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FIDIC’s COVID-19 Guidance Memorandum to users of its standard form construction contracts
Australia | Publication | April 2020
Introduction
The International Federation of Consulting Engineers (FIDIC) recently published guidance for its contract users which is aimed at helping them manage some of the situations that are arising across the world as a consequence of the current pandemic. The new guidance sets out typical scenarios which serve as a helpful aide-memoire of points for contractors and employers to consider as they try to avoid disputes and manage issues as they crop up.
The comments made in FIDIC’s COVID-19 Guidance Memorandum (“Guidance”) are general and broad in nature and do not relate to any particular type of project, legal system or jurisdiction. The Guidance looks at certain contractual mechanisms found in the main (unamended) FIDIC forms and advises parties to obtain specific legal advice in relation to their projects and contract terms. The Guidance also needs to be considered in the light of the governing law of any given contract, the positions being taken and policies being adopted by the relevant governments (at both national and local levels) and international organizations.
FIDIC’s Guidance is focused on its main ‘Books’ – its Red (RB), Yellow (YB), Silver (SB), Green (Green Bk), Pink (PB), Gold (Gold Bk) and the Emerald Book (EB) – and, in relation to the main construction contracts, both the 1999 edition, as well as the recent 2017 suite.
Examples of COVID-19-related project scenarios
The Guidance puts forward seven scenarios which could arise on any given project and looks at the remedies that might be available to the parties. Our table below highlights the issues and considerations set out in the Guidance.
In the introduction, the document provides a bold statement as to FIDIC’s approach to contract procurement, project management and dispute avoidance:
- Discouraging adversarial attitudes between the parties
- Promoting cooperation and trust between the parties
- Encouraging prompt payment to maintain cash flow
- Encouraging dispute avoidance
- Not supporting a party taking undue advantage of its bargaining power
The Guidance also highlights FIDIC’s Golden Principles which we outlined in our Overview of FIDIC 2017.
Health and safety matters under FIDIC forms
As a prelude to the COVID-19-related scenarios, the Guidance reminds FIDIC users that:
- The contractor is responsible for the safety of all of its operations and has certain health, safety and environmental obligations which include:
- Complying with all applicable health and safety laws and regulations (the Guidance specifically points out that this is particularly relevant at present as governments set out their own COVID-19-related requirements concerning construction sites; by way of example only, here is our update on UK construction sites).
- Ensuring that suitable arrangements are made “for all necessary welfare and hygiene requirements and for the prevention of epidemics.”
- Limiting damage and nuisance that results from the contractor’s operations/activities; and
- The employer is also generally responsible for ensuring that its own personnel (depending on the FIDIC form used, this will also extend to the employer’s representative and engineer) and other contractors comply to some extent with the same health, safety and environmental obligations which are imposed on the contractor.
Seven COVID-19-related scenarios
In relation to each scenario outlined below, the parties must remember the importance of complying with all communication obligations (the giving of notices and keeping of records) in a timely fashion in accordance with the contract terms.
