Are we really entitled to Time and Cost due to COVID -19 Pandemic?

Introduction

The outbreak of (“Coronavirus”) COVID-19 is increasingly and adversely affecting both the employers and the contractors who are most likely facing complete shutdowns of site operations or unexpected delays in the supply of resources. It is not unlikely to see in the future that many of the construction sites would be closed for all operations on the grounds of health and safety. The obvious questions from a contractor’s end will be about his entitlement to extension of time and related costs. The obvious questions from an employer’s end will be as to who shall bear the risk of the pandemic. The answer depends on the contract and the governing law. Perhaps, you may not find any provision related to a current pandemic in your contract. It is not very uncommon that people come for advice on a contract that has no provision for EOT at all. This article, therefore, examines the entitlement of both the Contractor and the Employer in most of those situations, but particularly in light of standard and un-amended clauses of the FIDIC (1999) Red Book, the FIDIC 1987 Red Book, and the UAE Law.

Recently, I have seen many posts and articles being shared on the internet classifying pandemic as both a Force Majeure event and an Employer’s risk event under the FIDIC 1999 editions stating that the Contractor is entitled to both cost and time. Some people use this approach under the FIDIC 1987 form of contract as well. Shortly, we will examine why this approach is not correct.

Position under the UAE Law

The wording “Force Majeure” may not be explicitly defined in all contracts. In a common-law jurisdiction, whether a certain event qualifies as a Force Majeure event depends on what has been agreed in the contract. Anything that does not fall within that definition under the contract will not be a Force Majeure under the English Law, unlike the civil law systems.  In such occasions, for the parties who seek excuse for non- performance, the equivalent remedy under the English Law would be claims under frustration which, if succeeded, would result in termination of the contract. In UAE, the doctrine of force majeure is dealt within Article 273 of the UAE Civil Code which states that:

1.   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 cancelled.

2.   In the case of partial impossibility, that part of the contract which is impossible shall be extinguished, and the same shall apply to temporary impossibility in continuing contracts, and in those two cases it shall be permissible for the obligor to cancel the contract provided that the obligee is so aware.

It is not, however, sufficient to show that the Force Majeure event has merely made the performance more onerous or costly, the provision demands that performance shall be impossible.  Importantly, the provision does not contain a definition as to what constitutes a “force majeure”. Under the UAE law, therefore, the determination of whether the circumstances have occurred that qualify as Force Majeure which release the contractor from performance is entirely a matter for the Court of Merits to decide[1]. This means that, the local court will have a wide discretion to determine whether the Coronavirus is considered a valid reason for the contractors to delay the work on sites. No cases have yet been filed in regard to the new Coronavirus and jurisprudence may be expected over the coming years in relation to the Court’s decision if the current event is a Force Majeure issue. There are, however, other mandatory provisions of the UAE law that the contractors and the employers may rely on for their respective entitlements in absence of provisions in the contracts. The Article 249 of the UAE Civil Code permits a judge or an arbitrator to vary contractual obligations to a “reasonable level” in the event of exceptional circumstances.

“If exceptional circumstances of a public nature which could not have been foreseen occur as a result of which the performance of the contractual obligation, even if not impossible, becomes oppressive for the obligor so as to threaten him with grave loss, it shall be permissible for the judge, in accordance with the circumstances and after weighing up the interests of each party, to reduce the oppressive obligation to a reasonable level if justice so requires, and any agreement to the contrary shall be void”

The wording “public nature” in this provision creates uncertainty about the qualifying circumstances for the exercise of the discretion provided by the provision. Some may argue that the element of state intervention is required to qualify for public nature which is apparently valid. Apart from above, there are several other provisions that the contractors may rely under the UAE Law.

Article (287)

“In the absence of a provision in the law or an agreement to the contrary, a person is not liable for reparation if he proves that the prejudice resulted from a cause beyond his control such as a heavenly blight, unforeseen circumstances, force majeure, and the fault of others or of the victim.

The difference betweenthe effects of the above two Articles is that the application of Article 273 results in termination of the obligation while the application of Article 249 permits contractual obligation to be modified. The Article 287 provides a safeguard against claims from the other party in Connection with such event.

Claims under Sub-Clause 8.4 and 17.3 of Standard FIDIC

Considering the provisions of un-amended the FIDIC 1999 Red Book, Sub-Clause 17.3 [Employer’s Risks] outlining Employer’s Risks, states at paragraph (h) that,

 “(h) 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 preventative precautions”

Such an event gives rise to claims under Sub-Clause 17.4 [Consequences of Employer’s Risks]

I have observed practitioners use this sub-clause to claim EOT and Cost interpreting the current pandemic as “operations of forces of nature”. However, there are two reasons why such approach is arguable in relates tothe current situation. The wording “forces of nature” stands basically for forces such as electromagnetic force, wind force, gravitational force, etc. Can the current pandemic be classified as a force of nature? Apparently, the drafter of the clause had intended to address such forces which could cause damage to the Works. Such interpretation disqualify the CODIV-19 pandemic as an Employer’s Risk event. 

