Posted by : Sajith Sreedharan on May 20th, 2020 in Strategic Advise And Management Support
A Short Guide to the FIDIC Contracts amid the Covid 19 Pandemic
On January 30, 2020, the World Health Organization declared the COVID-19 crisis – a pandemic that is time-dependent and geography-independent – as a “public health emergency of international concern”. , This statement followed by the declaration of national lockdowns by several federal and state-level Governments all over the world have jeopardised thousands of commercial contracts in almost every industry.
In general, contracts could be governed by well-drafted FIDIC clauses. They could also be based on any standard international format. Alternately, contracts could be completely ‘bespoke’, i.e. tailored to fit the specific requirements of a particular project. This article focuses on FIDIC contracts and the effects of the COVID-19 crisis on these particular types of contracts. Bespoke contracts, governed by Section 56 of The Indian Contract Act, 1872, are beyond the scope of this article.
Almost all FIDIC contracts contain ‘Force Majeure’ clauses in order to address potential risks which may not be insurable. According to Black’s Law Dictionary, a Force Majeure clause refers to ‘an event or effect that can be neither anticipated nor controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled’. Basically, it provides a temporary reprieve to a party from performing its contractual obligations if a Force Majeure event occurs. However, it is important to note that force majeure clauses do not always relieve any party of its obligations. This is because not everything is an ‘Act of God’.
In Clause 19 of the FIDIC 1999 Red, Yellow and Silver Books, the clause and term ‘Force Majeure’ is considered as being an “exceptional” event and/or circumstance beyond any Party’s control and which could not have been reasonably provided against before entering into the Contract. Further, test of the event cannot be one that the Party could have reasonably avoided or overcome, nor is it allowed to be “substantially” attributable to the other Party. Thereafter follows a non-exhaustive list of categories of events that could fall within the accepted definition of Force Majeure. Again, the qualification here is that the event has to be ‘exceptional’ and the other conditions referred to earlier have to be satisfied. Other non-exhaustive risks are deemed to be ‘localised’ operational risks of specific projects and therefore not identifiable as Force Majeure events.
From a contractual perspective, the available relief available under the Force Majeure clause(s) depends on the type of event. Therefore, it is worth noting the applicable categories, namely:
i. War and other hostilities.
ii. Rebellion, terrorism, and civil war.
iii. Riots and strikes, but only strikes by persons other than the Contractor’s personnel and Subcontractors.
iv. Explosive materials and radioactive contamination, so long as these events are not attributable to the Contractor’s use of such materials; and
v. Natural catastrophes such as earthquakes, hurricanes, typhoons, or volcanic activity
Relief is only available where the Contractor is ’prevented’ from performing any of his obligations by reason of an event that satisfies some or all of the above conditions for Force Majeure. To be eligible for relief, the prevention must be in a physical or legal context and not simply related to economic unprofitability. Legal prevention shall include local Government declaration of reasonable restriction that may prevent the performance of obligations of any Party. The Contractor will be entitled to an extension of time for delays arising from being ’prevented’ from performing his obligations as per the Contract in respect of all categories of Force Majeure events. However, the extension will only be provided so he can recover his costs and not profits – at least to a certain extent – in relation to some types of Force Majeure category (i). (ii), (iii) and (iv) events if they occur in the country where the project site is located. The Contractor will not be entitled to
recover his costs arising in relation to natural catastrophes (category v Force Majeure events).
The Clause is silent as to what financial remedy the Contractor would be entitled to in the event of an exceptional event which satisfies the criteria but does not fall within any of the above listed categories. As well as being able to recover his costs, the Contractor will also be entitled under the “Employer’s Risks” to an extension of time and cost (again, not profit) in relation to any remedial work required by the Employer due to loss or damage caused to the Works, Goods or Contractor’s Documents arising as a result of a Force Majeure event (although in relation to category (iii) only if the event occurred within the country in which the project site is located). Either party may give notice terminating the Contract in the event of a prolonged Force Majeure (prolonged in relation to the days defined in the contract) that ’substantially’ prevents the execution of all Works. Force Majeure entitles any or either Party to cancel the contract, or excuse themselves from performance of the contract in whole or in part or suspend performance or to claim extension of time for performance or to recover cost, if deemed applicable (but not cost), upon occurrence of a specified event or events beyond their control and such that the party shall not be liable for its failure to perform its obligation.
In general, an employer may, attempt to define COVID-19 as:
i. a narrow definition of Force Majeure.
ii. with possibly the right to step in and take action to remove or relieve the Force Majeure and back-charge any cost to the contractor; and
iii. the opportunity for termination after a certain period of time has elapsed.
Contractors may prefer to widen the definition of Force Majeure, covering specifics and also elements outside the control of either party along with suspension rights or restricted rights of termination that may result from such a definition.
A word of caution before we end: Not all the contracts are similar, even if they appear to be so. The Employer, Engineer and Contractor must all understand their contracts and attempt to make a techno-commercial interpretation with legal acumen. If deemed required, legal assistance for the legal interpretation of contractual clauses, especially with respect to techno-commercial aspects, must be sought to understand specific contracts for specific projects. This is critical to determine if it is impossible to proceed with works and satisfy the conditions under which the contract was undertaken, due to the outbreak of a pandemic like COVID-19.
Prof. Dr. George Yesu Vedha Victor,
International Arbitrator & Emergency Arbitrator Risk, Conflict and Contracts Management