Now that many construction and engineering contracts have recommenced after a period of shut down or slow down due to the issues surrounding Covid-19, many Contractors and Employers are having to assess and deal with the effects on their projects including whether extensions of time and damages should be awarded to the Contractor. In this article, I consider the issues that arise and the position of the parties under the FIDIC suite of contracts.
Most FIDIC contracts in the UAE utilise the law of England & Wales or the Federal Laws of the UAE. Additionally, although FIDIC has published their 2017 updated form of contract most projects are currently using the previous versions originally published in 1999 or, in some cases, the earlier versions. In order to be relevant to most readers, I have concentrated on the terms of the 1999 suite of contracts. This being the case I should mention that the 2017 suite of contracts are not significantly different but rather have been re-written so as to provide greater certainty and clarity so that the Employer, Engineer and Contractor understand their respective roles and obligations to reduce the potential for disputes. The Dispute Resolutions Procedures have also been updated so as to provide a more flexible approach. ‘Force Majeure’ under the 1999 suite of contracts has been replaced by ‘Exceptional Events’ under the 2017 suite of contracts but the emphasis and direction of these clauses remain essentially the same. The changed wording is, in reality, an effort by FIDIC to avoid the pre-conceptions of Force Majeure in civil law countries and allow the parties to understand what FIDIC meant by the terminology used. Therefore, much of what is said in relation to the 1999 suite of contracts and Force Majeure is pertinent to the 2017 suite of contracts as well.
Before looking at the contract itself it is perhaps worth noting that Force Majeure does not ordinarily result in a Contactor being awarded damages for delay. Under most contracts and legal systems Force Majeure is seen to be an event that prevents the works being carried out but the event is not one that is a fault of the Employer or the Contractor but rather an event which could not have been foreseen by either party and thus the financial effect should be neutral. In other words, neither party has accepted or indeed seen the risk of the Force Majeure event occurring as it was not within either party’s contemplation at the time that the contract was entered into.
FIDIC expand this idea and set out definitions as to what their use of the term means. It is important to understand that any case law or interpretation based on civil law concepts that deal with Force Majeure may not be applicable when construing the FIDIC suite of contracts. Care should be taken when considering case law of civil law interpretations outside of the FIDIC contracts to ensure that the specific issues being considered to do indeed fall within the scope and wording of the FIDIC suite of contracts.
FIDIC DEFINITION OF ‘FORCE MAJEURE’
Sub-Clause 19.1 (Definition of Force Majeure) in the Red Book states:
‘In this Clause, “Force Majeure” means an exceptional event or circumstance:
(a) which is beyond a Party’s control,
(b) which such Party could not reasonably have provided against before entering into the Contract,
(c) which, having arisen, such Party could not reasonably have avoided overcome, and
(d) which is not substantially attributable to the other Party.’
The clause then goes onto to say:
Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, so long as conditions (a) to (d) above are satisfied:
(i) war, hostilities (whether war be declared or not), invasion, the act of foreign enemies,
(ii) rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war,
(iii) riot, commotion, disorder, strike or lockout by persons other than the Contractor’s Personnel and other employees of the Contractor and Subcontractors,
(iv) munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radioactivity, and
(v) natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.’
Accordingly, under FIDIC 1999 Force Majeure not only needs to fall under categories (a) to (d) but also needs to encompass the types of exceptional event and/or circumstance listed at, although not limited to, (i) to (v).
Therefore, the first step is to consider whether Covid-19 falls under this definition of Force Majeure as set out within the FIDIC 1999 contracts. Looking at each category we can see:
- There can be no doubt that Covid-19 was and is beyond either party’s control.
- It could not have been reasonably provided for when entering into a contract prior to February 2020 (albeit that the actual knowledge of both parties may need to be looked at to ascertain whether the incidence of Covid-19 could have been known about and what precautions or other steps could have been taken to guard against the potential effect on the contract works).
- Once arisen Covid-19 could not be easily avoided or overcome. The actual circumstance in relation to each contract would need to be looked at.
- It is obvious that Covid-19 could not be attributed to either party.
Thus, whether Covid-19 falls within the four categories will be a matter of fact.
Interestingly in the UK, the Government did not regard Covid-19 as an event of Force Majeure as shown under the IPA issued on 2 April 2020:
“As a matter of the contract, the Government does not regard COVID-19 as an event of force majeure and therefore expects that best efforts are made by all parties for the continuation of service provision under PFI contracts at this critical time for the country”.
This view was also formed in many other countries across the world which is unsurprising. No government wishes to find itself liable for delays and costs (where applicable) to contracts entered into on its behalf. Therefore, whilst any government pronouncement needs to be looked at carefully this does not create a block on any such claims but does give an indication of a government’s view and the stance that they are likely to take.
Under the UAE Federal Law Article 273(1) states:
“In contracts binding on both parties, if force majeure supervenes which makes the performance of the contract impossible, the corresponding obligation shall cease, and the contract automatically cancelled.”
The effect of Covid-19 will need to be considered. Taking a construction contract as an example:
What are the likely effects?
Has the site been closed and if so why?
Was there a lack of resources and materials due to issues surrounding Covid-19? and
Even if the site remained open was there a loss of productivity?
In short, it is arguable that where a contractor has suffered problems in obtaining resources (labour) or materials then this is not Force Majeure as the contract has not become impossible even though it may become commercially unprofitable. This situation would more correctly fall under a claim for delay and/or disruption. Disruption could be argued where a government restriction or guidance causes social distancing to be employed on site.
Additionally, where Covid-19 is causing problems on-site the Contractor would be expected to take mitigating measures to reduce the effect on productivity. Are there alternative modes of delivery and/or alternative sources of labour and materials even where this be more expensive?
It will need to be shown that Covid-19 made the carrying out of the contract physically or legally impossible. Where the works have become more difficult or more expensive to carry out this would not be considered as being Force Majeure but could be seen as allowing a claim under the contract for other reasons.
Alternatively, the parties may wish to consider whether there has been a change to the law that allows a claim to be made. It may be that Covid-19 has caused a change to the law that has caused disruption or delay which could be the basis of a legitimate claim under the contract. The FIDIC Red Book at Clause 8.4(d) allows claims where there have been unforeseeable shortages in the availability of personnel or goods caused by an epidemic or governmental actions or Clause 8.5 where the contractor has diligently followed the procedures laid down by the relevant legally constituted public authorities in the country or under Clause 13.7 of the Yellow book where changes in the laws of the country have directly affected the contractor’s performance under the contract.
As may be seen a claim under the FIDIC suite of contracts is more likely to be arguable and successful if it can be shown that any delay or disruption has been caused by a change in the law rather than trying to argue Force Majeure which would necessitate evidence that Covid-19 has made the performance of the contract impossible. Where the contractor can show that changes in the law have caused delay and/or disruption than a claim under Clause 20.2 of the FIDIC contracts for Payment and/or Extension of Time will be possible.
Al Suwaidi and Company represents clients across the legal systems within the UAE and GCC region and has international and local lawyers who understand all aspects of a client’s needs when engaging with local courts, DIFC and ADGM courts as well as domestic and international arbitration offering both practical and cost-effective solutions.