Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
In France, the most common standard form construction contracts are the International Federation of Consulting Engineers (“FIDIC”) forms of contract. The predominant forms are the first editions (published in 1999) of the:
The FIDIC Red, Yellow and Silver Books are collectively referred to as the “Rainbow Suite”. Clause references and capitalised terms in this section refer to those used in the Rainbow Suite (1999 editions), unless specifically stated otherwise.
The FIDIC Red, Yellow and Silver Books all include provisions on Force Majeure at Clause 19.
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.”
The definition of Force Majeure does not require that the event or circumstance be unforeseeable. Accordingly, contracts entered into post the Covid-19 pandemic would not be precluded from citing Covid-19 as being an event of Force Majeure, even though it was existing and known to the parties at the time of entering into the contract.
Sub-Clause 19.1 includes a non-exhaustive list of events (including, among others: (i) war; (ii) rebellion; (iii) riot; (iv) munitions of war; and (v) natural catastrophes) that may constitute Force Majeure, subject to conditions (a)-(d) above being satisfied. Epidemic, pandemic and/or plague are not included in the non-exhaustive list of Force Majeure events in Sub-Clause 19.1. Notwithstanding, the Covid-19 outbreak could arguably be construed as a “natural catastrophe” and would likely satisfy conditions (a)-(d).
Sub-Clause 19.2 states that if “a Party is or will be prevented from performing any of its obligations” by Force Majeure then it shall give notice “within 14 days after the Party became aware, or should have become aware, of the…Force Majeure.” The Party shall then be excused performance of such obligation, although payment obligations shall not be excused. A party seeking to rely on Force Majeure relief must be able to show that it is actually “prevented” from performing its obligations under the Contract – it is not sufficient for such obligations simply to be disrupted or made more expensive to perform. In the context of the Covid-19 outbreak, prevention could arguably include government measures imposed to limit the spread of Covid-19, including lockdown and quarantine measures and the suspension of issuing certain permits and visas.
Under Sub-Clause 19.3 both Parties have a duty to “use all reasonable endeavours to minimise any delay.” In the context of the Covid-19 outbreak, mitigation could include adjustments to the programme and resource management to minimise delay to the works. Also, the sourcing of alternative suppliers for goods, equipment and materials to mitigate against disruption to the supply chain.
Sub-Clause 19.4 provides that, if Sub-Clauses 19.1-19.3 (above) are satisfied and subject to the Contractor’s claims procedure and notice requirements set out in Sub-Clause 20.1, a Contractor will be entitled to an extension of time and, in certain circumstances, Cost. Cost would only be available in case of events “of the kind” described in sub-paragraphs (i) to (iv) above, where events (ii) to (iv) must occur in the country where the Works are being executed. Natural catastrophe is thus excluded as an event of Force Majeure that entitles a claim for Cost. As mentioned above, even though epidemic, pandemic and/or plague are not included in the non-exhaustive list of Force Majeure events in Sub-Clause 19.1, Covid-19 could arguably be construed as a “natural catastrophe”. In such case, a contractor would be entitled to claim for time but not Cost.
Sub-Clause 19.6 provides that either Party may terminate the Contract if “the execution of substantially all the Works in progress is prevented for a continuous period of 84 days by reason of Force Majeure… or for multiple periods which total more than 140 days due to the same notified Force Majeure.” This entitlement to terminate only arises if the Contractor is prevented from executing substantially all of the Works in progress, which is a high threshold to satisfy.
Sub-Clauses 8.4 provides the Contractor is entitled to claim an extension of time, subject to the claims procedure at Clause 20, if completion of the Works is or will be delayed by, among other things, “Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions.” In the context of the Covid-19 outbreak, Contractors, whose supply chains are impacted by the pandemic, could seek to claim time relief under this clause. However, such relief may not be applicable for contracts entered into post-the Covid-19 outbreak, as the shortages must be “Unforeseeable” (i.e. “not reasonably foreseeable by an experienced contractor by the date of submission of the Tender”).
Sub-Clause 8.5 provides that, if the Contractor has “diligently followed” procedures laid down by public authorities and such public authorities cause “Unforeseeable” delay or disruption, the Contractor may claim an extension of time under Sub-Clause 8.4. In the context of the Covid-19 outbreak, the lockdown and quarantine measures and the suspension of issuing certain permits and visas could arguably constitute delay or disruption caused by public authorities. Again, relief is only available if such delay or disruption is “Unforeseeable” (see above).
Sub-Clause 13.7 provides the Contractor is entitled to claim an extension of time and Cost, subject to the claims procedure at Clause 20, in relation to any “change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws)…made after the Base Date, which affect the Contractor in the performance of obligations under the Contract.” “Laws” means “all national (or state) legislation, statutes, ordinances and other laws, and regulations and by-laws of any legally constituted public authority.” Given the relatively wide definition of Laws, the introduction of quarantine and lockdown measures relating to Covid-19 could arguably entitle the Contractor to claim time and Cost. Such change in Laws must occur after the “Base Date”, being “28 days prior to the latest date for submission of the Tender.”
