CONNECT SERIES: Force majeure and other options in construction
Experts from Clyde & Co provide insight on force majeure clauses and laws for the construction sector in the wake of Covid-19
Findings from Mashreq Construction Club Connect Series episode I
The outbreak of the novel coronavirus (Covid-19), first in China and then as a global pandemic, has severely disrupted construction supply chains. And while construction work has been allowed to continue in the UAE as an essential activity, government lockdown measures introduced to stop the spread of the disease are affecting many projects.
Some companies are finding as a consequence that they are unable to fulfil their contractual commitments, exposing them to the risk of being liable for failing to deliver work that they are contracted to perform, but seemingly unable to do anything about it.
How should construction companies in this position respond? What legal options do they have available to them? And what might be the consequences of these options?
On 16 April, the MEED Mashreq Construction Club launched the Connect series of webinars aimed at providing construction companies in the UAE with direct access to expert insights that will help them navigate the unexpected challenges that have suddenly emerged out of the Covid-19 pandemic.
Entitled ‘Force Majeure and Other Options’, the first event of the Connect series featured a live-streamed online briefing delivered by construction partners Michael Grose and Matthew Heywood from leading international law firm Clyde & Co.
Grose and Heywood examined clauses included in standard Fidic Red Book construction contracts that could provide contractors and suppliers unable to meet their contracted obligations with legal avenues to allow non-performance. The webinar also examined the various laws and codes in the UAE that apply to contract disputes, and which courts are available to hear cases.
Below is a summary of the key points covered in Force Majeure and Other Options:
Read your contract
The comprehensive set of terms and conditions contained in the Fidic suite of books are designed to provide construction clients and their contractors with a series of readymade, off-the-shelf contracts.
The menu of standard terms and conditions included in the commonly used Fidic Red Book include many clauses that can apply to situations where it is not possible to fulfil contracted commitments.
In the UAE however, and across the GCC, it is common for construction clients to amend or remove many of these standard clauses from their contracts. The result, say’s Heywood and Grose, is that any two construction contracts in the UAE are rarely the same.
The most important piece of advice for contractors affected by the Covid-19 disruption therefore is to conduct a detailed review of the terms and conditions of the contract with their lawyer.
It is of upmost importance that construction companies, and any other contracted parties, must analyse the relief provisions agreed in their contract at the outset.
Fidic Red Book (1999)
The Conditions of Contract for Construction based on the Fidic Red Book (1999) provide several clauses that contractors can refer to when advancing a claim to be relived from their contractual obligations to deliver work specified in the contract that has been affected by the Covid-19 lockdown.
Clause 20.1: If a contractor considers itself to be entitled to any extension of the time for completion and/or any additional payment, it shall give notice to the engineer, describing the event or circumstance giving rise to the claim, not later than 28 days after the contractor became aware, or should have become aware, of the event or circumstance.
Clauses that a contractor might use in conjunction with clause 20.1:
- Clause 8.4: Provides an Extension of Time for Completion (EOT), with paragraph (d) stating that it applies to: “…unforeseeable shortages in the availability of personnel or goods caused by epidemic or governmental actions”. In the region, it is common for this clause to be amended and paragraph (d) taken out of contracts.
Definition of an epidemic
The World Health Organisation (WHO) declared Covid-19 a pandemic on 11 March and its definition included ’epidemic’. This may well be be an area of contention, subject to expert evidence.
- Clause 8.5: Refers to a delay or disruption caused by a procedure implemented by a public authority, which appears to apply to the current Covid-19 scenario. This clause uses a foreseeability test, which an employer or contending party might be able to argue, that in the light of the recent history of viruses such as SARS, swine flu and MERS, the emergence of another virus was indeed foreseeable.
“This argument could be extrapolated out as almost anything one can imagine is, in one sense, foreseeable,” says Heywood. However, “the outbreaks of new viruses are not every day experiences and I [believe] that the effects of Covid-19 on the entire world were far from being foreseeable.”
Changes in law
- Clause 13.7 allows for additional time and money, due to a change in law. With the current scenario leading to newer regulations and by-laws, this could apply to anyone whose work has been disrupted by any laws introduced in response of Covid-19.
