A first look at FIDIC contracts and coronavirus

There is no doubt that one of the sectors worst hit by COVID-19 is construction, irrespective of the country where the project is executed. In the case of projects in which the FIDIC Conditions (the “Conditions”) apply, it is important to be familiar with certain clauses to understand the possible consequences of the pandemic for the parties involved. This note aims to take a first look at those clauses, focusing on the Conditions of Contract for Plant and Design-Build (yellow book) and the Conditions of Contract for Construction (red book) of 1999. When necessary, we will refer to the differences in the conditions published by FIDIC in 2017.

Concept of force majeure. It is appropriate to start this analysis by referring to clause 19 [Force majeure] of the Conditions, which, in general, regulates the situations classified in the agreement as force majeure or, as it is referred to in clause 18 [Exceptional events] of the 2017 version of the Conditions, an exceptional event.

We must remember that the definition of force majeure established in that clause may not necessarily match the definition in the law applicable to the contract. If such definition exists, it may also be relevant because, if the event cannot be classified as force majeure under the Conditions, but as a consequence of it, under the applicable law it is impossible or unlawful for one or both parties to comply with their contractual obligations (or that law releases them from complying), either one of the parties can notify the termination of the contract (sub-clause 19.7).

The Conditions define force majeure (sub-clause 19.1) as an exceptional circumstance or event that: (a) is outside the party’s control; (b) could not have been reasonably foreseen by the party arguing it before signing the contract; (c) cannot be reasonably avoided or overcome by the party; and (d) is not attributable to the other party.

The Conditions include a non-exhaustive list of examples of what can be considered exceptional events or circumstances for these purposes. That list does not expressly refer to epidemics or pandemics, which does not mean that they cannot be classified as an event of force majeure for the purposes of the Conditions if they meet the four requirements stated above.

Moreover, in some cases, the contractor may assert force majeure affecting its subcontractors, but exclusively if that force majeure meets the requirements envisaged in the Conditions, and the contractor notifies that force majeure in the period and form established in the contract (sub-clause 19.4 of the 1999 Conditions, not included in the 2017 Conditions).

Obligations of the party experiencing force majeure. If there is an event that can be classified as force majeure under the contract, the parties are obliged to take all reasonable measures to mitigate the harm and, in particular, the delay that the event may cause (sub-clause 19.3). Moreover, they must notify the other party of the existence of force majeure affecting or that may affect compliance with their obligations within 14 days of becoming aware of this circumstance.

The 2017 Conditions also specify that, if the 14-day period is not complied with, the party experiencing force majeure will not be exempt from the obligation until the other party receives notification. The 2017 Conditions stipulate, in sub-clause 18.2, that, if the 14-day period is not complied with, the party experiencing force majeure will not be exempt from the obligation until its notification is received by the other party (sub-clause 18.2). They also establish that, if an exceptional event has continuing effects over time, the party must notify the other every 28 days, updating the situation (sub-clause 18.3).

As a rule, contractual payment obligations cannot be addressed in that notice or affected by force majeure (sub-clause 19.2).

Consequences of force majeure. Contractors that, having duly notified the force majeure event, suffer delays affecting the completion of the project will be entitled to request a deadline extension under sub-clause 8.4 [Extension of Time for Completion]. The right to claim overcost, however, is only envisaged in certain cases: if the event is one of those included in the list of sub-clause 19.1 that can be classified as man-made (letter (b) of sub-clause 19.4). Therefore, overcost may not be claimed if the force majeure is due to a natural disaster.

As that list does not expressly refer to epidemics or pandemics, it is not clear whether they would entitle the contractor to claim overcost, if they could be classified as force majeure affecting compliance with its obligations. Given the individual circumstances of the case, it would be necessary to see whether the pandemic can be equated to the events that do entitle the contractor to claim overcost under the contract. Otherwise, the contractor would only be entitled to request an extension.

If, as a result of force majeure, the execution of the works is substantially affected for a period of 84 consecutive days or for multiple non-consecutive periods of over 140 days in total, either party may notify the termination of the contract.Other relevant clauses if the event cannot be classified as force majeure. Regardless of whether the event is classified as force majeure, the contractor may be entitled to an extension (but not to overcost) if completion of the works is delayed by any of the causes described in sub-clause 8.4, which include the “unforeseeable shortages of personnel or goods caused by epidemic or government actions.” In this case, we must understand that the express reference to an “epidemic” logically extends also to pandemics affecting not only the country where the project is developed but any other. Also, sub-clause 8.5 recognizes the sub-contractor’s right to claim an extension when the delay is caused by government measures (such as those being taken by the governments of different countries to fight against the pandemic).