Covid-19 and international projects: what can be done if your project is affected?

As the impact of Covid-19 spreads parties to construction and engineering projects worldwide are asking if force majeureapplies to excuse them from performance of their obligations or whether there are any other ways they might be able to put off or avoid performing. These questions can often arise in the context of FIDIC-based contracts.

Force Majeure

The 1999 and 2017 editions of the FIDIC Red, Yellow and Silver Books deal in similar ways with force majeure.

Clause 18 in the three 2017 contracts and clause 19 in the 1999 editions deal with events or circumstances which prevent one of the parties from performing some or all of its obligations under the contract; note that prevention is required, as opposed to hindrance or delay. ‘Force Majeure’ is the name given to such events in the 1999 editions whereas in the 2017 editions they are called ‘Exceptional Events’.

An Exceptional or Force Majeure event is an event or circumstance which in both editions of the Books is defined as having four characteristics:

i. it is beyond a party’s control

ii. the party could not reasonably have provided against the event or circumstance before entering into the contract

iii. having arisen, the party concerned could not reasonably have avoided or overcome it, and

iv. the event or circumstance is not substantially attributable to the other party.

Examples of Exceptional or Force Majeure events are set out in the contracts and include such things as war, hostilities, invasion, act of foreign enemies and ‘natural catastrophes’ such as earthquakes, tsunamis, volcanic activity, hurricanes or typhoons.

Unlike other force majeure clauses, ‘epidemic’ is not expressly included in the FIDIC examples. It would seem that Covid-19 is closest to a ‘natural catastrophe’, although even if the pandemic does not fit neatly into that category it could still give rise to a Force Majeure or Exceptional Event since the list in clause 18 or 19 contains examples only and is expressly not to be taken to be exhaustive. Other types of event or circumstance may also qualify as Exceptional or Force Majeure events if they have the above four characteristics. Covid-19 might count. Whatever the type of event or circumstance, the party seeking to rely on it has to show that in its particular situation the four characteristics, which are highly fact-sensitive, all apply.

Thus if the virus took hold after the contract was formed and there are no steps the affected party (the contractor, say) could realistically take to overcome or avoid its impact (suppliers have been embargoed from shipping materials to site; the workforce is told to stay indoors, as is now happening in the UK) there may be a good basis for relying on the clause.

The affected party must show that the event or circumstance caused it to be prevented from performing its obligations under the contract; a causal link between the event and the prevention of performance of any (not necessarily all) of its obligations under the contract must be demonstrated. Depending on the applicable law, the force majeure may have to be the sole effective cause. The affected party must continue to perform its other (unaffected) obligations; and in both editions of the contracts payments of sums due must in any event continue to be made. This can be critical to the cash flow of contractors in a situation like the present where the effects of the virus could be prolonged.

Certain formalities must be observed. A notice of the event must be given, specifying which obligations are affected, within 14 days after the party became aware, or should have become aware, of the event; it is then excused performance of the obligations which it is prevented from carrying out by reason of the event for as long as it is so prevented, and may claim an extension to the contract completion date if delay results to that date; in some circumstances, the affected party may also claim payment of additional costs.

Of particular relevance now is that if the effects of an Exceptional Event or Force Majeure continue beyond a certain point the FIDIC contracts allow either party, contractor or employer, to terminate the contract. In both editions of the three Books, if the execution of substantially all the works in progress is prevented for either a continuous period of 84 days or for multiple periods totalling more than 140 days due to the same Event or Force Majeure then either party may end the contract by giving the other seven days’ notice.

Other types of supervening event

If a party affected by Covid-19 or a similar situation can rely on a force majeure clause it may not need to invoke any other basis for seeking to be excused performance. The FIDIC forms do however provide in both editions for the parties to be released from performance of their obligations under the contract where any event outside the control of the parties, including but not limited to an Exceptional Event or Force Majeure as defined, occurs which either

a) makes it impossible or unlawful for either party or both of them to fulfil their contractual obligations or

b) under the governing law, entitles the parties to be released from further performance.

This provision enables, for example, a contract to be declared ‘frustrated’ by a supervening event if the governing law is English law and the parties to be accordingly discharged from further performance, whether or not the relevant circumstances fall within the definition of Exceptional Event or Force Majeure under clauses 18.1 or 19.1 respectively. Frustration is however a doctrine which is quite narrowly applied and is difficult to establish; other systems of law, if they apply, may have similar doctrines. In both editions, the discharge from further performance is without prejudice to the rights of either party in relation to any previous breach of the contract.

How the 2017 FIDIC contracts compare with the 1999 editions

Let’s look now at some of the main features of the 2017 contracts which distinguish them from the 1999 editions.

Aims

The first thing to say is that many of the new features of the 2017 updates were driven by the need to increase clarity and certainty. Contractor, Employer and Engineer/Employer should know more clearly what was expected of them and when it was expected. Another important aim was to improve project management and reflect international best practice. The Contracts have therefore become more detailed and prescriptive.

New Definitions

Users will find several new definitions, which are now in alphabetical order (clause1.1). ‘Claim’, ‘Dispute’, ‘Notice’ and ‘Programme’ , for example, are now defined terms; ‘may’, ‘shall’ and ‘consent’ are also defined, with the particular aim of assisting users whose first language is not English.

