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COVID-19: Delay & Cost Claims for FIDIC Red Book Based Contracts

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COVID-19: Delay & Cost Claims for FIDIC Red Book Based Contracts

First Edition
 

Overview

COVID-19 impacted all aspects of daily life across the globe, and the performance of construction projects is no exception, with disruption to supply chains, workforce, and facilities.

The purpose of this Guidance Note is to provide practical advice to contractors seeking to excuse potential non-performance and obtain an extension of time and/or recovery of costs due to the impact of COVID-19 on construction projects procured through the FIDIC Red Book Standard Form of Contract.[1]

The routes to relief set out in this Guidance Note are summarised in the following Table:[2]

Deciding on the route to relief is important, as this can determine if a contractor can claim time and/or costs and/or reasonable profit, or potentially even seek optional termination of the contract.

Principal Routes to Relief

Depending on the circumstances there are four (4) principal routes to raise a claim under the FIDIC Red Book for relief associated with the effects of COVID-19:

Force Majeure

Sub-Clause 19.1 [Definition of Force Majeure] describes Force Majeure as an exceptional event or circumstance which:

  • Is beyond a Party’s control;
  • Which such Party could not reasonably have provided against before entering into the Contract;
  • Which, having arisen, such Party could not reasonably have avoided or overcome; and
  • Which is not substantially attributable to the other Party.

The Sub-Clause proceeds to offer some examples of Force Majeure events. These do not specifically include pandemics, but to the extent COVID-19 meets the definition of Force Majeure, which at face value it does, then a contractor may seek relief under Clause 19 [Force Majeure]. Sub-Clause 19.4 [Consequences of Force Majeure] provides that if the Contractor suffers delay and/or incurs Cost by reason of Force Majeure, the Contractor shall be entitled (subject to Sub-Clause 20.1 [Contractor’s Claims]) to:

  • 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
  • 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 sub-paragraphs (ii) to (iv), occurs in the Country, payment of any such Cost.

While Force Majeure may provide contractors with a route to relief for delay, COVID-19 is unlikely to be attributable to an ‘’event or circumstance’’ of the kind described in sub-paragraphs (i) to (iv) of Sub-Clause 19.1 [Definition of Force Majeure].

These sub-paragraphs describe events or circumstances such as war, hostilities, terrorism, revolution, insurrection, riot, commotion, etc. For contractors seeking to recover costs, adopting Force Majeure as a route to relief is unlikely to achieve that objective.

Notwithstanding the lack of mechanism for cost recovery, the Force Majeure route to relief includes provision for optional termination in accordance with Sub-Clause 19.6 [Optional Termination, Payment and Release]. This explains where 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, then either Party may give to the other Party a notice of termination of the Contract. Termination shall take effect seven (7) days after the notice is given.

Upon termination under this Sub-Clause, the Engineer is required to determine the value of the work done and to issue a Payment Certificate.

Extension of Time – Unforeseeable Shortages in Personnel or Goods

Sub-Clause 8.4 [Extension of Time for Completion] part (d) provides for contractor’s entitlement, subject to Sub-Clause 20.1 [Contractor´s Claims], to an extension of Time for Completion due to unforeseeable shortages in personnel or Goods due to epidemic or governmental actions. It should be noted that a claim under Sub-Clause 8.4(d) specifically covers time and does not address entitlement to claim Cost.

Extension of Time – Delays by Authorities

Sub-Clause 8.5 [Delays Caused by Authorities] provides for contractor’s entitlement in the event, for example, that greater levels of health and safety testing instituted by authorities leads to project work disruption. Where such event or circumstance arises, then delay or disruption may be considered as a cause of delay under sub-paragraph (b) of Sub-Clause 8.4 [Extension of Time for Completion]. This being the case, the event will be subject to the provisions of Sub-Clause 20.1 [Contractor’s Claims].

Again, it should be noted that a claim under Sub-Clause 8.5 [Delays Caused by Authorities] specifically covers time and does not address entitlement to claim Cost.

Adjustments for Changes in Legislation

Sub-Clause 13.7 [Adjustments for Changes in Legislation] provides for contractor’s entitlement, subject to Sub-Clause 20.1 [Contractor´s Claims], for changes in legislation that affects the performance of the Contractor. Under this Sub-Clause, a contractor may be entitled to claim for both time and costs associated with the effects of COVID-19.

Other Potential Routes to Relief

The FIDIC Red Book contains several wider Clauses / Sub-Clauses which, subject to a contractor’s specific circumstances, could also provide routes to relief from the impact of COVID-19. These are briefly set out below.

The Employer’s Right to Vary

An Employer may take proactive measures and assert its right to vary the Works in accordance with Sub-Clause 13.1 [Right to Vary] in the event, for example, it decides to change the timing, sequencing, characteristics, quality, quantity, etc. of the Works. In this event, the impact of COVID-19, in part or whole, might be administered through the Variation provision.

The Contractor’s Right of Access to the Site

Another potential route to relief for a contractor could be through Sub-Clause 2.1 [Right of Access to the Site], where the Employer is required to give the Contractor ‘’right of access to, and possession of, all parts of the Site within the time (or times) stated in the Appendix to Tender.” Where an Employer fails to comply with this obligation (to provide access), the Contractor is entitled to both time and Cost (plus reasonable profit).

