Tuesday, March 10, 2020

Coronavirus and the Potential Impact on Construction Contracts in Oman

There is widespread economic impact as a result of the numerous factories that have suspended production in China due to the coronavirus, and with companies instructing many employees to work from home.  Construction activities are likely to be impacted worldwide as major suppliers are unable to meet delivery dates.  It is therefore timely to consider what contractors can do if faced with this type of delay.
The FIDIC Red Book
In the 1999 version of the FIDIC Red Book, a potential claim for an extension of time under Sub-Clause 8.4(d) should be considered for:
“Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions.”
This Sub-Clause is not often removed or amended in the Particular Conditions, and therefore provides entitlement for an extension of time, assuming of course that 28 days’ notice since becoming aware of the event or circumstance is provided, as per Sub-Clause 20.1.  In this context the “event or circumstance” would most likely be any notification from a supplier.
If problems become more serious, one may need to consider Force Majeure defined in Sub-Clause 19.1 as:
“an exceptional event or circumstance:
(a) which is beyond a Party’s control,
(b) which such Party could not reasonably have provided against before entering into the Contract,
(c) which, having arisen, such Party could not reasonably have avoided or overcome, and
(d) which is not substantially attributable to the other Party.”
Whilst the coronavirus event is not an “exceptional event or circumstance” of the kind listed following this definition, FIDIC makes clear that the list is not limited to those events.
Therefore, if the General Conditions are unamended at Sub-Clause 19.1, the Contractor could issue a notice under 19.2 within 14 days of becoming aware of the event or circumstance, which in turn could provide entitlement under Sub-Clause 19.4 to claim an extension of time.  However, it is interesting to note that to claim for some types of events listed in 19.1 (related to war, rebellion, riot, etc.), the event must occur in the country where the project is located, whilst for others (such as natural catastrophes) it does not.
Force Majeure can be limited in 19.1 strictly to the events or circumstances listed, by deleting “may include, but is not limited to” and then letting the list read as only the circumstances listed.  One could then turn to Employer’s Risks in Sub-Clause 17.3 and in particular argue that the coronavirus event is “any operation of the forces of nature which is Unforeseeable or against which an experienced contractor could not reasonably have been expected to have taken adequate precautions.”  Assuming that the Particular Conditions have not been amended to delete this provision as well (another common amendment), there would at least be entitlement to claim for an extension of time under Sub-Clause 17.4 (and 8.4(b)).  The advantage of claiming under 19.1, however, is the right to terminate the contract if the effect is prolonged as per 19.6, but care must be taken since this can work both ways:  either party may give such notice, thereby providing the employer grounds to terminate under the contract.
Under the 1987 FIDIC Red Book, there is entitlement to claim an extension of time under Sub-Clause 44.1(e) if considering the coronavirus as “special circumstances which may occur, other than through the default of or breach of contract by the Contractor or for which he is responsible.”  Notice should also be provided in this instance under 53.1.
The 1987 version of the FIDIC Red Book does not include Force Majeure although some of the Employer’s Risks listed at Sub-Clause 20.4 are considered as “Special Risks” at Sub-Clause 65.2.  The problem here is that the only Employer’s Risk that could apply to the coronavirus at 20.4(h) (“any operation of the forces of nature against which an experienced contractor could not have been expected to take precautions”) is not one of the Employer’s Risks taken to be a “Special Risk” at 65.5 where there is considerable scope to claim increased costs.  There is therefore no path to termination of contract but at Sub-Clause 66.1 there is still a possibility that a party may be released from further performance if “any circumstance outside the control of both parties arises after the issue of Letter of Acceptance which renders it impossible or unlawful for either or both parties to fulfill their contractual obligations.”
If therefore 20.4(h) has not been struck out in the Particular Conditions, there is a path for the contractor to recover any loss or damage arising from the coronavirus under 20.3 as a result of 20.4(h) by giving 28 days’ notice under 53.1.
The Oman Standard Conditions
There is no explicit provision for “force majeure” as such in the Sultanate of Oman Standard Conditions for Building and Civil Engineering Works Fourth Edition September 1999 (the “Standard Conditions”).  However, Clause 66 [Frustration] provides that:
“If … circumstances outside the control of both parties … arises … so that either party is prevented from fulfilling his obligations, or under the Law of the Sultanate of Oman, the parties are released from further performance, then the sum payable by the Employer to the Contractor in respect of the work executed shall be [the] same as that which would have been payable under the provisions of Clause 65 hereof.”
Clause 65 [Special Risks] of the Standard Conditions governs “Special Risks” and specifies in subsection 65(8) what payments the employer must make to the contractor in the event a contract is terminated as a consequence of the occurrence of a Special Risk, as defined in subsection 66(5).
Essentially, the contractor is entitled to:  payment for work executed prior to the date of termination; amounts payable for preliminary items; the cost of materials or goods ordered by the contractor for the works; expenditure incurred in expectation of completing the works; and any additional sums as provided earlier in Clause 66.
Omani law
Force Majeure is covered by Article 172 of the Oman Civil Code as promulgated by Sultani Decree 29/2013 (the “Civil Code”), which states:
“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 terminated.”
The Civil Code does not define what constitutes force majeure, and the Omani courts have been reluctant to allow termination of a contract based on non-economic factors.  However, the courts have recognised that natural disasters may constitute circumstances that result in the frustration in the performance of a contract.
Whilst this article focuses on construction contracts, the issues discussed will likely apply to a broad range of commercial contracts.  We would be happy to assist any clients who have contracts that are impacted by delay.  As with managing all contractual delays, the key is to obtain advice and develop a strategy at the earliest possible opportunity.