- Clause 13.8 relates to price escalations for material and labour but, according to Heywood, this clause is nearly always removed from contracts in the region.
- Clause 19.1 of the 1999 Red Book sets out the definition of force majeure.
It sets out tests, and lists examples/events that constitute a force majeure, which is generally defined as an exceptional event or circumstance that is:
a) Beyond a party’s control;
b) Which the 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.
The standard form of contract does not specifically list disease or epidemics. But the list is not exclusive and an argument can be raised that the Covid-19 outbreak is covered.
Despite the visible effects of Covid-19 on the society, construction sites in the UAE largely remain operational, albeit less efficient which is a point that will likely count against an argument in favour of a Covid-19 force majeure.
It can help to analyse situations similar to the Covid-19 outbreak, such as major natural disasters, the 2009 swine flu outbreak and terror attacks.
In these instances, force majeure clauses did not always work. It often came down to specific wordings of the clauses as well as the dispute resolution forum in which the interpretation of the clause was analysed.
Every contract is different. Amendment of clauses may lead to varying definitions and interpretations of force majeure, making it important to check the wordings of contracts.
Confirming force majeure
- Clause 19.2: States that the event or circumstance must have prevented the party from performing any of its obligations under the contract. The word ‘prevented’ is also used in clause 19.4.
“It is my view that there is going to be a lot of debate in the coming weeks, months, years, over what the word prevented means,” says Heywood. “To assist, synonyms include stopped, blocked, impeded, prohibited – which suggests an obligation can no longer be undertaken.”
The definition of ‘prevented’ then links to another word – obligation.
Clause 19.2 refers to any of the contractual ‘obligations’ being ‘prevented’. For example, this could refer to clause 8.2 (time for completion) or clause 8.3 (compliance with programme) being prevented.
Disputes could arise over whether the contractual obligation (i.e. clauses 8.3 of 8.4) is still capable of being performed, as opposed to it simply becoming more costly and time consuming.
Impact of a force majeure event
Once force majeure is defined, a party must consider how the event or circumstance impacts work.
Extension of Time
Clause 20.1 requires the contractor to notify the engineer of its claims. Clause 19.4 then states that with proper notice, a party will be entitled to an EOT.
However, entitlement to cost is more of a challenge, as the contractor needs to demonstrate that the event is classified as force majeure as per the list of events in clause 19.1. The list includes natural catastrophes and so contractors will have to work with their legal teams to prove whether a pandemic can be classed as a natural catastrophe.
Termination of contract
- Clause 19.6 provides that if the execution of the works in their entirety, or a substantial part is prevented for a continuous period of up to 84 days or multiple periods totaling 140 days, either party may serve a notice to terminate the contract. If the contract is terminated, the contractor will be paid for work done, materials produced and other costs reasonably incurred, usually excluding profits.
- Clause 19.7 is the impossibility clause, and broadens the force majeure specific clauses, covering all events and circumstances. For the UAE, this may include restrictions of works between emirates and physical impossibility elements such as site access, getting labourers to site and so forth. However, the works must strictly be impossible, and note merely more difficult or costly, for this clause to apply.
Other relevant clauses to consider from Red Book 1999
- Clause 2.1: Site access
- Clause 6.7: Health and safety
- Clause 13: Variations
- Clause 13.2: Value engineering
- Clause 20: Claims and notifications
Highlights from the first Mashreq Construction Club Connect Series webinar
Records, records, records
Once it has been established that a contractor is entitled to submit a claim, it is necessary to establish that work is actually being delayed by Covid-19.
There are signs that claims are being raised with little or no justification that Covid-19 is the cause of delay, making employers suspicious of contractor intentions. Hence, it is important to be as specific and punctual as possible when communicating with the employer.
Proving the cause of delay on a project will be one of the major challenges for developments underway. Site issues should be assessed on a daily basis, separate from the problems caused by Covid-19.
Heywood also suggests that any mitigation measures such as value engineering undertaken should also be recorded and clearly reported. But it should be ensured these measures do not breach contract provisions requiring engineer or employer approvals.
“To help your lawyers and consultants in the event of claims, keep really detailed records of how things have changed as to how they were before,” says Heywood. “It’s really about records, records, records.”