Covid-19, FIDIC and Construction Contracts

By Jeremy Glover, Partner, Fenwick Elliott

One of the potential difficulties with international projects is that the contracts entered into are governed by laws which may be unfamiliar to one or other of the contracting parties. For example, there is a difference in the way that force majeure is treated in common and civil law jurisdictions. Whilst most civil codes make provisions for force majeure events, at common law, force majeure is not a term of art and its meaning is far from clear. No force majeure provision will be implied in the absence of specific contractual provisions, and the extent to which the parties deal with unforeseen events will be defined in the contract between them. Thus without a specific clause, there will not necessarily be relief for force majeure events. The current pandemic caused by Covid-19 has generated much discussion about force majeure and this article looks at the position under the FIDIC form of contract and in the UAE and Qatar.  

Force Majeure under civil and common laws

Whatever your jurisdiction, the contract wording is, as always, crucial. In broad terms the intention of a force majeure clause is to provide for what happens where there is non-performance which is caused by events beyond the control of the party/parties. Most force majeure clauses usually suspend the obligation to perform the contract when a force majeure event has occurred, and the event must be beyond the control of the party relying on the clause. Force majeure excuses what would probably otherwise be a breach and effectively suspends temporarily an obligation to perform the Works, but it may not give rise to any compensation/loss and expense unless provided for under the contract. 

There is no established meaning under the common law of force majeure, so every force majeure clause turns on the words used. This also means that for force majeure to apply there must be a specific clause in your contract, whether it is called force majeure or something else.

In civil jurisdictions force majeure is a recognised legal concept and most civil codes make provision for it, for example Article 273 of the UAE Civil Code.  Generally, in the UAE force majeure is given a narrow definition with stress on the need for the event to make performance of the obligation impossible. Elsewhere in the Middle East, in the case of National Oil Corp v Libyan Sun Oil Co,  a Tribunal held that US sanctions, in terms of the use of American personnel and technology, did not render performance impossible, since other companies were able to perform, through reliance on citizens from other countries and using non-US technology. The fact that the US sanctions made performance more difficult was not enough.

Force Majeure in the MENA Region

Force majeure is treated in a broadly similar way across MENA, although it is always important to check the provisions of the Civil Code for the jurisdictions where your contract is based. 

Force majeure under UAE law

The usual position is that parties are free to agree the terms of their contract provided they do not conflict with the mandatory provisions of the UAE Civil Code. With construction contracts, it is only if your contract makes no provision for force majeure or exceptional events, then you must look to the civil code. Whilst, there is no specific definition of force majeure under UAE law, as noted above, Article 273(1) lays stress on performance being impossible:

“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 shall be automatically cancelled”. 

If the force majeure event renders only part of an obligation impossible to perform, then only that only that part of the contract will be cancelled. The Abu Dhabi Court of Cassation case No. 13/2010 laid stress on it being “absolutely impossible” to perform the obligations of the contract by reason of the force majeure event. Impossible means something different to that which makes performance merely “burdensome.”

The Civil Code provisions relating to Muqawala contracts (which include construction contracts), make similar provision. Article 893 provides that “when an excuse arises that prevents the execution of the contract, or the completion of its execution, any of the contracting parties may ask for its rescission or termination”. Article 894 deals with compensation, noting that where a contractor has started the execution of the work and then became unable to carry it out “for a reason beyond his control, he shall be entitled to value of the completed work, in addition to the expenses disbursed for its execution to the extent of the benefit that the masters derives from such work”. 

Whilst the Civil Code makes no mention of giving notice, the underlying requirement to act in good faith (Article 246) would require that timely and clear notice is given explaining what has happened and also that steps are taken to reduce the impact of the event and reduce and losses. 

Force majeure in the KSA

The Kingdom of Saudi Arabia’s (KSA’s”) legal system is based on the principles of Sharia Law which, following the Hanabali school of Islamic interpretation, adopts a fundamentalist and literal interpretation of the teachings of the Qur’an. This means that the way in which Saudi courts regulate contractual relationships is therefore strikingly different from the common and civil law systems. Whilst Parties are free to contract with each other, the degree of freedom with which they can do so is governed by certain prohibitions in the Qur’an. If the provisions of your contract violate the fundamental principles of Sharia law then it is likely that they will not be enforced by the Saudi courts.  