Other important definitions include ‘Particular Conditions’, which is now defined as comprising Part A – Contract Data, and Part B – Special Provisions. ‘Plus reasonable profit’, as used in 1999 Contracts, often caused difficulty. A new definition, ‘Cost Plus Profit’, now applies, and refers to a percentage for Contractor’s profit to be stated in the Contract Data or, if none is stated, 5%.

Notices

One very important procedural change concerns Notices in the 2017 Contracts. ‘Notices’ are now defined, in a new clause 1.3. They must be in writing and identify themselves as a Notice, among other requirements. Notices are particularly important in the 2017 Contracts as

(a) they are required in many more situations than previously and

(b) when given, they trigger time limits.

For example, under new clause 3.5 (Yellow and Red)/3.4 (Silver), if an instruction is a variation the Engineer (Yellow/Red) or Employer (‘ER’) (Silver) should state explicitly that it is a variation. If it is not so stated, but the Contractor thinks that the instruction is a variation, then he must immediately give a Notice to that effect with reasons. If the Engineer/ER does not respond within 7 days, by giving another Notice (confirming, reversing or varying the instruction), he is deemed to have revoked the instruction.

Role of the Engineer

The Engineer/Employer’s Representative’s role in agreeing or determining any claim or other matter arising under the Contract is also set out in more detail than in the 1999 Books, and in a step-by-step fashion with time limits. Clause 3.7 of the Yellow and Red Books 2017, for example, requires the Engineer first to consult the parties to try to reach agreement; if no agreement is reached within 42 days, or the parties give ‘early Notice’ of no agreement, then the Engineer must give a Notice accordingly and within 42 days (or other agreed time limit) must make his determination. If the Engineer is late then, in the case of a claim, the Engineer is deemed to have rejected the claim and, for any other matter, a dispute is deemed to have arisen which may be referred to the renamed Dispute Avoidance/Adjudication Board (DAAB) for its decision. Similar provisions apply in clause 3.5 of the 2017 Silver Book.

Managing the project better and avoiding disputes

New procedures designed to promote best practice and improve project management include requiring the Contractor to prepare and implement a Quality Management System to show compliance with the Contract requirements (clause 4.9.1) and a Compliance Verification System to show that the design, materials, workmanship and certain other matters all comply (clause 4.9.2).There is in general much greater emphasis on dispute avoidance, including an enhanced role for the DAAB in this respect, and promoting co-operation between the parties during the project.

Next time we will look at some of the key new contract clauses in more detail.

Let's get to know the new FIDIC Contracts 2017

By our Fidic accredited course leader William Godwin QC- a highly experienced specialist practising barrister (Queen's Counsel) and arbitrator and legal member of the FIDIC Updates Task Group

The 2017 Red, Yellow and Silver Books are 1.5 times the length of the 1999 editions; they seem much more complex and prescriptive. Why is this?

Before we can understand the new contracts, we have to see how they compare with the 'old' 1999, editions.

So let's look at the main features of the 1999 Books :

Construction contract (Red Book)

Employer Design

Under the Red Book, the Employer is responsible for all or most of the design of the Works.

Measurement

The Contractor’s entitlement is to be paid according to the amount of work he executes in accordance with the Contract, applying the contract rates.

Engineer

There is an important role for the Engineer, to administer the contract and determine claims.

‘Even-handed’ risk allocation

The Contract strives to apportion risk according to each party’s ability to manage and control risk (for example, of unforeseeable physical events which delay the Works or result in additional cost).

Plant and Design Build contract (Yellow Book)

Contractor design

Like the Red Book, theContractor is responsible for all or most of the design of the Works.

Fixed price lump sum

Contractor is entitled to be paid the lump sum price stated in the Contract, subject to adjustments for such things as variations.

Engineer

Like the Red Book, there is an important role for the Engineer, to administer the contract and determine claims.

‘Even-handed’ risk allocation

Also like the Red Book, the Contract strives to apportion risk according to each party’s ability to manage and control risk.

EPC/turnkey contract (Silver Book)

Contractor design

Also like the Yellow Book, thContractor is entitled to be paid the lump sum price stated in the Contract, subject to adjustments. (The matters for which the Contractor may be entitled to such an adjustment are however fewer than in the Yellow Book.) ok.)

Fixed price lump sum

Also like the Yellow Book, the Contractor is entitled to be paid the lump sum price stated in the Contract, subject to adjustments. (The matters for which the Contractor may be entitled to such an adjustment are however fewer than in the Yellow Book.)

No Engineer

Unlike the Yellow Book, there is no Engineer in the Silver Book; the Employer is entitled to administer the Contract directly.

Contractor risk

Also unlike the Yellow Book, the Contractor bears nearly all the risk associated with design, procurement and construction. The Silver Book is used in projects in which the sponsors are particularly anxious to ensure completion on time and within budget. The scope for Contractor’s claims is severely reduced, by comparison with the Yellow Book.

Next time, we will start to look at how the new Contracts compare and contrast with the 1999 editions.

Come to one of our seminars on just this topic, and participate in more depth with case studies and plenty of opportunity for clarification and discussion. See our website for details of courses in London (including two nights’ accommodation!) and Dubai.