FIDIC based EPC Contracts and COVID-19 – A “silver” bullet?

Introduction

The on-going COVID-19 pandemic, is giving rise to the very real problem of hindered performance in respect of supply and construction obligations under EPC contracts in the power and infrastructure sectors. We have noticed an increasingly common trend that sees contractors seeking to make claims for extensions of time and costs on the basis that the COVID-19 epidemic either constitutes force majeure.

The key to this issue however, lies with the parties examining the terms of the contracts themselves. This is in order to identify the correct provisions that may entitle parties to relief, but also equally to ensure compliance with contractual requirements relating to notification. 

In Trinity’s recent experience, contracting parties often have strong views on whether to assert or deny a claim for an extension of time, force majeure or other relief based on each party’s individual view of the impact of COVID-19 on the obligations under the relevant EPC contract. Employers often take the view that COVID-19 should not serve as a “whitewash” for contractors that were already displaying signs of poor performance and delays.  Conversely contractors can be of the opinion that given the impact of COVID-19 on an increasingly global supply chain due to various restrictive measures having been introduced, they are left with little choice but to seek relief under the contract.

Furthermore, while contractors are more likely to be impacted by COVID-19, this cannot be taken as an issue exclusive to the contractor. Employers too need to consider whether their obligations to contractors may be impacted such that notice needs to be given to the Contractor.

In this context, the relevant wording of the underlying contract will be key, particularly where a standard form such as FIDIC Silver has been used and then further amended.

This article serves as a case study for any party considering the application and interpretation of force majeure clauses in the context of a COVID-19 based claim primarily in FIDIC based contracts but the principles are broadly applicable to any other project or construction contract that contains force majeure provisions.

FIDIC Silver

Over recent years, the use of the FIDIC Conditions of Contract for EPC Turnkey Projects (First Edition) 1999 and the recent update by way of the Second Edition in 2017 (both contracts commonly referred to as the FIDIC “Silver Book”), have become the de-facto starting point for EPC contracts in power and infrastructure projects particularly in Sub-Saharan Africa. This is especially the case where such projects are funded by way of project finance. Although the Second Edition (2017) is the latest version of FIDIC Silver, the First Edition (1999) remains widely used and will form the core provisions on many projects impacted by COVID-19 particularly in Sub-Saharan Africa. 

Irrespective of which edition of FIDIC Silver is adopted as the “base” document for the EPC contract, the market practice on power and infrastructure projects in Sub-Saharan Africa has developed such that many of the standard provisions providing relief from performance (including force majeure in particular) will have been heavily amended. One of the main reasons for this usually stems from the need to obtain “back-to-back” protection with a document further up the contractual chain. In the majority of IPPs, this document will take the form of either a power purchase agreement entered into by the employer and an offtaker/utility or a concession/ implementation agreement entered into by the employer and the national government in order to secure performance of certain rights and obligations in respect of the project.

For more information on this topic please see Trinity’s previous article  
https://www.trinityllp.com/updates-to-fidic-suite-of-contracts-a-detailed-analysis/ .

This article focuses on the relevant FIDIC terms in light of COVID-19, on the basis of the First Edition (1999).  However, the relevant sections of the Second Edition (2017) have been referred to where those principles are capable of broader application. We also aim to share Trinity’s experience of the issues that are raised below.

Not safe to assume

It is never advisable to consider a term of any contract in a vacuum.  That is certainly so in respect of determining possible contractual means of obtaining relief in respect of COVID-19 under FIDIC Silver.  

Many parties will instinctively, first look to the force majeure provisions for the solution.  In the various notices that we have seen thus far from contractors, many are indeed relying upon force majeure.  The reasons for this are multiple but in large part it is because force majeure is an instinctive choice when a significant event outside of a party’s control arises.  In addition, force majeure can provide an affected party with immediate relief from compliance with their obligations (in addition to the possibility of more substantive claims for compensation that might also be made).   