| COVID-19-related project scenario | Possible contractual remedies |
|
|---|---|---|
| 1 |
Government (national/local) does not issue new legislation/regulations stopping construction works/activities on sites. Due to health and safety measures being implemented to stop transmission of the virus, the contractor faces difficulties:
|
Time: The contractor may explore
Which provide for EOT entitlement in cases of “Unforeseeable shortages in the availability of personnel or Goods (or Employer-Supplied Materials, if any) caused by epidemic or governmental actions” (RB 2017 wording). Under SB 2017, the contractor is entitled to EOT only in the event of Unforeseeable shortages in the availability of Employer-Supplied Materials, if any, caused by epidemic or governmental actions. There is no similar provision under SB 1999 as it is a Contractor’s risk under this Book. There is no similar provision under Green Bk 1999 but SC 6.1(h), 7.3 and 10.4 could be investigated. Money: The above provisions only give entitlement to EOT; there is no mention of financial remedy, which would depend on particular circumstances and whether the contractor can establish entitlement to financial compensation elsewhere under the contract or at law. |
| 2 |
Government (national/local) does not issue new legislation/regulations stopping construction works/activities on sites. Due to health and safety measures being implemented to stop transmission of virus, the contractor suffers delay which is caused by the authorities (for example, the authorities make repeated health and safety inspections of the site). |
Time: The contractor may be entitled to an EOT under
Provided that conditions set out in the sub-clauses are fully satisfied. Money: Regarding any financial entitlement, the same comment applies as in Scenario 1 above. |
| 3 |
Government (national/local) has issued a change in the law (CIL) which restricts construction works/activities on sites. The contractor is still able to proceed with works – but suffers delay and/or additional cost as a result of the CIL. |
What constitutes a CIL in the relevant country? CILs may include specific COVID-19-related measures affecting construction projects (examples include social distancing, supply of face masks and hand sanitizers, alternative arrangements for transportation, facilities, working hours for staff and labour). Obtain expert legal advice on what particular events constitute CILs (for example, whether they include the introduction of new laws, modification of existing laws, judicial interpretation of laws or official governmental interpretation of laws). FIDIC’s broad definition of “Laws” means that emergency laws/decrees being issued in different jurisdictions around the world are likely to constitute CILs. This definition also extends to cover regulatory actions from “any legally constituted public authority” and can therefore apply to national parliamentary acts and state-wide actions as well as municipal orders at local levels. In relation to CILs, the contractor may look to
CILs may also be treated as variations owing to any “adjustment to the execution of the Works” they may cause or to the “changed or new applicable standards” which they may constitute. Alternatively, CILs may be treated as claim events. |
| 4 |
Government (national/local) has issued order(s)/decree(s) that prevent construction works/activities on sites. Such order(s)/decree(s) may include lockdowns, curfews or quarantined areas (that become inaccessible). It becomes impossible to carry on with the works on site and the contractor (and possibly even the employer) is unable to perform its obligations under the contract. |
Consider whether Scenario 3 above in relation to CILs applies. Alternatively, consider whether the scenario invokes the Force Majeure (in the 2017 suite, an “Exceptional Event”) provisions: whether the event/circumstance is one which:
Consider the following FIDIC clauses:
The above clauses give examples of what might qualify as Force Majeure/Exceptional Event. The examples at the beginning of SC 19.1/SC 18.1 are of man-made events; the last example covers “natural catastrophes.” Pandemics and local authorities/governmental actions are not specifically listed. A government ban on construction activities may enable a party to argue Force Majeure/Exceptional Event, but it would still need to pass the test in the clause such that the party arguing so “could not reasonably have avoided or overcome” the event. A successfully claimed Force Majeure/Exceptional Event excuses performance of the said prevented obligations, provided the correct notifications have been given:
Time: The contractor may be entitled to an EOT for any resulting delay:
Money: Financial entitlements are more likely to flow from CILs (see Scenario 3 above) than from Force Majeure/Exceptional Events. |
| 5 |
Government (national/local) has issued order(s)/decree(s) that prevent construction works/activities on sites. Such order(s)/decree(s) may include lockdowns, curfews or quarantined areas (that become inaccessible). It becomes impossible to carry on with the works on site and the contractor (and possibly even the employer) is unable to perform its obligations under the contract. Can the contractor turn to Clause 17 (1999 – Risk and Responsibility/2017 – Care of the Works and Indemnities) in search of financial compensation (in addition to seeking an EOT)? |
This Scenario builds upon Scenario 4 above. Under Clause 17 of both the 1999 edition and the 2017 suite, a pre-condition to relief is damage or loss to the works. It is unlikely that the pandemic will cause loss or damage to the “Works, Goods or Contractor’s Documents”. Clause 17 is therefore unlikely to apply to Scenario 5. It is more likely that the consequences of the pandemic will delay and disrupt the project, for which the FIDIC forms provide remedies in Clause 19 (RB 1999, YB 1999, SB 1999 and PB) and Clause 18 (RB 2017, YB 2017, SB 2017, EB and Gold Bk), as outlined in Scenario 4 above. |
