COVID-19: can a party invoke force majeure clauses to escape a contract?
News of COVID19 shocked the world when on New Years’ Eve it was reported that the virus had been detected in a region in China. Since then, it has spread to over 93 countries. Lockdowns and other restrictive impacts which arose as a result of COVID 19 no doubt can have a dilatory effect on power construction contracts. Construction delay claims therefore may arise where such events compromise the critical path of a construction project. The critical path is a term used in construction parlance to refer to the path on the construction programme which shows the dates when certain activities must be completed by in order to achieve completion by the specified date. The construction program should be adhered to as there are time frames to be complied with as specified in the Power Generation Licence and the Power Purchase Agreements (PPA).
In the midst of this global crisis, parties to any construction contract, that is the employer and contractor, should revisit their contracts, to understand the nature and extent of a force majeure clause if it is at all included and to determine if there can be an extension of time, a claim for damages or other recourse.
Construction contracts and the power sector
In energy projects, the Engineering, Procurement and Construction (EPC) is quite critical to a project’s success. An EPC contract generally covers project management, site management and supervision, engineering, materials and equipment, works, foundation and site infrastructure works, installation, and commissioning of the power plant. In Zimbabwe, most projects rely on experienced EPC contractors from China and Europe. Oftentimes, they bring in their experienced engineers and technicians from those regions to carry out the works. With the advent of COVID 19 and movement restrictions, this becomes a problem. The question is whether or not the lockdowns and other adverse measures emanating from COVID 19 can be classified as an act of God of force majeure for the purposes of construction contracts. If so, what can be done about such?
What is force majeure?
A force majeure or an Act of God is defined as generally including “risks beyond the reasonable control of a party, incurred not as a product or result of the negligence of the afflicted party, which have a materially adverse effect on the ability of such party to perform its obligations”. Zimbabwe applies a common law system to force majeure and will only apply it in cases where it is identified in a contract.
Force majeure in FIDIC contracts
In standard construction contracts such as General Conditions of Contract (GCC) and the International Federation of Consulting Engineers (FIDIC) Rainbow Suite (that is the Red Book, Yellow book and Silver book) force majeure is more commonly framed as an exceptional event or circumstance. Globally, most international investors prefer the International Federation of Consulting Engineers (FIDIC) construction contracts. This is because it is endorsed by the World Bank and is generally acceptable worldwide. In these contracts, although a list is provided of what may constitute a force majeure, the list is not exhaustive and is vague enough to cover events like COVID–19. In any case, COVID–19 may be viewed as a natural catastrophe beyond a party’s control. It has been argued that such a clause is vague on the “what” question. However, the four gate keepers included in most standard construction contracts particularly FIDIC offer an effective filter of what can pass as a force majeure:
- Must be beyond a party’s control
- Such party could not have reasonably provided against it prior to entering the contract.
- Which having arisen, such party could not reasonably have avoided or overcome and
- Which is not substantially attributable to the other party.
A clause drafted in this manner is less concerned about the event itself but rather the real impact of the event on the parties’ ability to perform. Whatever the event may be it must pass the test above.
Interpretation of force majeure clauses – the Seadrill Ghana Operations Case
Force majeure provisions are usually construed strictly such that if there is ambiguity the contra proferentem rule will apply. Contra proferentem means that the clause is interpreted against the interests of the party that drafted and is seeking to rely on it. . In the present circumstances, a party must prove the extent COVID –19 prevented them from performing their obligation whether in whole or in part. This therefore creates a cumbersome task for a party that bears the burden of proof and that seeks rely on it In simple terms it must clearly be shown that the virus caused the failure to perform. The case of Seadrill Ghana Operations Ltd v Tullow Ghana Ltd  EWHC shows that courts not only look at an event as a cause but rather the effective cause of the failure to perform.
For the reason that, a third of the global supply chain depends on Chinese factories, the construction industry has been adversely affected. Without attempting to be exhaustive, some probable effects in the construction and energy industry are labour shortages due to ongoing lockdowns.
Back home – COVID 19 and force majeure
Our fragile health system poses COVID –19 as a real threat should the virus touch base in Zimbabwe. Parties may further experience hindered decision making as primary decision makers may be required to undergo quarantine after travel overseas. A practical example is the travel warnings given by the President recently.
Again, without exception to Zimbabwe, faced with supply shortages, parties may face challenges with their construction endeavours which will cause significant delays in a project and ultimately their ability to complete a project on time. A contractor in this predicament is exposed to liquidated damages in projects where time is of the essence.
However, as mentioned above despite the impact of COVID19, real or imagined, invoking force majeure requires a solid evidence of causation. For this reason, courts may not easily be convinced that Covid-19 inhibited performance. Another party may allege that the failure to perform was caused by a more significant underlying issue other than the effects of the virus. It may also be argued that because the virus broke out on the 31st of December 2019, a party particularly contractors had ample time to anticipate the effects of the virus on their works and adequately prepare. A contractor anticipating a fundamental hindrance in performing their obligation may need to revisit the force majeure clause because in light of both sides of the argument the gap to invoke COVID19 might be constricted.
On the other hand, while a contract may create a possible excuse for a party through force majeure, there remains procedure. This is why the importance of revisiting the contract cannot be overemphasised. The preferred approach for a project company is to define force majeure events as being any of the events in an exhaustive list set out in the contract. In this manner, both parties are aware of which events are force majeure events and which are not. However, this is not always the case such as unexpected eventualities can arise.
The notice requirement – need for promptness
In the case of the FIDIC Rainbow suite, the party raising a force majeure must give notice to the other party. A closer look at the language used shows the present and future tense, with an effect that the event must be presently occurring or be anticipated. This clear language shows a contractor runs the risk of incurring liability if notice is given long after the event has occurred.
To be more precise there is a time bar for giving notice as 14 days from the date a party becomes aware or the time the party should have been aware of the event. The need to predict impact is one that parties in projects need to consider in their decision making concerning this global crisis.
Duty to minimize damage – the Classic Maritime Inc case
Lastly there is always a common law duty whether included in a contract or not, to minimize the possible damage incurred by either parties. Recently, in Classic Maritime Inc v Limbungan Makmur SDN BHD and Another it was clarified that a contract does not necessarily need to have a clause requiring a duty to take reasonable steps because the common law imposes an obligation to mitigate the effects of a force majeure. FIDIC contracts explicitly provide for this duty by particularly requiring parties to ‘use reasonable endeavours to minimise any delay in performance’. Thus in the wake of the virus parties need to be proactive in their efforts to contain the effects of COVID–19.
Force majeure events are a phenomenon of life. Though their occurrence is unexpected, they are to be expected. The excitement of signing a contract must not blind parties from adequately accounting for risk which include outbreaks like COVID19. With the majority of critical factories worldwide under shutdown and the rest of the globe following, parties to projects must without delay revisit their force majeure clauses. As noted above, the contractor can be entitled to an extension of time if a force majeure event impacts on its ability to perform the works. Some contractors also request costs if a force majeure event occurs though this is undesirable. COVID 19 amounts to a force majeure which ought to be set out as a neutral risk as it is not in the control of either party. In such circumstances, each party ought to bear its own costs. With COVID 19, a substantial haircut is expected in the energy sector.
This article has been provided for informational purposes only. For legal support on how to manage contracts in response to COVID-19, please contact our Corporate Advisory team.