The strength of a contract is determined by its ability to support the execution of the Works and to distribute risks and responsibilities in a fair and efficient manner. Jakob B. Sørensen, the author of FIDIC 2017 Contracts Companion - 3 vol set, examines whether the FIDIC Contract provides a robust tool for managing Coronavirus related difficulties.
The FIDIC Conditions of Contract (FIDIC COC) includes several relevant provisions that need to be considered when the Contractor's execution of the Works is affected by events like the current health crisis. Please be mindful that strict application of contract terms may not be the most prudent approach for any of the Parties during the Coronavirus pandemic. When managing the contract, the Parties should always consider what approach benefits the project and the Parties most in the long term, rather than rigorously sticking to the written contract. It might be useful to consider out-of-the-box solutions during this crisis.
Many governments are currently encouraging public employers to seek amicable solutions rather than strictly apply the provisions of the contract.The guidance prepared by the Agency for Public Finance and Management - Danish Ministry of Finance on 1 April 2020 suggests that public employers (i) pay contractors and suppliers early, (ii) prepay deliverables where relevant, and (iii) manage all provisions on default with a flexible approach (e.g. refraining from claiming delay damages). A similar way of working could also be beneficial to private employers. In addition to the numerous provisions obliging the Parties to give Notices, it is advisable to continue communicating in order to overcome challenges imposed by the Coronavirus crisis.
Also note that most of the provisions of the FIDIC COC on relief in case of exceptional circumstances or events (and most of the similar provisions of other construction contracts) are drafted on the assumption that it will usually be the Contractor relying on the provisions on Exceptional Events etc. The protection provided to the Employer is not a mirror image of the protection provided to the Contractor, even if Clause 18 applies to both Parties. The Payment is usually the main obligation for the Employer, but the obligation to make payments is specifically exempted from Clause 18 (it applies to both parties). As a result, Clause 18 does not provide any relief if the Employer is prevented from making payments.
The obligation to allow access to the Site under Clause 2 will rarely be prevented by an exceptional event (although the Contractor may be prevented from initiating any work there). If the Employer cannot, e.g., exercise their right of inspecting under Clause 7, then the FIDIC COC do not provide the Employer any relief as the right to inspect is not an obligation and, therefore, such prevention does not fall within the scope of Clause 18. Instead, the Employer will have to either skip the inspection, have someone locally carry out the inspection or suspend progress of the Works under Clause 8 or, ultimately, terminate the Contract under Sub-Clause 15.5 (Termination for Convenience).
FIDIC has published a COVID-19 Guidance drafted by the FIDIC Contracts Committee. The FIDIC Guidance on the Coronavirus crisis provides balanced views on provisions to be considered in specific COVID-19 scenarios.
Below, please find an overview of clauses in the FIDIC COC relevant to the circumstances during the pandemic:
Sub-Clause 6.7 Health and Safety of Personnel
The Contractor shall (2017: in collaboration with local health authorities) make suitable arrangements for the prevention of epidemics.
Application: It is within the Contractor's scope of work to comply with locally applicable guidelines to prevent the spreading of the Coronavirus. EOT relief and Cost due to changes are not included in these requirements after the Base Date.
Sub-Clause 8.5 (1999: 8.4) Extension of Time for Completion
The Contractor is entitled to an EOT if they are or will be delayed by unforeseeable shortages in staff or goods (or Employer-Supplied Materials, if any) caused by epidemic or the Government’s actions.
Application: This Sub-Clause gives the Contractor an Extension of Time, but no compensation for the increase in costs. Also, please see Clause 18 below.
Sub-Clause 8.6 (1999: 8.5) Delays Caused by Authorities
If the Contractor has followed the relevant procedures but the authorities’ actions disrupted the Contractor's work and if such delay/disruption was unforeseeable, then the Contractor is entitled to an EOT under Sub-Clause 8.5 (1999: 8.4).
Application: Applicable if, e.g., processing time for local authorities' issuance of permits etc. is unforeseeably extended due to the pandemic, this may entitle the Contractor to an EOT. No relief is provided for Cost, but consider Sub-Clause 13.6 (13.7), cf. below.
Sub-Clause 8.9 (1999: 8.8) Employer's Suspension
To comply with local legislation, the Employer (through the Engineer) may suspend the work at the Site.
Application: Contractor will be entitled to an EOT as well as Cost compensation (2017: Plus Profit). The Contractor shall protect and secure the Works during the suspension.
Sub-Clause 13.6 (13.7) Adjustments for Changes in Laws
Time for Completion and the Contract price are both adjusted due to the changes in the Law implemented after the Base Date.
Application: In many cases, Coronavirus does not impact the execution of the Works directly. However, changes in legislation and guidelines issued by the authorities due to Coronavirus will, in many cases, impact the execution of the Works. If the Contractor is delayed or incurs Cost because of such (new) legislation, the Contractor is entitled to an EOT and payment of such Cost.
Sub-Clause 15.5 Termination for Employer’s Convenience (1999: Employer’s Entitlement to Termination)
The Employer may at any time terminate the Contract’s services for convenience.
Application: If the Employer - because of Coronavirus or for another reason - no longer requires the completion of the Works, the Employer may terminate the Contract and pay the Contractor for work carried out plus cover the costs incurred by the Contractor as a consequence of the termination. If the Contract is terminated under this Sub-Clause, the Contractor is entitled to the payment in accordance with Sub-Clause 18.5 (1999: 19.6). The Contractor is not entitled to be compensated for the loss of profit on the terminated part of the Works.
Clause 18 Exceptional Events (1999: Clause 19 Force Majeure)
This Clause provides relief for a Party if the performance if an obligation is prevented by an Exceptional Event (1999: Force Majeure). The event does not need to be unforeseeable, but it has to be beyond the party's control and not attributable to the other party. The Coronavirus crisis fulfils these criteria. Further, the affected party could not reasonably have provided against it before entering into the Contract or have reasonably avoided or overcome it once it had arisen. This is assessed individually based on the specific circumstances.
Application: The affected party must notify the other party within 14 days of the event and each party shall seek to minimise any delay caused by the event. Clause 18 (1999: 19) does not provide relief for the costs incurred as a consequence of the Coronavirus. If the Contract is terminated, the Contractor is not compensated for their loss of profit on the terminated parts of the Works. If the execution of nearly all of the Work is prevented for a continuous period of 84 days (or for multiple periods in the aggregate of more than 140 days), either Party may terminate the Contract. The Contractor is then paid the value of work completed plus the costs of Materials ordered for the Works as well as other costs incurred by the Contractor because of the termination.
Overall, The FIDIC COC provides robust and well-balanced regulations for most of the complications caused by the Coronavirus crisis and the FIDIC COC constitutes an efficient and sound contractual basis for construction projects.
If you are involved in preparing, administering, or contributing to the FIDIC suite of contracts, 2017 edition, you can find out more if you read the FIDIC 2017 Contracts Companions, available in print and as eBooks: