We are in a unique situation. The Covid-19 pandemic is affecting pretty much all commercial activities. But, as usual, the construction industry can claim to be uniquely impacted by it. This is because of the complex web of contracts which supports any commercial construction project.
The immediate reaction to the pandemic is to label it a force majeure (FM) event. This is usually going to be correct in any given contract, by a combination of contractual provisions and/or general law principles.
The real question is: what then? What will be the effect of FM within each of (say) 40 construction contracts, subcontracts, supply, engineering, management and technology contracts on a typical project? What will be its effect on the pre-existing position in the administration of each contract – lateness, breach, claims in progress? Can we manage this at a whole-project level?
Differences between contracts
Most likely all of our 40 or so project contracts will contain express FM provisions, and most of those provisions will share the same basic principle that a party will be relieved of its obligations to perform contractual obligations when, and for such time as, performance is rendered impossible by circumstances which were unforeseeable and are outside of that party’s control.
It is, therefore, tempting to think that all parties are in a back-to-back situation: that Covid-19 will trigger FM provisions in all of these contracts at once, all activities will be frozen and everyone will remobilise on a date later on.
In fact, there are important differences such as:
- The FM events might be set out as an exclusive list, a non-exclusive list or as a set of general principles, maybe with a list of excluded events.
- To trigger a claim for relief, the FM event may or may not have to be the sole factor or dominant factor preventing performance.
- The procedural requirements might include giving prior written notice as a condition precedent and there might be a time bar on that notice which will exclude any late claim.
- In consequence, a party might be completely excused from its obligations or given only an automatic suspension of them; or FM might trigger a separate entitlement to claim an extension of time (EOT) through the EOT mechanism. And any of these options might be available with or without entitlement to recovery of direct cost, prolongation or disruption – although FM is usually considered a time issue only.
- Notice of termination may become available to one or both parties after a certain period of continuous FM prevention or a longer aggregate of several periods of prevention. These periods vary significantly between contracts.
- The obligation to mitigate the effects of the FM event might be expressed as a condition precedent to relief.
Just as one example of the variety of provisions in the market, the Fidic Second Edition main contracts (Clause 18; Exceptional Events) require written notice to be given within 14 days of the time at which the affected party became aware, or should have become aware, of the event. This is a “soft” time bar: if notice is given late, relief is allowed only from the time of delivering that late notice.
The ‘exceptional events’ are described both in terms of general principles (which might cover Covid-19) and a list of specific events, which do not include epidemics or pandemics.
The affected party is “excused performance” of the notified prevented activities and, if the event causes delay, the contractor may claim an EOT, subject to compliance with the separate claims procedure. There is, however, no entitlement to cost unless the cause is one of the listed ‘exceptional events’.
Interaction with other factors
Then, how will the FM event impact into a live project? These are already dynamic situations, often with other pre-existing and ongoing events (some compensable, resulting in claims, and some not), causing delay and disruption to progress of works.
To cite one example of interaction: if there is pre-existing or concurrent culpable delay, is the FM event in fact preventing the performance of an obligation which would not be performed anyway? This question came up in a dispute, Classic Maritime Inc versus Limbungan Maritime SDN, before the English Court of Appeal last year. Limbungan claimed relief from performance of an obligation to supply cargoes of iron ore pellets for shipment by Classic (a ship owner) because of a dam burst at a source mine in Brazil which halted production of the pellets. Classic argued that, for entirely independent reasons (a collapse of demand for steel), Limbungan would not have supplied the cargoes anyway.
The court found that Limbungan needed to prove (but could not prove) that it would have performed the contract, had it not been for the dam burst. As a result, Limburgan could not invoke FM relief. This decision is readily applicable to construction contracts where competing causes of delay need to be weighed. It relied on the basic “but for” test of causation (“Would performance have happened but for the intervening event?”). Of course, all such decisions are specific to the facts, the contract and the applicable law.
Differences in the law
Different jurisdictions recognise and treat an event such as this pandemic in different ways.
English law is the simplest to summarise. FM is not a recognised concept so, to have any effect, it needs to be provided for in the contract. There is recognition of the concept of Frustration which happens when an unforeseeable event intervenes after contract formation and makes it impossible to perform or radically changes the principal purpose of the contract.
Frustration is much narrower than FM and is applied only to cases of permanent impossibility, for instance where performance becomes illegal or the subject matter of the contract no longer exists. Frustration automatically ends a contract by discharging both parties from all further obligations. There are provisions for recovery of sums paid or benefit given without recompense at the time of discharge.
Civil law jurisdictions generally recognise FM in the form of legal principles and legislation which imply terms into contracts or affect their enforceability. Of course, these jurisdictions also recognise freedom of contract and will seek to give effect to agreed terms, so the balance needs to be understood.
Connected to this is the interaction between the contractual governing law and the law applicable to the place where it is being performed – where they are different. To get a complete understanding of a contract, we need to know how far (for instance) the law of Kuwait will implement the written terms of (for instance) an English law-governed contract being performed in Kuwait; and how far Kuwaiti legal principles will be applied.
Examples of provisions:
- Article 273(1) of the UAE Civil Code provides that, if a FM event supervenes to make a contract obligation impossible, the corresponding obligation shall be extinguished so that the contract is automatically cancelled.
- Article 273(2) of the UAE Civil Code allows for partial cancellation of the contract where only parts of the obligations are rendered impossible, although the affected party can terminate the whole contract, by notice.
- Article 386 of the UAE Civil Code provides that a party will not be held liable to compensate for his non-performance if performance was made impossible by an external event for which that party was not responsible.
- In Saudi Arabia, Article 51 of the Procurement Law (applying to public works contracts) provides that, there shall be no delay damages levied if a delay in performance is due to unforeseen circumstances or reasons beyond a contractor’s control, provided that the period of delay is proportionate to those reasons. Note that this does not require the event to be both unforeseen and beyond control.
The pandemic is reaching into projects at every level in the supply chain but, for the above reasons, project participants are unlikely to be in a “back-to-back” situation.
In any given project, it is a near certainty that misalignment of outcomes will leave some parties “in a hole” unable to claim reliefs or terminate onerous contracts, whilst other parties are able to claim more extensively and/or terminate against them. Given that termination rights might mature at (in my experience) as little as 60 days suspension, it will not be long before these notices start to land.
To manage this proactively, parties may consider alternative ways to achieve certainty and uniformity of outcomes. It might be agreed collaboratively that quick claims or dispute resolution procedures are needed at a whole-project level to speed things up. These might include:
- An adjudication board, giving binding but not final decisions;
- A review board, giving non-binding decisions;
- Expert Determination of time and quantum issues; and
- Multi-party mediation.
Our industry will get through this better if we plan carefully.
* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.