However, electing to pursue force majeure is not the end of the matter under FIDIC Silver terms (or indeed any other contract).  An affected party must also consider the following key questions:

• Under which clause the “event” (or possibly, other action or impact consequent on the event) may fall;
• What notification requirements are in place?  Must the notice be submitted within a prescribed number days?  If the notice has not been submitted on time, is relief entirely excluded, or does relief simply commence from the date of the notice once served?  Are updates required at certain defined intervals, or as and when the impacts change?
• What information has to be included in any notice?  What is the impact on performance and can that be evidenced (as opposed to merely asserted)?  By way of example, an inability to access the project site or even the country obviously has an obvious impact.  However, in many instances the analysis will be more complicated.  It is not safe to assume that a brief letter from an affected party referring to a list of possible matters impacted by COVID-19 without more detail, will suffice to satisfy all the requirements to obtain force majeure relief;
• What steps are being taken, and what further steps can reasonably be undertaken, to mitigate the impact of COVID-19?

Parties are advised to carefully consider whether the “event” impacting performance, is in fact an event of force majeure, or whether it is, for example, a change in law.  In other words, there may (depending upon the scenario) be an important distinction between the event (a) in the form of COVID-19 itself and its direct impact (i.e. worker shortages due to COVID-19 infections) as opposed to, for example (b) changes in local legislation/regulations that may result from the pandemic (i.e. restriction of movement, importation and quarantine).

Which provisions under FIDIC Silver are relevant?

Definition of Force Majeure

The 1999 FIDIC Silver Book refers to “Force Majeure” (Cl. 19).  The 2017 edition refers to the same as “Exceptional Events” (Cl. 18).  The terms of those provisions are otherwise broadly similar.

Under FIDIC (1999), Sub-Clause 19.1 defines “Force Majeure” as “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.

This raises the ongoing question as to what constitutes the “event”.  If the “event” is COVID-19 itself, the direct impact of that is likely to be something akin to worker shortages due to illness.  However, the issues becomes more complicated if we try and examine any subsequent regulations, legislation or the like.

Sub-Clause 19.1 also includes a non-exhaustive list of events or circumstances that might constitute Force Majeure, stating that they “may include, but [are] not limited to” exceptional events or circumstances “of the kind listed below”, as long as they meet the four requirements in Sub-Clause 19.1(a) to (d) above:

“(i) war, hostilities (whether war be declared or not), invasion, act of foreign enemies,

(ii) rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war,

(iii) riot, commotion, disorder, strike or lockout by persons other than the Contractor’s Personnel and other employees of the Contractor and Subcontractors,

(iv) munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio-activity, and

(v) natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.”  

A pandemic is arguably not an event of the kind listed at (i) to (v) above. However, given the proviso that this list is non-exhaustive, means it is unlikely to be fatal when considering whether an event constitutes a Force Majeure Event or Exceptional Event under FIDIC terms. 

Notice Requirements

A party impacted by a Force Majeure must give a notice to the Employer if it “is or will be prevented from performing any of its obligations under the Contract” (Sub-Clause 19.2 (1999)).

Under FIDIC (1999), that notice “shall” be given within 14 days after the affected party became aware (or should have become aware) of the relevant Force Majeure event or circumstance.  Where that notice has been given, the affected party will then be excused from performance of the affected obligations until the impact ceases.  

On the face of it, the requirement to issue the notice within 14 days under FIDIC (1999) appears to be compulsory.

Although this points towards an affected party issuing a notice as soon as a potential Force Majeure event arises, it is important to remember that vague notices that fail to identify the impact in identifiable terms remain open to challenge.  In our recent experience, we have seen that many of the notices issued, have been prepared in a rushed or “last minute” fashion. We have also become accustomed to seeing notices that list every possible impact arising from the existence of COVID-19, without any real evidence or detail of what obligations, in fact, are prevented from being performed.

FIDIC Silver terms require that the notice “shall specify the obligations , the performance of which is or will be prevented”. That obviously presents some difficulty in circumstances where, the full impact may not yet be known.  A prudent cause of action is to be more detailed than less, accompanied by a substantiation of what aspects of the works are affected.    

