COVID-19

COVID-19: Options for Contractors, Engineers and Employers

In my last blog, I discussed the effects of COVID-19 under the FIDIC Red and Yellow Books. Particularly whether contractors are entitled to claim for an extension of time and/or costs.

My advice was just a few weeks ago. At that time, some contractors were anticipating delays. Firstly caused by supply chain problems associated with plant, goods or materials sourced from China. Secondly by the travel restrictions which were in place. My thoughts were that,  the Contractor will be entitled to an extension of time provided he can demonstrate delay to the Time for Completion and/or the incurrence of Cost. He may also be entitled to claim for additional payment for Cost incurred.

But since then things have changed drastically. Some countries are on total lockdown with people having to stay at home. Many countries have imposed travel bans. So the effects of COVID-19 are now extreme and likely to last for a long time.

Reconsidered Options

As a consequence, I thought it would be sensible to examine the options available to the Parties as the situation  develops further. Again, I shall look at the provisions of the FIDIC Red and Yellow Books.

Suspension

The Employer may consider that if the Contractor is not able to proceed with the Works for the foreseeable future, it may be sensible to suspend the Works. This may minimise any cost which may become due to the Contractor. Sub-Clause 8.8 (Suspension of Work) allows the Engineer to issue a suspension instruction. The Contractor would then be obliged to protect, store and secure the Works against deterioration, loss or damage. This would effectively ‘mothball’ the project until the Employer decides to lift the suspension. In a case of suspension, the Contractor would be entitled under Sub-Clause 8.9 (Consequences of Suspension) to an extension of time and the payment of Costs including mobilisation and demobilisation costs. The Employer must weigh up the options here.

However, sub-Clause 8.11 (Prolonged Suspension) allows the Contractor to terminate the Contract if the suspension affects the whole of the works and the suspension period continues for more than 84 days. We are unsure how contractors will react as and when things return to normal and operations may be resumed. Presumably, many of them will be willing to pick up where they left off.

FIDIC does not provide any options for the Contractor to suspend the Works under the circumstances arising from COVID-19.

Termination

There are two clauses in FIDIC which give the Employer entitlement to terminate the Contract. Sub-Clause 15.2 (Termination by Employer) allows the Employer to terminate because of various acts of default by the Contractor. In my opinion, it cannot be said that inability to progress the works in the circumstances of COVID-19 is a default of the Contractor. This is therefore inapplicable.

Sub-Clause 15.5 (Employer‘s Entitlement to Termination) however, allows the Employer to terminate for his own convenience by giving 28 days’ notice. Nothing can be sensibly predicted at the moment. But as things progress, some employers will simply decide not to proceed further with the project, or at least not for some considerable time.

My earlier blog suggested that it is uncertain whether COVID-19 constitutes a Force Majeure event under FIDIC. If the Parties agree that it does, Sub-Clause 19.6 (Optional Termination, Payment and Release) provides that if the Works are prevented from progressing for a period of 84 days or for multiple periods of 140 days by reasons of Force Majeure, then either party may terminate the Contract.

Sub-Clause 19.7(Release from Performance Under the Law) provides that ‘if any event or circumstance outside the control of the Parties arises under the Law which makes it impossible or unlawful for either or both Parties to fulfil its or their contractual obligations … the Parties shall be discharged from further performance…’.  This may become applicable in circumstances whereby governments have introduced measures  which havemade further performance impossible. It then becomes a further reason for termination by either party.

Finally

The circumstances arising from COVID-19 have never been experienced before, or at least not within my – long! – lifetime. They are drastic and far reaching. Whilst I have given my opinion on the applications of the FIDIC contracts to the situation, this has been from a purely contractual point of view. In my opinion, the FIDIC contracts do not really envisage such a situation.

That said, in a situation as serious as this, the Parties must think outside the box of the contract. It is important to find ways to work together to safeguard the personnel involved. Comply with government rules and regulations and seek ways to manage the project to the best abilities of both Parties. The ability to maintain progress and complete on time may well be out of the control of both Parties. Contractors may be expending substantial additional costs. They no doubt will suffer from cash flow problems and will be powerless to control this. In short – both sides of the contracting fence will undoubtedly suffer. In my opinion, it would be unfair for either Party to attempt to gain any advantage from the situation.

Don’t forget that, provided both parties are in agreement, contracts may be amended at any time. Despite what the contracts say, I would encourage all involved to seek to reach agreement on a course of action. Ideally one which will be the least harmful to the parties and the project.

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