Whilst in general the laws are not codified in the KSA, for public sector contracts, Article 51 of the 2006 Procurement Law provides for the extension of a contract period (and the waiver of any penalty for delay) “if the delay is due to unforeseen circumstances or for reasons beyond the contractor’s control, provided that the period of delay is proportionate to these reasons”. More generally, whilst the court do recognise force majeure provisions, the emphasis is on exceptional events which are impossible not merely more burdensome or expensive. Therefore potentially a contract can be voided provided a specific event took place which was unforeseeable and unavoidable as well as making the contract impossible to perform.

Force majeure under Qatari Law

If your contract makes no provision for force majeure or exceptional events, then you must look to the civil code. Again, as with the UAE, there is no definition under Qatari law for force majeure. Article 204 of the Civil Code provides that if a person can demonstrate that a loss has arisen due to an external cause not of their making, that party will not be liable for that unless there is agreement to the contrary. Article 258 permits agreement to the contrary allowing parties to allocate the risk for force majeure how they choose, usually to the contractor.

And again as throughout the MENA region, there is an emphasis on the event being impossible (and not merely more difficult) with Article 188 of the Qatari Civil Code stating that “if fulfillment of the obligation becomes impossible due to some external cause”  then the contract may be rescinded. 

Force Majeure and the FIDIC Form of Contract

The 1999 and 2017 editions of the FIDIC Form treat force majeure in slightly different ways. Clause 18 of the 2017 edition is now headed “Exceptional Events”, replacing Clause 19 of the earlier edition which was headed ‘‘Force Majeure’’.  

Definition

However, the scheme of both forms remains the same, with the party affected, usually the contractor, entitled to an extension of time and (with exceptions) additional cost where an “exceptional event” occurs. To constitute an exceptional event, the following needs to have occurred:

(i) There must be an event or circumstance; 

(ii) The event/circumstance must be beyond the control of the party affected;

(iii) The party affected could not have foreseen or provided against the event/circumstance before entering into the contract nor avoided it once it had arisen;

(iv) The event/circumstance was not the fault of the other party; about which,

(v) Proper notice in accordance with the relevant sub-clause has been given.

Although both FIDIC editions list some exceptional events, these do not include specific reference to events such as “epidemic” or “pandemic”, but the list is specifically stated to be examples only. The key is that the above conditions are satisfied.

Common Law/Civil Law

As noted above, in civil jurisdictions force majeure is a recognised legal concept and most civil codes make provisions for it. Therefore, the change to ‘‘exceptional event’’ should be treated with some care as it might cause confusion as to whether the term should be interpreted differently to force majeure or not. It is important to consider the wording of the clause carefully against the definition to be found in the relevant code. Does it simply duplicate what is usually provided for or does it enlarge the scope of the meaning and application of force majeure? 

At common law, as described above, the confusion appears less likely to arise since ‘‘force majeure’’ is not a term of art. No force majeure provision is implied in the absence of specific contractual provisions and the extent to which the parties deal with unforeseen events will be defined in the contract between them. If there is no provision, there will be no relief.

Optional Termination 

Both editions of the FIDIC Form provide for optional termination if the execution of “substantially all the Works” is prevented for a continuous period of 84 days (or multiple periods which total 140 days).

Notice

Inevitably with FIDIC, proper notice must be given. Under the 1999 edition notice must be given within 14 days after the date a party became aware of the circumstances. The same 14-day period can be found in the 2017 edition but if the Notice is received after the period of 14 days, the affected Party is excused performance only from the date on which the Notice is received. 

Extension of Time

If the force majeure event has caused delay, then subject to a contractor using “all reasonable endeavors to minimize any delay in the performance of the Contract as a result of Force Majeure”, the contractor should be entitled to an extension of time. However, the contractor may not be entitled to claim costs as a result of covid-19.  Under the 1999 FIDIC Form, sub-clause 19.4 states that a contractor is only entitled Cost if the event is of the kind described in sub-paragraphs (i) to (iv) of sub-clause 19.1. These only include war and hostilities (whether war be declared or not), rebellion and terrorism, riot or strike and “munitions of war”, not natural disaster or epidemics. A similar clause can be found at sub-clause 18.4 of the 2017 edition. 

