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.