COVID-19 - In Construction Contracts

By Eng. M.A.A. Rumais

Introduction

COVID-19 has affected every aspect of our life and so has the construction. Given the construction, in general, is subject to a construction contract, the impact of the COVID-19 on the construction must be assessed in the light of such contract to identify the right and obligations accrued on parties. This article focuses on such rights triggered by COVD-19 under the FIDIC form of Contract, 1st edition 1999.

COVID-19 and Force Majeure

The relevant clause which covers the COVOD-19 situation, among others, is Clause 19 [Force Majeure]. Sub-Clause 19.1 [Definition of Force Majeure] defines Force Majeure as an event/circumstance (that satisfies the following five criteria):

1. that is exceptional;
2. that is beyond a Party’s control;
3. which a Party could not reasonably have provided against before entering into the Contract;
4. which having arisen, such Party could not reasonably have avoided or overcome; and
5. which is not substantially attributable to the other Party.

In addition, the sub-clause provides following non-exhaustive list of likely events as Force Majeure events:

1. war, hostilities (whether war be declared or not), invasion, act of foreign enemies;
2. rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war;
3. riot, commotion or disorder, strike or lockout by persons other than the Contractor’s Personnel and other employees of the Contractor and Subcontractors;
4. encountering munitions of war, explosive materials, ionizing, radiation or contamination by radioactivity, except as may be attributable   to the Contractor’s use of such munitions, explosives, radiation or radioactivity; or
5. natural catastrophes such as earthquake, tsunami, volcanic activity, hurricane, or typhoon.

The illustrative examples in the list are non-exclusive thus any comparable events also can be considered for this purpose. It is worth noting that the events listed above may occur but are not necessarily Force Majeure. At the same time, a comparable event which is not in the list can constitute Force Majeure. It is also to be noted that should occurrence of any such event is attributable to any one party of the contract, then it must be dealt under breach of contract; not as Force Majeure.

Time and Cost

Sub-Clause 19.4 [Consequences Force majeure] provides relief to the Contractor if it suffers delay and/or incurs cost because of Force Majeure. Hence the Contractor whose performance is prevented by the Force majeure and thereby the completion is delayed is entitled to Extension of Time (EOT). In addition, the Contractor is entitled for additional payment that it incurs as a result of any comparable events (i) to (v) from the above list. While item (i) is applicable without any border restrictions, items (ii) to (IV) are applicable only if such events occur in the country. Natural events as provided in the item (V) is subject only to time; not to cost.

COVID-19 situation coupled with government actions such as lockdown squarely fit into the requirements of Clause 19 [Force Majeure] as it satisfy the criteria (a) to (e) as well as fall within item (iii) and hence provide cost and/or time entitlements to the Contractor if  the Contractor suffers delay and/or incurs additional cost. Nevertheless, the Contractor’s compliance with sub-clause 20.1 [Contractor’s claim] wherein the Contractor’s time bound notice of his intention to claim for cost and/or time is condition precedent to secure his time/cost entitlement. Such compliance is applicable not only to Force Majeure, but common for all Time/Cost claims under any clauses or otherwise. Yet, Clause 19 [Force Majeure] warrants an additional Notice, under sub-clause 19.2 [Notice of Force Majeure], of event constituting Force Majeure along with specifying the obligation(s)/performance(s) which is or will be prevented. Sub-clause 19.2 [Notice of Force Majeure] calls for careful attention to ensure such notice being wide enough to cover all the obligations/performances that is likely to be affected.

Termination

Subclause 19.6 [Optional Termination, Payment and Release] provides right to either Party to terminate the Contract as a result of Force Majeure for which a notice pursuant to sub-clause 19.2 [Notice of Force Majeure] is issued. However, such right is subject to the following

1. Execution of Substantially all the Works in progress is prevented for a continuous period of 84 days or
2. Multiple periods which total more than 140 days due to the same notified Force Majeure.

For the termination to take effect, the party who wishes to terminate the Contract must issue the notice of termination. In the event of such notice, the termination shall take effect after 7 days. Irrespective of whether the party opted for termination, the Engineer has the duty to determine the value of work done by the Contractor and to issue a Payment Certificate.

Frustration

Sub-Clause 19.7 [Release from Performance under the Law] releases parties from further performance in the event the Force Majeure is such that it makes it impossible or unlawful for a party or either parties to fulfil their obligations under the Contract. It is not only applicable to Force Majeure, but all the events/circumstances that are beyond Parties’ control. It is similar to the legal doctrine of ‘Frustration’ under the common law. Payment after such release is the same as the payment under sub-clause 19.6 [Optional Termination, Payment and Release].

Other Clauses

Sub-clause 8.4 [Extension of Time for Completion] sets out Epidemic as an event that entitles the Contractor for EOT subject to compliance with sub-clause 20.1 [Contractor’s claim]. However, the Contractor is not eligible for additional cost. Pandemic being epidemic all over the world, the COVID-19 situation entitles the Contractor for EOT should it suffer delay in completion. Epidemic under sub-clause 8.4 [Extension of Time for Completion] is not necessarily a Force Majeure to entitle the Contractor for EOT. Another area the Contractor can focus is on his right to adjust the Contract Price as well as Time for Completion as a result of change in legislation as provided in the Sub-Clause 13.7 [Adjustments for Changes in Legislation]. Sub-Clause 1.1.6.5 defines what is covered under legislation.

Conclusion

The rights of the parties are set out in the contract. Nevertheless, such rights are not necessarily automatic. A party which is willing to secure such rights must, in general, comply with the protocol set out in the Contract. Accordingly, it is applicable to the COVID-19 situation as well. The FIDIC contract, under sub-clause 19.4(a) [Consequences Force majeure]/8.4[Extension of Time for Completion], entitles the Contractor for EOT. Sub-Clause 19.4(b) [Consequences Force majeure] provides relief for additional payment. Rights under sub-clause 19.4 (a) and (b) [Consequences Force majeure] are only secured upon compliance with the notice requirements under both sub-clauses 19.2 [Notice of Force Majeure] and 20.1 [Contractor’s claim]. On the other hand, rights under sub-clause 8.4 [Extension of Time for Completion] is subject to compliance with sub-clause 20.1 [Contractor’s claim]. Also, a party which opts the termination shall issue a notice in that effect. 

Reference

1. Nael G. Bunny, The FIDIC Forms of Contact (Third Edition, Blackwell Publishing, 2005)
2. The FIDIC Contracts Guide (First Edition, International Federation of Consulting Engineers, 2000)

 

Eng. M.A.A. Rumais
Bsc (Eng), LLM (Construction Law & Arbitration)
AMIE (SL), MCIArb(Uk)