Sub-Clause 17.4 provides the Contractor is entitled to claim an extension of time and Cost, subject to the claims procedure at Clause 20, in relation to Employer’s risks set out in Sub-Clause 17.3. Such risks include, at sub-paragraph (h), “any operation of the forces of nature which is Unforeseeable or against which an experienced contractor could not reasonably have been expected to have taken adequate preventative precautions.” If the Covid-19 pandemic is deemed a force of nature, then relief may be available to a contractor that suffers related loss or damage that is “Unforeseeable” (see above) or that could not reasonably have been prevented against. This second limb could allow contractors to claim for foreseeable loss related to Covid-19 (i.e. under contracts entered into after the pandemic outbreak).
Article 1218 of the French Civil Code (the Civil Code) provides that – “There is force majeure in matters relating to a contract when an event beyond the control of the debtor, which could not reasonably have been foreseen at the time of conclusion of the contract and the effects of which cannot be avoided by appropriate measures, prevents performance of the obligation by the debtor. If the impediment is temporary, performance of the obligation shall be suspended unless the resulting delay justifies termination of the contract. If the impediment is permanent, the contract is terminated by operation of law and the parties are discharged from their obligations under the conditions set out in articles 1351 and 1351-1.”
Article 1218 provides that three conditions must be met (i.e. the event being exterior to the party’s control, unforeseeable and unavoidable) to evidence a force majeure event whereby performance of the obligations under the contract would be suspended either temporarily or permanently.
The mere existence of an epidemic is not in itself sufficient to constitute force majeure. In the past, French case law has had the occasion to rule out the classification of force majeure invoked on the grounds of an epidemic (i) when no causal link was established between the Ebola virus and the company's decline in activity, (ii) when the Ebola virus had not made the performance of the obligations impossible, (iii) when the Dengue epidemic was recurrent and therefore foreseeable, and (iv) when the presence of the H1N1 virus had been widely announced even before the introduction of health regulations.
With regard to unforeseeability, it would be possible to consider that this condition is met for contracts entered into before the COVID-19 outbreak. For contracts entered into as of that date, relief may not be applicable.
It is essential to note that the parties remain free to adjust the definition of force majeure in their contract, specifying what will or will not be expressly considered as a force majeure event. Reference could be made here to a more general notion, such as "any epidemic affecting the performance of the contract" (even if known and on-going at the time of signing of the contract) or a specific virus, such as COVID-19.
Article 1351 of the Civil Code provides that – “Impossibility of performance shall release the debtor to the extent that it is due to force majeure and is definitive, unless the debtor has agreed to perform or has been given prior notice of default.”
Article 1351-1 of the Civil Code provides that – “Where the impossibility of performance results from the loss of the thing due, the debtor who has been put in default shall nevertheless be discharged if he proves that the loss would have occurred in the same way if the obligation had been performed. He shall however be bound to assign to his creditor the rights and actions attached to the thing.”
The onus will be on the contractor invoking it to demonstrate that the conditions of force majeure are met, and in particular the impossibility to implement appropriate measures enabling the performance of its obligations, as well as the causal link between the COVID-19 and the impossibility to perform its obligations (subject to any additional terms set out under the specific contract).
Article 1195 of the Civil Code states that “If a change in circumstances, unforeseeable at the time of conclusion of the contract, makes performance excessively onerous for a party who had not agreed to bear the risk, that party may request the other party to renegotiate the contract. It shall continue to perform its obligations during the renegotiation. If the renegotiation is rejected or fails, the parties may agree to terminate the contract, on the date and on the conditions they determine, or may request the court to adapt it by mutual agreement. If no agreement is reached within a reasonable time, the court may, at the request of one of the parties, revise or terminate the contract, on the date and under the conditions it shall determine.”
If COVID-19 is likely to constitute a force majeure event according to article 1218 for contracts entered into prior to the outbreak, some contractors will attempt to invoke hardship (imprévision), allowing the parties to renegotiate their contract under the conditions of article 1195 of the Civil Code. Hardship is evidenced when performance of the obligation has not been made impossible, but is only more difficult for the debtor, either because he will obtain in return a performance whose value will have considerably diminished, or because performance, without being impossible, will require his greater efforts or a longer time than what was envisaged. Hardship is therefore intended to play a preventive role, since the risk of the contract being terminated or revised by the judge should encourage the parties to negotiate. The court may also decide that the contract should be reviewed by a judge.
It should be however noted that the parties may contractually exclude the application of article 1195 of the Civil Code or may adjust the conditions of its application, in particular by adjusting the conditions of renegotiation and recourse to the court for the revision / termination of the contract.
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