| 6 |
The contractor is able to proceed, but the pandemic is having an adverse impact on the progress of the works (this Scenario encompasses Scenarios 1, 2 and 3 above). Government (national/local) does not issue new legislation/regulations stopping construction works/activities on sites. But, due to health and safety measures being implemented to stop transmission of the virus, the contractor:
OR Government (national/local) has issued a change in the law (CIL) which restricts construction works/ activities on sites. The contractor is able to proceed with the works, but suffers delay and/or additional cost as a result of the CIL. Under Scenarios 1, 2 or 3, can either party turn to Clause 19 Force Majeure (1999 edition or PB)/Clause 18 Exceptional Events (2017 suite or EB)/Clause 18 Exceptional Risks (Gold Bk)? |
In each of Scenarios 1, 2 and 3 above, the performance of obligations under the contract will become harder and more onerous, but will not necessarily be prevented. It is likely that the contractor will able to continue on site and reasonably overcome the events contemplated. Scenarios 1, 2 and 3 are therefore unlikely to qualify as Force Majeure/Exceptional Events. Where the employer/engineer suspends part or all of the works (under Clause 8), as a precautionary measure, this is unlikely to result in Force Majeure/Exceptional Event (particularly in the absence of a CIL), but the contractor would be able to look to the remedies available under SC 8.9 of RB 1999, YB 1999, SB 1999 and PB, SC 7.3 and 10.4 of Green Bk, SC 8.10 of RB 2017, YB 2017, SB 2017 and EB, and SC 9.8 of Gold Bk. In addition:
|
| 7 |
There is no direct impact on the contractor’s operations, but the employer (or the employer’s representative/engineer) is working from home. In this scenario, there is no CIL and no real impact on the availability of personnel or on the supply chain. However, members of the employer’s/employer’s representative’s/engineer’s organisation are working remotely and away from the site. As a result of this, the contractor suffers delay/additional cost because of slow decision-making. |
Time: The contractor may turn to provisions of the contract that provide an EOT entitlement in the event of delay, impediment or prevention caused by or attributable to the employer/employer’s representative/engineer:
Money: The above provisions only give entitlement to EOT; there is no mention of financial remedy, which would depend on particular circumstances and whether the contractor can establish entitlement to financial compensation elsewhere under the contract or at law. |
Key recommendations
The challenges that all businesses face as a result of the COVID-19 pandemic mean that contract terms need to be examined carefully in light of the facts of each transaction. The provisions dealing with the following matters are of particular importance:
- Health and safety
- Changes in the law
- Force Majeure (including the impact of the governing law of the contract and the application of Force Majeure in some civil law jurisdictions)
- Unforeseeable shortages in personnel and in the supply chain
- Variations
- Delays caused by authorities
- Extensions of time
- Claims and disputes (and dispute avoidance provisions)
In addition, parties are asked to look at the broader picture. This includes a consideration of wider issues such as the following:
- In relation to public sector projects, many governments now recommend that public authorities adopt approaches and pursue relief regimes that preserve cash flow and keep the supply chain alive throughout the crisis (click here for our briefings on UK developments)
- From a ‘social responsibility’ perspective (using the phrase in the Guidance), a strict interpretation and rigid application of contract terms will simply increase the likelihood of insolvencies with knock-on effects on societies at large.
Key observations
- It is interesting to note that, at the very end of the Guidance, FIDIC asks its users to “keep an objective view.” The last paragraph states that “one should be able to differentiate difficulties caused by the COVID-19 crisis from those which would have been experienced in any case, but for the crisis.” It is worth keeping this in mind.
- It is also notable that the Guidance does not deal with the thorny issue of termination. Instead, it encourages the parties to take a broader, more lenient and open-minded approach. Last month, FIDIC published its COVID-19 Guidance for Global Consulting Engineering Businesses, which it intends to update and keep ‘live.’ The document makes specific references to the solvency test – that, in many countries, directors must ensure their company can pay its debts when they are due and payable. But it also notes the importance of cash flow to a company’s survival, encourages clients to keep operating where possible and to look to other sources of cash. Ultimately, however, termination will always be on the table. Under FIDIC, an entitlement to terminate may arise where the Force Majeure/Exceptional Event is prolonged but only where substantially the whole of the works is prevented by the event.
A number of coronaviruses are already endemic in the human population. COVID-19 could become the next one. Managing projects, avoiding disputes and crafting bespoke arrangements that meet the challenges ahead is now more important than ever before.
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