The outbreak of the COVID-19 disease was completely unforeseen and a devasting phenomenon, which is negatively affecting various industries across the globe, and the Construction industry is not an exception. However, the legal implications on this industry in the wake of the pandemic vary from country to country and will depend on the terms of the contract between the parties. As far as the standardization of contracts in construction and engineering is concerned, FIDIC (short for International Federation of Consulting Engineers, an acronym for its French name Fédération Internationale Des Ingénieurs-Conseils) standard contracts are being followed in many multiple international jurisdictions including India. While a lot has been expressed by various governments across the world and the situation due to COVID-19 still not completely under control, there are multiple issues arising out of these contractual obligations.
At the present stage (as on May, 2020), COVID-19 is not rendering construction projects altogether impossible to complete. However, the pandemic has caused a slow down in their completion thereby causing delay and disruption. Till now the pandemic has not altogether rendered the completion of construction projects impossible, though there is a considerable slow-down, delays and disruptions in the sector. The supply chain disruptions due to extended lockdowns caused may projects to stop but with an intention to resume work at a later date.
Many countries, including India had ordered a lockdown which forced businesses to stop working. In India there was a full lockdown till 3rd May 2020, post which some services were allowed to resume. Due to the restrictions, the entire construction activity came to a halt during the lockdown period. In this article, we attempt to discuss a number of practical considerations that may arise, in the light of the Covid-19 pandemic under a standard form construction contract – such as the FIDIC Red Book. Is COVID-19 a force majeure event under FIDIC contracts?
The COVID-19 pandemic qualifies as a "force majeure" event under the 2017 FIDIC Red Book1 . Pursuant to Clause 18 of the Red Book, a force majeure event is an event that is a) beyond the parties' control; b) was not reasonably foreseeable by either of the parties; c) could not reasonably have been avoided once having arisen; and d) was not substantially attributable to either of the party. The spread of COVID-19 or any other world pandemics are not specifically listed by name among the list of Exceptional Events in the FIDIC book, however the COVID-19 pandemic fits easily within the general definition of an Exceptional Event.
Shall the affected party provide notice of an Exceptional Event to the other party(ies)?
Once an Exceptional Event occurs, it is imperative for the affected party to follow the contractual notice and mitigation provisions. A party prevented from performing any of its obligations must give notice to the other party of the Exceptional Event, detailing the impact of the event on performance2 . Notice must be given within 14 days of the date when the party became aware (or should have become aware) of the Exceptional Event and it should be delivered in accordance with Clause 1.3. While the notice period is generally uniform, the exact timing of the required notice may vary substantially based on the facts and circumstances of each particular contract, e.g., when the COVID-19 pandemic prevented a particular performance.
What are the consequences of providing notice of an Exceptional Event?
Once the notice is provided, the affected party, either a contractor or an employer, may suspend its performance as long as the Exceptional Event prevents the performance.
Steps to be taken by a contractor to mitigate such effects of an Exceptional Event
The affected party is not excused from performing obligations that are not prevented by the Exceptional Event. Hence, the crucial threshold question for a contractor is whether COVID-19 is the actual cause of the delay, suspension of work or increased cost. The pandemic will not have a uniform impact on contractors' obligations. A contractor will need to show that it sought to mitigate the effects of the pandemic which caused delays. Under Sub-Clause 18.3 each party needs to use all reasonable means to minimize any delay in the performance of the contract.
Payments continue after notice of an Exceptional Event
The occurrence of an Exceptional Event does not in and by itself excuse the parties' payment obligations.
Will the contractor be entitled to recover costs?
While the occurrence of an Exceptional Event can trigger an extension of the time to perform, entitlement to recover costs and losses incurred as a result of COVID-19 is less certain. A contractor would be able to recover costs in relation to some types of Exceptional Events, e.g., a war or strike where the construction is occurring. By contrast, a contractor will not be entitled to recover costs arising in relation to other Exceptional Events, such as natural catastrophes. As the Red Book does not expressly address costs in the context of global pandemics, it is less certain how costs will be treated in light of COVID-19.
The FIDIC also contains other provisions that may impact costs. A contractor can rely on Clause 13.7, which provides for an entitlement to price adjustments if a contractor can identify changes in the laws of the country of construction that result in increased costs. Clause 1.1.49 provides that "laws" means "all national (or state or provincial) legislation, statutes, acts, decrees, rules, ordinances, orders, treaties, international law and other laws and regulations and by-laws of any legally constituted public authority." While such claims are infrequent, a contractor should analyze whether COVID-19-related government restrictions caused the accrual of additional costs.
When can a contract be terminated due to an Exceptional Event3 ?
Sub-Clause 18.5 of FIDIC provides that either party may terminate the contract (upon notice) if an Exceptional Event causes a delay of 84 continuous days or multiple delay periods totaling more than 140 days. In such cases, the affected party/ contractor is then entitled to recover certain costs specified in Clause 18.6 of the FIDIC Contract Red Book. Any part of the advance payment not yet repaid by the contractor becomes immediately payable to the employer under Clause 14.2.34 of the FIDIC Contract.
Dispute5 arising due to the impact caused by COVID-19
While a general assertion that COVID-19 can qualify as an Exceptional Event should not be seriously contested, there are project-specific issues that may lead to disputes. For example, there may be disputes about the impact on the project and its "critical path," mitigation measures, and whether a contractor is entitled to costs and losses incurred.
In the event a dispute arises, FIDIC provides for 2 tiers of dispute resolution:
- A Dispute Adjudication/Avoidance Board (DAAB)
- ICC arbitration (upon failure of DAAB)
As mentioned above, the decision of DAAB is a prerequisite for a party(s) to approach for an ICC arbitration. In the instances wherein DAAB makes a decision, the parties shall comply with it or serve a Notice of Dissatisfaction (NOD) within 28 days. In case the dissatisfied party/ parties fail to serve such NOD within the stipulated time frame, the decision of DAAB becomes final and binding upon the parties. Further, in cases where a party fails to comply with any such final decision of the DAAB, the other party can initiate ICC arbitration to enforce it.
Under FIDIC contracts, the COVID-19 pandemic and associated governmental actions should qualify as an Exceptional Event. Depending on each project under dispute, different issues will arise in different projects in the coming days and years. Therefore, it shall be imperative to review each and every contract individually and consider the unique facts. In order to mitigate the damages caused/ or to be caused due to COVID-19, the parties, especially the affected party should follow all procedural requirements for declaring and dealing with an exceptional event and even termination in certain cases. Some governments are offering aid to businesses negatively affected by the COVID-19 situation. Even in the cases where a contractor may have no contractual or legal entitlement to compensation for prolongation costs due to work being significantly delayed or impaired, state aid may be available to defray some of the ongoing costs incurred, or otherwise provide a financial respite. Employers may also be entitled to the benefit of these state aid measures6 .
1 Clause 18 of the FIDIC Red Book
2 Sub-clause 18.2 of Clause 18 of the FIDIC Red Book
3 Sub-Clause 18.5 of FIDIC Contract: Termination
4 Clause 14.2 of FIDIC Contract deals with Advance Payment
5 Clause 20 of FIDIC Contract deals with Dispute Resolution
Originally published on May 2020. Vol. XIII, Issue V
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.