28 April 2021 by , and Dispute Resolution Alert

The FIDIC Contracts: COVID-19, Acts of God and other Exceptional Events

The COVID-19 pandemic has had a profound impact on the construction industry in South Africa. Construction projects were only permitted to resume operations once the country reached Alert Level 3, on 1 June 2020. Parties to construction contracts, including contractors and employers, are now required to face the contractual music to address claims for losses upon resumption of construction works after lockdown.

With regard to the consequences of COVID-19 on construction projects, certain categories of potential losses can typically be identified. These include:

  • Execution of additional or varied works giving rise to claims for a variation of the contract.
  • Critical delays to the completion of the works beyond the agreed completion date, giving rise to claims for an extension of time in relation to the agreed completion date.
  • Increased time-related site costs – if the Contractor suffers critical delay, its time-related site costs, which include its general requirements such as site establishment and the salaries of on-site management, will increase due to its presence on site being extended giving rise to an entitlement to claim for those extension costs to be fully compensated.

The Fédération Internationale Des Ingénieurs – Conseils (FIDIC) suite of contracts are among the most commonly used standard forms of construction contracts, in particular in relation to higher value international construction projects. FIDIC contracts are endorsed by many multilateral development banks including the African Development Bank.

The FIDIC Red Book is the standard and most used construction contract form in projects where the design is provided by the Employer, pursuant to a procurement process.

Force Majeure

When considering the FIDIC (1999) standard form contracts (Red, Yellow and Silver Books), certain contractual mechanisms are available to the parties to address claims for COVID-19 related losses, in particular clause 19 relating to Force Majeure and clause 13.7 relating to Changes in Legislation.

In terms of Clause 19, it appears that the COVID-19 pandemic may meet the definition of Force Majeure and thus entitle a party to invoke the provisions thereof to be excused from performance of certain obligations under the contract.

To rely on Force Majeure relief on account of COVID-19, a party has to prove that its obligations are being prevented by the relevant event or circumstance, and that the event or circumstance constitutes a Force Majeure event.

Clause 19.1 sets out the conditions that must be satisfied for an event or circumstance to be considered Force Majeure and states:

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.

Clause 19.1 lists events which may constitute a Force Majeure provided that conditions (a) to (d) above are satisfied. Although a pandemic such as COVID-19 is not expressly included in the list of example events and circumstances, the list is non-exhaustive and COVID-19 related claims may find application under the category cited in clause 19.1(v): “natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity”.

Clause 19.2 provides that if a party is or will be prevented from performing any of its obligations under the contract by Force Majeure, then it shall give notice to the other party of the event or circumstances constituting Force Majeure and shall specify the obligations, the performance of which is or will be prevented.

To assert Force Majeure, the party must actually be prevented from performing at least some of its obligations. It is not enough that the performance might simply have become more difficult or expensive to fulfil.

Therefore, depending on the particular circumstances, COVID-19 may qualify as a Force Majeure if the above conditions are met. The two areas of possible contention in terms of meeting the standard of Force Majeure would be whether construction activities were prohibited which would depend on the severity of restrictions being imposed in terms of lockdown legislation and/or whether COVID-19 is determined to fall within the category of a natural catastrophe.

The consequence of Force Majeure is that the party who is relying on the Force Majeure event will be entitled to claim an Extension of Time in terms of clause 19.4 (a) should the prevention of the relevant obligations result in a critical delay. However, in terms of clause 19.4 (b), compensation for the relevant costs incurred by reason of such event would not be available to the party claiming relief for COVID-19 related claims in that such claims would fall within the events described in sub-paragraph (v) of sub-clause 19.1 and not sub-paragraphs (i) to (iv) as required.

In FIDIC (2017), the term “Force Majeure” was replaced with “Exceptional Event” in clause 18. The definition and the non-exhaustive list of events, however, is largely unchanged.

Changes in Legislation

Parties may argue that it was not necessarily COVID-19 itself that prevented construction activities on site, but rather that the statutory imposed lockdown caused the suspension of the works.

Clause 13.7 of the FIDIC Red Book (1999) (Adjustments for Changes in Legislation) states that the Contract Price shall be adjusted to take account of any increase or decrease in Cost resulting from a change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws) or in the judicial or official governmental interpretation of such Laws, made after the Base Date, which affect the Contractor in the performance of obligations under the Contract. If the Contractor suffers (or will suffer) delay and/or incurs (or will incur) additional Cost as a result of changes in Laws, made after the Base Date, the Contractor shall give notice to the Engineer for an extension of time and/or costs. The provision entitles the Contractor to an extension of time for any such delay, if completion is or will be delayed, under clause 8.4 relating to Extension of Time for Completion, and payment of any such Cost, which shall be included in the Contract Price.

The definition of Laws in the FIDIC standard form Contracts is quite broad and covers a wide range of legislation as well as regulatory actions from “any legally constituted public authority”. In South Africa, the COVID-related regulations imposed by the Minister of Cooperative Governance and Traditional Affairs in terms of the Disaster Management Act No 57 of 2002 would constitute a change in legislation as per clause 13.7.

Therefore, if the party claiming relief in terms of clause 13.7 can provide supporting evidence in terms of clause 20.1 that it suffered delays and/or incurred additional cost as a result of a change in laws as a consequence of COVID-19, it would be in a position to claim for both an extension of time and the time related costs suffered.

Parties would be entitled to similar relief in terms of the Adjustments for Changes in Laws provisions of the FIDIC Red Book (2017) at paragraph 13.6.

Force Majeure versus Changes in Legislation

There is no provision in the FIDIC standard form Contracts which precludes a party from seeking relief in terms of either Force Majeure (FIDIC Red Book 1999) or Exceptional Events (FIDIC Red Book 2017) clauses, or the Changes in Legislation clauses in seeking relief for claims relating to COVID-19. The party seeking relief would need to determine the strength of their position and prospects of success under the contract based on the facts and circumstances of the matter and the particulars that can be provided to substantiate such claims.

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