The Farce that is Force Majeure and the death of the Contractor

The Farce that is Force Majeure and the death of the Contractor

These are unprecedented times. The spread of the corona virus throughout the world has put governments in a flat spin. The reactions of these governments have brought economies to a standstill. Many, many businesses will not see this through and for those that survive, the impacts will be felt for years to come.

This was a news report published on 16th March 2020 in response to President Cyril Ramaphosa’s announcement made on the evening of the 15th March 2020.

“South Africa declared a national state of disaster over the coronavirus

 Outbreak and announced the continent’s most drastic measures yet to curb its spread. Stocks slumped to a six-year low, bonds fell and the rand weakened.

The government is imposing travel bans on some nationals, shutting schools and banning public gatherings of more than 100 people, President Cyril Ramaphosa said Sunday in a televised address to the nation, after an emergency cabinet meeting. The state is also finalizing a package of measures to minimize the effect of the global pandemic on the economy, he said.

 “We have decided to take urgent and drastic measures to manage the disease, protect the people of our country and to reduce the impact of the virus on our society and on our economy,” he said. “There can be no half measures.””

On the evening of the 23rd March 2020 the President announced that the country would enter into a state of lock down for 21 days starting on the 26th March 2020.

Many project owners and clients in South Africa immediately announced to all their suppliers, contractors and subcontractors that this constitutes Force Majeure. The reason for this swift and sweeping statement by clients and owners of projects is so as to ensure that the Contractors can’t claim costs for this period. They are shrewd enough in their contracts, however, to insist that the Contractors must demonstrate their actions related to keeping those costs as low as possible. They have also declared Force Majeure in an effort to show that the corona virus pandemic is responsible for our situation, rather than the forced lock down by government.

The term Force Majeure in law is given to all “unforeseeable circumstances that prevent someone from fulfilling a contract.”

In nature, Force Majeure is given to anything of “irresistible compulsion or superior strength”.

In South Africa in 2019 there were over a million Flu infections and 11,000 related deaths. We continued to operate and we kept the economy going. Now that’s a pandemic!

 At the time of the announcement of the lock down there were around 400 infections and around 18 deaths. The only unforeseen issue here was the government’s reaction. We had enough warning from the way corona virus was publicized in the many months before it got here.

Construction Contractors among most businesses have been affected the worst and have been treated most unfairly, and supposedly legally so.

Let me spell it out.

There are many different Conditions of Contract for Construction that exist and are being used in South Africa, including bespoke contracts. I have referred to FIDIC here because it is so widely used.

The FIDIC Conditions of Contract for Construction (Red Book), 1st Edition, 1999, (which is widely used nationally and internationally) deals with Force Majeure in the following manner.

To qualify as a force majeure event, the event or circumstance needs to tick all the boxes defined in Sub-Clause 19.1 (Definition of Force Majeure), which lists the following criteria:

1.   Beyond a Party’s control;

2.   The Party could have not reasonably anticipated;

3.   The Party could not have reasonably avoided;

4.   Which is not substantially attributable to the other Party.

The sub-clause then lists examples of types of exceptional event or circumstances that should be considered as force majeure. The list includes war, hostilities, rebellion, disorder and natural catastrophes and several other circumstances. The list is not definitive and provided that an event is of a similar nature, it should qualify.

Sub-Clause 19.2 (Notice of Force Majeure) requires the party to give notice within 14 days.

Sub-Clause 19.4 (Consequences of Force Majeure) provides that, if notice has been given, the Contractor may claim for an extension of time if the Time for Completion will be delayed and the payment of any Cost for some, but not all circumstances. This sub-clause refers back to Sub-Clause 19.1 (Definition of Force Majeure) for the types of event under which Cost may be claimed.

Most clients and project owners ensure to either amend the FIDIC interpretation to suit them or simply qualify out of the cost implications of Force Majeure, but accede to granting the time.

Well, it is not corona virus or its health impacts that stopped us from working, it’s the response of the government that did, and therefore changes to law and/or delays caused by authorities are the sub-clauses to be invoked here.

Most contracts give the contractor time relief and compensate for costs in the instance of changes to the Law that impact the project, and in the case of Delays caused by authorities. When contractors give notice in this respect, and seek the compensation, the clients sweep this aside and point to the Corona virus pandemic as being “not attributable to either party”.

In the interim, Contractors have continued to keep contracted and permanent employees on their books and remunerated during the lock down period. This was basically the case because of a humanitarian stance that was taken and it was in response to a request by our President that we continue to do so. It is considered to be the right thing to do.

