7 of the Dutch Civil Code) provide no specific rules regarding illness, except that the agreement may be terminated in case of the contractor’s death or permanent incapacity for work (Section 763 of Book 7, DCC). Apart from this provision, which only applies to one-man businesses, illness is considered a general business risk. In principle, that risk lies with the party that falls ill or that suffers the negative consequences of such illness.
However, the contractor may be able to invoke Section 753 of Book 7 DCC in such cases. This provision provides the contractor with the possibility of increasing the contract price when:
i) cost-increasing circumstances exist; which
ii) arise or come to light only after the conclusion of the agreement; and which
iii) cannot be held against the contractor.
Depending on its severity and impact in concrete situations, the present disease outbreak may meet these criteria. As previously stated, the outbreak may lead to additional costs, resulting in criterion (i) being met. Where existing contracts are concerned, this is a circumstance which has occurred only after the conclusion of the agreement (criterion ii). Criterion (iii), however, is more difficult to substantiate, considering that broadly speaking, illness constitutes a general business risk. However, the present outbreak does not appear in all cases to submit easily to comparison with ‘ordinary’ illness. For example, if deliveries cannot go ahead (materials from areas which are locked down) or an entire team of workers is incapacitated, then circumstances might be said to exist which may not reasonably be held against the contractor (Section 75 of Book 6 DCC). The contractor may then claim reimbursement of costs.
In addition, the general law of obligations provides a number of further pointers. In particular, a rule does not apply when, in the given circumstances, it may be considered unacceptable according to the standards of reasonableness and fairness (Section 248(2) of Book 6 DCC). In addition, a contract may be amended or terminated by the courts on the basis of unforeseen circumstances of such a nature that the other party, according to standards of reasonableness and fairness, cannot expect the contract not to be amended (Section 258(2) of Book 6 DCC). However, both rules are applied very cautiously. The criteria for them are not easily met, where the principle once again holds that illness is a business risk to be borne by those who are confronted with it. However, should the outbreak of the disease lead in a concrete situation to what might be considered “extreme” consequences - for example, if the contractor is no longer in a position to carry out the work (or do so in a timely manner) due to employee sickness - then reliance on these provisions may prove successful.
To the extent that this differs from the aforementioned Section 753 of Book 7 DCC, UAV 2012 states that cost-increasing circumstances only occur when the circumstances ‘considerably increase’ the costs of the work (§47(1) UAV). The question of what constitutes a considerable increase has been the subject of many legal proceedings. An increase in the contract price of at least 5% is often referred to in this context (cf. Dutch Arbitration Board for the building industry 23 March 2017, no. 72.009).
Furthermore, according to UAV 2012, the contractor is entitled to reimbursement of costs and/or extension of the time limit where costs and/or delays are the result of amendments to government or other authorities’ regulations (§6(11) and (12) UAV). Therefore, if the contractor cannot obtain materials because, for example, these are at a location which has been closed by order of the competent authorities, it may be able to claim reimbursement of costs and/or an extension of the time limit.
In deviation from Section 753 of Book 7 DCC discussed above, UAV-GC 2005 includes an exhaustive list of situations in which the contractor is entitled to reimbursement of costs and/or extension of the time limit. §44(1)(a) UAV-GC refers to a right to reimbursement of costs and/or extension of the time limit where UAV-GC expressly provides for it. In addition, particular reference is made to §11(2) and (3) UAV-GC, which like UAV, provides that the client is liable for the consequences of amended government regulations. §44(1)(b) UAV-GC appears not to offer the contractor any relief. This provision gives the contractor the right to reimbursement of costs and/or extension of the time limit if the costs and/or delay are caused due to circumstances for which the client is responsible under the agreement (rather than being attributable to the contractor, as included in Section 753 of Book 7 DCC). The outbreak of disease does not, however, appear to meet this criterion; nowhere in UAV-GC is it stated that the client is responsible for this. Lastly, the contractor may claim from the client in case of unforeseen circumstances (§44(1)(c)). This is in fact a restatement of the rule - to be applied cautiously - discussed above in Section 258 of Book 6 DCC.
2. The client cannot meet its obligations
There are also situations conceivable in which the client cannot meet its obligations.
For example, the client must make the construction site available to the contractor (§5(1)(b) UAV / §3(1)(b) UAV-GC) and provide certain licences (§5(1)(a) UAV / §9 UAV-GC). Should the client fail to do so, for example due to the illness of its construction manager or by order of the authorities, then it becomes liable for compensation (Section 74 of Book 6 DCC) and the contractor may claim from it reimbursement of costs and/or extension of the time limit.
In such cases, the client may also order the contractor to suspend the work. This is effectively a modification to the contract and, pursuant to the law, may lead to a claim for payment for contract extras on the part of the contractor (Section 755 of Book 7 DCC). Where UAV or UAV-GC apply, the client is entitled to suspend the work, though according to those conditions, the contractor must also be compensated financially (§14 UAV 2012 and §16 UAV-GC).
It is possible that the statutory provisions of Section 248/258(2) of Book 6 DCC may be of use to the client here (cf. the examples provided at 1 above). However, as stated, these provisions are applied only very cautiously.
3. Neither the contractor nor the client can meet their obligations
In this situation, from a strictly legal point of view, the first party to fail to perform even after it has been given notice of default, is in default (Section 81 of Book 6 DCC). Thus, the client must first make the site available. As long as it fails to do so, the contractor cannot be in default of its obligation to deliver the work in a timely manner (Section 58 of Book 6 DCC). If, however, it is clear that neither party can perform the agreement, for example because the client cannot make the site available and the contractor cannot provide any employees, then reliance on the foregoing default rule will very likely be deemed unacceptable. Section 258(2) of Book 6 DCC discussed above may provide some relief here: the courts may then determine the way in which the agreement may reasonably be amended or terminated in order to accommodate the situation which has arisen and the interests of the parties.
In conclusion
The above rules provide the contractor and the client with some pointers when adopting positions in respect of their counterparties should they be confronted with the negative consequences of the present disease outbreak. However, in case of an impasse, it would make sense to seek a reasonable solution which accommodates the interests of both parties, seeing as neither of them could have foreseen this situation when they concluded the contract.
Please feel free to contact Jan Hein Meerburg for advice in relation to specific cases.