Indemnities

Sub-Clause 17.1 [Indemnities] represents a potential barrier to parts of a contractor’s claim for the impact of COVID-19. This is because it requires the Contractor to indemnify and hold the Employer harmless against all claims, damages, losses, etc. in respect of (amongst other matters) sickness, death, and disease (unless attributable to any negligence, wilful act, or breach of the Contract by the Employer).

At face value, Sub-Clause 17.1 [Indemnities] does not permit claims for damages, losses, and expenses against the Employer for sickness, disease, or death, to the extent that this was not attributable to any negligence, wilful act or breach of Contract by the Employer. However, the Sub-Clause continues to explain where the Employer may have contributed (by negligence, wilful act, or breach of Contract) to the disease, sickness, or death of any persons which impact the Contractor’s performance of the Works, the Employer shall hold the Contractor harmless against all claims, losses, damages, and expenses.

Impossibility of Performance

Where the works may become either impossible to perform or unlawful due to reasons including, but not limited to, Force Majeure, under Sub-Clause 19.7 [Release from Performance under the Law], the Parties can be released from further performance of the Contract. In this event, Sub-Clause 19.7 [Release from Performance under the Law] provides that:

  • The Parties shall be discharged from further performance, without prejudice to the rights of either Party in respect of any previous breach of the Contract, and
  • The sum payable by the Employer to the Contractor shall be the same as would have been payable under Sub-Clause 19.6 [Optional Termination, Payment and Release] as if the Contract had been terminated under this Sub-Clause.

Insurance

Contractors may wish to review project insurances and contact their insurance brokers to ascertain the extent to which (if any) project insurances may cover losses deriving from the impact of COVID-19.

Routes to Relief at Law

To the extent contractors may exhaust the routes to relief under contracts, the governing law of contracts could provide additional/alternative routes to relief at Law (e.g. through application of specific or general legal principles).

Contractors may wish to seek legal advice in relation to the specific circumstances surrounding non-performance at Law due to COVID-19.

General Notice Requirements

Under the FIDIC Red Book the Contractor is required to provide notice. The form and type of notice will be determined by the specific Clause / Sub-Clause of the contract under which the claim is being notified.

The route to relief (i.e. Clause / Sub-Clause) may require a contractor to give a specific notice, within a set period. In addition, any route to relief which is subject to Sub-Clause 20.1 [Contractor’s Claims] will require a notice issued under this Sub-Clause in addition to any notice required under the selected route to relief. The Sub-Clause 20.1 [Contractor’s Claim] notice is typically required within 28 days after a contractor become aware, or should have become aware, of the event.[8] It is important to be aware the Sub-Clause 20.1 [Contractor’s Claims] notice is a condition precedent[9] and failure to provide such notice within the timeframe specified (i.e. 28 days) may result in the claim being time-barred.

Evidence and Supporting Particulars

Evidencing the specific event has occurred, in this case COVID-19, will unlikely be the subject of any dispute. However, contractors should collect and prepare specific evidence which demonstrates that COVID-19 has adversely impacted performance of the project; for example through a shortage of manpower or restrictions in transport. Required evidence and supporting particulars may include the following:

  • Evidence of the event: notices from suppliers, subcontractors, changes in legislation, government circulars, Employer instructions, etc.;
  • Evidence of the delay / disruption: delay and disruption analysis measuring the effect of the events on the contractor’s schedule and productivity, etc.; and
  • Evidence of the Costs: payroll and salaries, invoices, proof of payment, daily diaries, manpower records, etc.

Disclaimer

This document has been prepared in accordance with the FIDIC Red Book Standard Form of Contract (unamended). Capitalized terms set out in this document are generally intended to have the same meaning as those defined in the FIDIC Red Book.

This document was produced for information purposes only. The content is general in nature and should not be applied to specific circumstances. J.S Held accepts no liability for any claims arising from the use of this document or its contents.

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[1] Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer First Edition 1999.

[2] Table should be read in accordance with the wider content of this Guidance Note.

[3] Notice required under Sub-Clause 20.1 [Contractor’s Claims].

[4] Costs are recoverable for specific events under Force Majeure, but COVID-19 is unlikely to be attributable to these events.

[5] Entitlement under this Sub-Clause may extend to Cost plus reasonable profit.

[6] Work to be valued in accordance with Clause 12 [Measurement and Evaluation] and may include reasonable profit.

[7] Work to be valued in accordance with Sub-Clause 19.6 [Optional Termination, Payment and Release].

[8] The event is not the existence of COVID-19, but the fact that say shipping is delayed due to COVID-19. Therefore, notice is reasonably required within 28 days of a contractor becoming aware that shipping has been delayed because of COVID-19.

[9] In contract law, a condition precedent is generally considered to be an event which must occur, unless its non-occurrence is excused, before performance under a contract becomes due, i.e., something which must happen before any contractual duty exists.

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This publication is for educational and general information purposes only. It may contain errors and is provided as is. It is not intended as specific advice, legal, or otherwise. Opinions and views are not necessarily those of J.S. Held or its affiliates and it should not be presumed that J.S. Held subscribes to any particular method, interpretation, or analysis merely because it appears in this publication. We disclaim any representation and/or warranty regarding the accuracy, timeliness, quality, or applicability of any of the contents. You should not act, or fail to act, in reliance on this publication and we disclaim all liability in respect to such actions or failure to act. We assume no responsibility for information contained in this publication and disclaim all liability and damages in respect to such information. This publication is not a substitute for competent legal advice. The content herein may be updated or otherwise modified without notice.

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