Secondly, the clause refers to the Cost of rectifying loss or damage to the Works. Note that the Sub-clause states “If and to the extent that any of the risks listed in Sub-Clause 17.3 above results in loss or damage to the Works, Goods or Contractor’s Documents” and “If the Contractor suffers delay and/or incurs Cost from rectifying this loss or damage”. The wording “this loss or damage” refers to the damage to the Works and the term “Works” is defined in the FIDIC 1999 Red Book.

The word “epidemic” is used once in the standard form of contract, in Sub-Clause 8.4. Contractors operating based on standard terms may rely on Sub-Clause 8.4 [Extension of Time for Completion] to justify time claims resulted from the consequences of Coronavirus. Sub-Clause 8.4 provides at paragraph (d) for

(d) Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions

If the Contractor considers himself to be entitled to an extension of the Time for Completion, the Contractor shall give notice to the Engineer in accordance with Sub-Clause 20.1 [Contractor’s Claims]. Note that the word “epidemic” is used instead of the widely used term “pandemic’. The epidemic address a wide variety of disease and exceptional events that include pandemics as well.

Claims for relief under Sub-Clauses 8.4 are to be brought under Sub-Clause 20.1 in the usual manner. This Sub-Clause stipulates that if the Contractor considers himself to be entitled to any extension of the Time for Completion and/or any additional payment, under any Clause of the FIDIC Red Book conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer, describing the event or circumstance giving rise to the claim.

Considering the actions taken, Laws enacted by the state government to counter the adverse effect of the pandemic situation, the Contractor may rely on the below clause in order to claim EOT and Costs. Sub-clause 13.7 [Adjustments for Changes in Legislation] states that “If the Contractor suffers (or will suffer) delay and/or incurs (or will incur) additional Cost as a result of these changes in the Laws or in such interpretations, made after the Base Date, the Contractor shall give notice to the Engineer and shall be entitled to EOT and Costs”

The definition of the Law is set out under clause 1.1.6.5 as “Laws” means all national (or state) legislation, statutes, ordinances and other laws, and regulations and by-laws of any legally constituted public authority and the “Country” is the country in which the site is located where the permanent work to be executed. The Sub-Clause requires a change in the Law of the Country.

If there is a change in the law of the Country aimed at countering the effect of Coronavirus such as restrictions on work timing, transport restrictions, or VISA bans, that will be good grounds to claim EOT and Costs. However, the effect of the delays in deliveries due to restrictions of the countries of origin from where the materials are imported shall not qualify under this clause. However, the‘’Change in Law’’ claims are rarely successful and may be difficult to prove. Claims may only be successful if a contractor can also show the direct effect of such a change on the performance.

Force Majeure

 There are other provisions intended to treat a claim for ‘’Force Majeure’’ underClause 19. An un-amended FIDIC Red Book has both general provisions to provide what constitutes ‘’Force Majeure’’ in Sub-Clause 19.1 (a) to (d) followed by a non-exclusive list of examples of Force Majeure in (i) to (v).

 In this Clause, “Force Majeure” means 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.

Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, so long as conditions (a) to (d) above are satisfied:

The pandemic event qualifies all the above four criteria and can now be classified as a Force Majeure event without a doubt although not listed under (i) to (v) events of the above Sub-Clause. There is a particular notice regime and provisions for advising the Employer/Engineer of ‘’Force Majeure’’. These are set out in Sub-Clause 19.2. The mechanism for claims for additional time, losses and expenses are to be found in Sub-Clause 19.4 and are not specifically dealt within this note.

 Notice under Sub-clause 19.2 shall be given to the other Party – the “Employer” or the “Contractor” - but not to the Engineer. The notice shall also specify the obligation, for which the performance is prevented

 Under FIDIC 1987

 Extension of Time for Completion 44.1

 Similar to what is discussed above under FIDIC 1999 Red Book, Sub-Clause 20.4 [Employer’s risks] of FIDIC 1987 Red Book is intended to address the events that can cause damage to the Works. Therefore, for EOT entitlement, Contractors can rely on clause 44.1 (e)

In the event of

(e) Other special circumstances which may occur, other than through a default of or breach of contract by the Contractor or for which he is responsible,

However, Sub-Clause 44.2 provides that notice shall be issued within 28 days after the event has first arisen. Thereafter interim particulars shall be submitted in 28 days’ intervals and the final particulars  are to submitted not less than within 28 days from the end of the effect resulting from the event pursuant to Sub-Clause 44.3.  

It is not uncommon to observe practitioners argue under that Sub-Clause 53.1  entitles the Contractor to claims cost for pandemic by interpreting the word “Otherwise” as giving the right to claim for any event whether stipulated in the Contract or not. This is not correct as on the one hand Sub-Clause does not provide any entitlement to additional time or cost and it is merely intended to govern the issuance of notices. Also the word “Otherwise” is intended to cover claims for breach of Contract, claims Legal provisions and claims under Law of Tort.

Notice of Claims 53.1

 “Notwithstanding any other provision of the Contract, if the Contractor intends to claim any additional payment pursuant to any Clause of these Conditions or otherwise, he shall give notice of his intention to the Engineer, with a copy to the Employer, within 28 days after the event giving rise to the claim has first arisen”.

[1] Dubai Cassation No. 24/1993 dated 5 October 1993 and judgment number 384 of 2014 and 466 of 2014 by Abu Dhabi Cassation Court.