There is a potential alternative. Under sub-clause 8.5(d) of the 2017 Form and 8.4(d) of the 1999 Form, the contractor is entitled to an extension of time for “[u]nforeseeable shortages in the availability of personnel or Goods (or Employer-Supplied Materials, if any) caused by epidemic...” As has already been demonstrated globally, most governments have extensive powers to deal with health emergencies which may lead to the shutdown of a project or factory supplying materials.  That is provided the contractor has complied with the strict 28-day notice provisions. Any shortage of personnel or goods would have to be shortage of a nature unforeseen by the experienced contractor and that contractor must also be able to demonstrate both shortages in availability of personnel or goods and how this caused delay.

Sub-clause 8.5 of the 1999 Red Book (or 8.6 of the 2017 edition)  also refers to delays caused by authorities, noting that if the contractor has “diligently followed” the procedures laid down by the relevant legally constituted public authorities in the country where the project is being carried out, and those authorities delay or disrupt the contractor’s work, and the delay or disruption was unforeseeable, then “this delay or disruption will be considered as a cause of delay under sub-paragraph (b) of Sub-Clause 8.4 [Extension of Time for Completion]”.

Change to the Contract Price Contractors may also want to check sub-clause 13.7. Has there been a change in the laws of the country which directly affected performance of the contract works and has led to an increase in the Contract Price? 

Frustration under the FIDIC form Sub-clause 19.7 of the FIDIC form is also of interest. Here, the parties will be released from performance (and the Contractor entitled to specific payment) if (i) any irresistible event (not limited to force majeure) makes it impossible or unlawful for the parties to fulfil their contractual obligations, or (ii) the governing law so provides. It acts as a fall-back provision for extreme events (i.e., events rendering contractual performance illegal or impossible) which do not fit within the strict definition of force majeure laid out under sub-clause 19.1. It also grants the party seeking exoneration the right to rely on any alternative relief-mechanism contained in the law governing the contract.

Practical steps and checks:

• What does your contract say? And it might not use the words “force majeure”
   
• If there is a force majeure clause, what does it say? In what circumstances might performance be excused and with what result? Just because something costs more or is more difficult, that will not of itself be sufficient to rely on a force majeure, or similar clause.
   
• What is the governing law of the contract and what does that law say about force majeure?

• Check what the consequences of triggering the force majeure provision are. Is performance simply suspended? Some Civil Codes provide for termination. Often contracts include the right to terminate the contract after a certain period of time has elapsed. 
   
• What alternative means of performance are there? How can you reduce any delay? Performance might still be possible, even if engaging alternative suppliers and means of delivery are more costly.
   
• Follow the notice provisions of the contract, to the letter. What are the timescales? Who should the notice be sent to? At what address? Can you deliver the notice bearing in mind any government restrictions that might be in place? 

• You cannot sit back and do nothing after serving the notice. Think about how you can mitigate the impact of the force majeure event. 
   
• It will be important to be able to prove the steps that have been taken to mitigate the impact, so both from the employer’s and the contractor’s perspective, keep clear records which will help resolve any potential areas of dispute.
   
• Keep proper records so you can show why performance was impossible, what steps did you take to find an alternative approach and what were the costs and delays incurred?  Take photographs and make videos. Put a paper trail in place to record that it was unsafe or impossible to continue.
   
• Think about how you will judge when the event is over?
   
• Whilst always taking care to follow the contract requirements about notices, look to see if there are other routes available to deal with the issue. Talk to the other parties who are involved. Everyone has been affected to C-19. A negotiated way forward is always the preferable route. Far better to agree a way forward, if need be in a binding contract addendum.
   
• If you are entering into a new contract, how does that contract allocate risk arising from the pandemic?  
   
• Everyone is talking about force majeure, but what other remedies may be available in the contract? 

Ps It’s not just about Force Majeure

Whilst everyone has been talking about force majeure, there are a number of other issues parties should be thinking about. Health & safety? Should sites close? The answer to this will depend on the relevant Government guidance but may also depend on the criticality of the projects in question as well as whether social distancing measures can be implemented at the same time as ensuring that working under the new methods and restrictions can be carried out safely.

You must keep your health and safely policies and procedures under regular review and also ensure that they are understood by everyone on site.  You should also keep a careful eye on risk assessments. In particular, what is happening with the supply chain? Where are goods supposed be coming from? 

Also, make use of technology, think about what can be carried out remotely. Think too about how you can keep in contact with people. Keeping lines of communication open and maintaining relationships is more important now than ever. And not just email, talking to people is key, keep in touch with your team, your contacts, with those working on your project. The key to collaboration is communication. We really are all in this together, and that won’t change when the restrictions wherever you may be, are lifted. 

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