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Practical Considerations under FIDIC Contracts in Light of COVID-19

The outbreak of the coronavirus has been an unprecedented event affecting every industry, including construction.  To ensure their entitlement to an extension of time, costs, or even termination, parties to construction contracts need to carefully review the contract provisions that allocate risks.  Below, we discuss a number of practical considerations that may arise under a standard form construction contract – such as the FIDIC Red Book – in light of the COVID-19 pandemic.

A. Is the outbreak of coronavirus a force majeure event under FIDIC contracts?

The COVID-19 pandemic qualifies as a force majeure event under the 2017 FIDIC Red Book.  Pursuant to Clause 18 of the Red Book, a force majeure event is an event that is (1) beyond the parties’ control, (2) was not reasonably foreseeable, (3) could not reasonably have been avoided once having arisen, and (4) was not substantially attributable to either party.  While global pandemics are not specifically listed among the examples of Exceptional Events, the COVID-19 pandemic fits easily within the general definition of an Exceptional Event.

B. When (and how) must the affected party provide notice of an Exceptional Event?

Once an Exceptional Event occurs, it is important to closely follow contractual notice and mitigation provisions.  Under Sub-clause 18.2, the party prevented from performing any of its obligations must give notice to the other party of the Exceptional Event, detailing the impact of the event on performance.  Notice must be given within 14 days of the date the party became aware (or should have become aware) of the Exceptional Event and should be delivered in accordance with Clause 1.3. While the notice period is generally uniform, the exact timing of the required notice may vary substantially based on the facts and circumstances of each particular contract, e.g., when the COVID-19 pandemic prevented a particular performance.

C. What are the consequences of providing notice of an Exceptional Event?

Once the notice is provided, the affected party, either a contractor or an employer, may suspend its performance as long as the Exceptional Event prevents the performance.

D. What efforts is a contractor required to take to mitigate the Effects of an Exceptional Event?

The affected party is not excused from performing obligations that are not prevented by the Exceptional Event.  Hence, the crucial threshold question for a contractor is whether COVID-19 is the actual cause of the delay, suspension of work or increased cost.  The pandemic will not have a uniform impact on contractors’ obligations.  A contractor will need to show that it sought to mitigate the effects of the pandemic caused delays. Under Sub-Clause 18.3 each Party needs to use all reasonable means to minimize any delay in the performance of the contract.

E. Must payments continue after notice of an Exceptional Even

The occurrence of an Exceptional Event does not in and of itself excuse the parties’ payment obligations.

F. Will a contractor be entitled to recover costs?

While the occurrence of an Exceptional Event can trigger an extension of the time to perform, entitlement to recover costs and losses incurred as a result of COVID-19 is less certain.  A contractor would be able to recover costs in relation to some types of Exceptional Events, e.g., a war or strike where the construction is occurring.  By contrast, a contractor will not be entitled to recover costs arising in relation to other Exceptional Events, such as natural catastrophes.  Because the Red Book does not expressly address costs in the context of global pandemics, it is less certain how costs will be treated in light of COVID-19.

The FIDIC also contains other provisions that may impact costs.  A contractor could rely on Clause 13.7, which provides for an entitlement to price adjustments if a contractor can identify changes in the laws of the country of the construction that result in increased costs.  Clause 1.1.49 provides that “laws” means “all national (or state or provincial) legislation, statutes, acts, decrees, rules, ordinances, orders, treaties, international law and other laws and regulations and by-laws of any legally constituted public authority.”  While such claims are infrequent, a contractor should analyze whether COVID-19-related government restrictions caused the accrual of additional costs.

G. At what point can a contract be terminated due to an Exceptional Event?

Sub-Clause 18.5 provides that either party may terminate the contract (upon notice) if an Exceptional Event causes a delay of 84 continuous days or multiple delay periods totaling more than 140 days. The contractor is then entitled to recover certain costs specified in Clause 18.6.  Any part of the advance payment not yet repaid by the contractor becomes immediately payable to the employer under Clause 14.2.3.

H. What happens if disputes arise over the impact of COVID-19?

While a general assertion that COVID-19 can qualify as an Exceptional Event should not be seriously contested, there are project-specific issues that may lead to disputes.  For example, there may be disputes about the impact on the project and its “critical path,” mitigation measures, and whether a contractor is entitled to costs and losses incurred.

In the event a dispute arises, FIDIC Clause 20 provides for two primary tiers of dispute resolution: a Dispute Adjudication/Avoidance Board (DAAB) and ICC arbitration. A DAAB decision is a prerequisite to ICC arbitration.  Where a DAAB makes a decision, the FIDIC contract provides that Parties shall comply with it or serve a Notice of Dissatisfaction (NOD) within 28 days.  If no NOD is served, the DAAB decision becomes “final.”  If a party fails to comply with the DAAB decision, the other party can initiate ICC arbitration to enforce it.

Key Takeaways

Under FIDIC contracts, the COVID-19 pandemic and associated governmental actions should qualify as an Exceptional Event.  But that is only the start of the analysis.  Depending on the facts of each project, different issues may arise. As always, it is vital to review the specific contracts and consider the unique facts. It is also important that parties follow all procedural requirements for declaring and dealing with an exceptional event.  It is particularly important for an affected party to follow the procedures provided for under the respective contract and governing law for serving a notice of termination.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Ira M. Schulman Corporate Business Attorney Sheppard Mullins Law Firm
Partner

Ira M. Schulman is a partner in the Business Trial Practice Group in the firm's New York office.

Areas of Practice

Ira has more than 40 years of experience in all aspects of construction law with a particular emphasis on dispute resolution and contract negotiation.  He has tried numerous complex construction disputes in jury and bench trials in state and federal courts and before arbitration panels on behalf of owners - both public and private - contractors, subcontractors, sureties and school districts...

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Natalia M. Szlarb Intellectual Property & Arbitration Attorney Sheppard Mullin Law Firm
Associate

Natalia Szlarb is an associate in the Intellectual Property Practice Group in the firm's Washington, D.C. office.

Areas of Practice

Natalia focuses her practice on international arbitration and commercial litigation. She often works on complex arbitrations governed by a variety of arbitration rules, including ICC, ICDR, UNICTRAL and AIAC.

During law school, Natalia worked as an international intern at Beijing Arbitration in China and at the International Law Institute. She also interned at the Asian International Arbitration Centre.

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