In addition, FIDIC (2017 Edition) also requires an affected party to give further notices every 28 days after giving the first notice if the Exceptional Event has a continuing effect. Even in the absence of this requirement, regular updating of the position is advisable as it provides an opportunity to provide further details of the Force Majeure event, especially where those details were not included in earlier notices.

Entitlement as a Result of Force Majeure / Exceptional Event

A Force Majeure event does not necessarily entitle a contractor to costs under FIDIC.  Often, the only relief will be for an extension of time. Sub-Clause 19.4 of FIDIC (1999) provides that:

“If the Contractor is prevented from performing any of his obligations under the Contract by Force Majeure of which notice has been given under Sub-Clause 19.2 [Notice of Force Majeure], and suffers delay and/or incurs Cost by reason of such Force Majeure, the Contractor shall be entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to:

(a) an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion], and

(b) if the event or circumstance is of the kind described in sub – paragraphs (i) to (iv) of Sub-Clause 19.1 [Definition of Force Majeure] and, in the case of subparagraphs (ii) to (iv) , occurs in the Country, payment of any such Cost.”

Contractors (if relying on Force Majeure / Exceptional Events) have argued that COVID-19 is an event “of the kind” listed in Sub-Clause 19.1(i) to (iv), simply by reason of the fact that those events are by their nature unexpected and fundamentally not attributable to the fault of any party.  However, based on that logic, arguably any Force Majeure event falling within the requirements of Sub-Clause 19.1 would attract relief by way of extensions of time and cost, where that is clearly not what was intended by the drafting.                                                  

Mitigation

Under both FIDIC 1999 and 2017, each Party is at all times obliged to use “all reasonable endeavours to minimise any delay in the performance of the Contract”. 

What satisfies “all reasonable endeavours” is dependent on the circumstances and the governing law.  This is likely to be the subject of considerable debate between parties.  However, under English law, “all reasonable endeavours” is a high threshold. 

FIDIC requires that employers also minimise the delay in performance of the contract.  Employers should actively consider whether there may be, for example, approvals that might reasonably be given to undertake work in different ways to that anticipated, or to use alternative suppliers to those provided for in the contract. 

However, given the ongoing financial effects of the COVID-19 pandemic, employers are likely to see arguments that contractors should not be obliged to “mitigate” where that would would lead to financial distress– where parties are already likely to be in a difficult financial position.  

What about contracts that amend the FIDIC Silver provisions relating to Force Majeure and Exceptional Event?

We noted above that more often than not,EPC contracts forpower and infrastructure projects in Sub-Saharan Africa will not only have FIDIC Silver provisions providing relief from performance (including force majeure) but the same have also been heavily amended. The core justification for this position is the need to “back to back” or align the risk allocation for Force Majeure/Exceptional Event with the corresponding risk allocation “head” project document.

In many cases, the force majeure regime in the head project document, will at their core, often mirror the same considerations and mechanisms described above vis-à-vis FIDIC but such document may not have applied the same rigour and clarity as the FIDIC forms. Therefore, parties are strongly advised not to assume the definitions of force majeure and the associated requirement to obtain relief are identical to FIDIC and/or can be interpreted accordingly. As mentioned, the terms of the individual EPC contract will need to be analysed carefully. Indeed, the risk allocation in a head contract relating to Force Majeure may have been reached after a protracted negotiation and the risk profile accepted by the employer may not match the risk an EPC contractor is willing to accept.

Summary

There has been concern from our clients and industry participants with regards to the potential impact of COVID-19 on their projects.

This article serves as a case study for any party considering the application and interpretation of force majeure clauses in the context of a COVID-19 based claim primarily in FIDIC based contracts but the principles are broadly applicable to any other project or construction contract that contains force majeure provisions.

Trinity has been advising on force majeure provisions in EPC contracts (and more generally) arising from the current COVID-19 pandemic and the process required to obtain relief and/or respond to claims by an affected party. We would advise any party considering making or defending a claim for force majeure in the face of the potential impact of COVID-19 to seek legal advice at the earliest stage possible to ensure the precise requirements of FIDIC and/or the precise requirements of the individual contract.