The contractors also had no choice but to continue paying for the hired facilities on those sites in order to keep them there. The clients and owners of projects benefit from this by the fact that reintegration onto their projects is far swifter than if the employees had been terminated, or had their pay been suspended, and if the facilities on hire had not been paid for. One can only imagine the industrial relations headache that would have ensued.

The contractor is further prejudiced by this lock down in that there are further costs associated with the restart of projects. These are:

1)   The early stoppage of projects in order to allow people to travel to their homes prior the lock down.

2)   The cost of bringing people back to site from other provinces because of the no travel ban.

3)   The additional cost of transport because of the regulations around the numbers of people that can occupy a vehicle.

4)   The cost of screening people before being allowed to work.

5)   The cost of the Corona virus PPE and medical waste disposal facilities.

6)   The slower production because of the new methodologies associated with the corona virus prevention initiatives.

And the clients and project owners get to say “sorry, but because of Force Majeure we can’t help you”. It’s also quite obvious that if Contractors terminate the contract, then the clients will call in the guarantees. Not only is this lose-lose situation for contractors, it is tantamount to Unjust Enrichment for clients and Owners.

In the meantime, the following is true:

1)   The flu epidemic kills 6000-11000 people in South Africa annually and does not invoke changes to law. The government did not have to call a lock down but that was their choice.

2)   This does constitute a change in law in that new regulations were promulgated and a new government gazette was issued publishing those new regulations. The contractor should be compensated.

3)   This situation is totally unprecedented and untested in our courts.

So what is the way forward? How do we deal with this situation and still maintain the relationships that are so important to contractors for the sake of repeat work and continuous business in an already flailing economy?

In the UK and elsewhere in Europe where clients have thrown the rule book at the contractors, the Advocates are lining up outside the courts to fight this.

I suggest that clients, project owners and contractors get into a room and find alternative resolutions to the contract. There isn’t a contract around or a past experience in the last 35 years that could have given Contractors an awareness of the possibility of a countrywide lock down, and the famous Engineer’s statement that “a competent contractor should have known”, does not apply.

 Alternative dispute resolution strategies need to involve wisdom.

Get together and analyze the absolute costs in an effort to ensure that no undue profit is part of the equation. Then there should be a collaborative approach towards these costs.

Maybe these costs can be off-set against a slightly shorter duration, which implies that the contractor will expend some acceleration effort towards finishing earlier.

Maybe clients can bear the costs associated with the local labor because these are their communities that they have a responsibility towards them.

 There are so many permutations.

Ultimately, Contractors and Clients must find a way to collaborate and deal with the problem, or agree to fight.

The fact is that your silence, Contractors, your willingness to take this “on the chin”, does not bode this industry very well at all. We certainly don’t see our bargaining council doing very much about this. Consulting Engineers find themselves squarely in the middle, but rather than side with Contractors, prefer to dish out the rules in favor of the one who pays the bills.

The impact of this lock down will be felt for many years to come, and so many Construction Contractors cannot see themselves surviving this year. The costs associated with carrying wages, plant and facilities for one month, without generating revenue, far outweigh any project markup. There is no insurance that will cover this, and no Contractor or Engineering consultant could have foreseen this at time of tender. In any case any such allowance would have rendered our tenders non-compliant or noncompetitive. Either way the client wins. The more projects that one contractor has and the more his clients shout Force Majeure, the higher the likelihood of his demise.

Construction contractors have had to foot the bill for the following injustices already:

1)   Volatile communities that clients don’t negotiate with properly stop contracts and burn equipment. No compensation.

2)   Consequences of adverse weather that stop the projects in most instances for many days longer than the “payable days” that the Engineer grants. No compensation.

3)   Increase in contractors resources to compensate for lack of time generated by non payable stoppages. No compensation.

4)   Dealing with design inadequacies that a “competent” contractor should have foreseen, as deemed by the Engineer. No compensation.

5)   Deliberately wrongfully determined contractual clauses in favor of the Client. Contractors’ costs to bear.

So here is my call to all Construction Contractors:

Unite!

It is definitely the time to stand together against unjust practices that are having the effect of destroying our livelihood. Unacceptable!!! Enough already!!!

Note: I am still very much of the opinion that the President did the right thing and that while he might be vilified for it; his resolve to stand by his convictions is admirable. I believe that the unscrupulous attitude of clients who now take the opportunity to “screw” the contractors is very much against the spirit that, we are all in this together and should help each other, which the President tried to engender. Such Clients need to be named and shamed.

I say to those clients and project owners that while you are seeking to get payment holidays for your debts, and are seeking leniency from SARS during this period, consider assisting your contractors with the landed costs of trying to survive in these times. They have no other recourse but to plead with you.

Thank you.