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.
