Covid-19: Pressure Points: The impact on construction contracts – will the force majeure relief or other rights be available? (Global)

As the human cost of the novel coronavirus (2019-nCOV) continues to escalate, so too does the commercial and economic impact.  The economic effects are not confined to mainland China. Supply chain disruption is being felt worldwide, including in the construction industry as China plays a major role in parts manufacturing.  We are having an increasing number of enquiries from clients as to how to manage force majeure risk, both in terms of whether they should claim force majeure protection and in anticipation of receiving force majeure notices up the chain.

At the time of writing, it has been widely reported that CNOOC’s force majeure notices to seek relief from taking delivery of some LNG cargoes have been rejected by Shell and Total, leaving CNOOC to consider whether to go ahead and cancel the contracts in any event.  With many construction projects around the world reliant on Chinese contractors and suppliers, we anticipate that similar disputes as to the availability of force majeure relief will become commonplace.

Here are some top tips to help navigate your way around the issues:

Check the scope of the force majeure clause

Under English law, force majeure is a creature of contract, so it will be imperative that the event in question falls within the scope of the defined term in the contract.  It is not uncommon to see a non-exhaustive list of events that could constitute force majeure so long as other conditions are satisfied, such as it being an “exceptional” event that is beyond the party’s control, which it could not have avoided, and is not attributed to the other party (to summarise FIDIC/1999 19.1).  Where the list of events is exhaustive, it will be necessary for the event to fall squarely within the scope of a listed item – therefore, if the clause covers ‘pandemics’ then, as the coronavirus is currently defined by the WHO as a ‘public health emergency of international concern’, the relief would not yet apply.
In China, the China Council for the Promotion of International Trade (a Chinese State body) now accepts applications from affected parties to certify facts relating to the virus outbreak.  Whilst this would commonly be thought to be powerful evidence of the occurrence of force majeure if your contract is governed by Chinese law, or if the question is considered by the Chinese courts, it will not necessarily be the case if your contract is governed by another law or has a different dispute forum.

Check whether other clauses may apply to give rights or relief

Some contracts may have provisions which give relief or entitlements in the event of governmental actions which impact contract performance.  In China, governments at national and local levels have issued directions or policies extending public holidays, imposing travel restrictions (lockdown of cities), mandatory self-quarantine and prohibition against resumption of work or production in many cities.  Depending on the precise orders, policies and procedures required to be followed, these may amount to a change in law or delay caused by authorities giving rise to an entitlement to claim time and/or cost, but of course subject to any specific limitations in your contract (e.g. FIDIC/1999 where change in law relief applies to changes in the Laws of the Country, where “Country” is defined as where the Site is located – 1.1.6 and 13.7; and relief for delay caused by the authorities applies to actions by authorities in the Country – see 8.5).

Check the notification provisions in your contract

The FIDIC force majeure provision only allows for time and cost relief in the event that notice has been given within 14 days after the party became aware, or should have been aware, of the event constituting force majeure.

Check your other contracts

If you are reliant on your subcontractors and suppliers to provide force majeure notices, check those contracts to identify the extent to which they are truly back-to-back and, where they are not, draw up a risk mitigation plan to manage and contain any fall-out.

Manage notices from subcontractors and suppliers

If you do receive a force majeure notice from a supplier or subcontractor, ensure that it is passed up the chain within the contractual deadline for providing notices set out in your contract, even if you consider it may be questionable or lacking in some way.  Reserve your position under the subcontract and request further information and details from the notifying party pending any additional requests that might come from up the chain.  Ensure that any further documentation provided is passed on up the chain equally as swiftly.

Avoid, overcome and mitigate

Your contract may include express provisions that could limit the protection available.  For example, in the FIDIC/1999 force majeure definition, it requires that after the event occurred the effected party could not “reasonably” have avoided or overcome it (19.1(c)).  Consider what steps you could be taking now to avoid or overcome the impact of the coronavirus, within the bounds of what would be “reasonable” in the circumstances e.g. bearing in mind penalty clauses for early termination of related contracts.  There is also an express duty to minimise delay by using “reasonable endeavours” at clause 19.3.  Under English law, “reasonable endeavours” obligation requires a party to take a reasonable course of action to achieve a particular aim (as opposed to exhausting all reasonable courses of action), and is not required to sacrifice its own commercial interests in doing so¹.  Even if there is no express mitigation clause, regardless of the governing law of the contract, there is always an underlying duty to mitigate in the event of force majeure. If you can find solutions, you should do so.

Consider any concurrent causes of the failure to perform

In the recent case Classic Maritime v Limbungan²  the English Court of Appeal held that, where the force majeure event was one of two possible causes of the failure to perform, a strict “but for” test should be applied and as a result, and on the facts, force majeure relief was not applicable.  While it would seem there are certain grounds on which to distinguish Classic from a typical construction contract situation, the judgment does raise a significant point of uncertainty as to how force majeure clauses would operate in cases of true concurrent delay under a construction contract under English law.

Keep proper records

The burden will lie with the party claiming force majeure to prove its claim, so it is important to keep detailed records of the impact of events as they happen.  It is equally important to keep copies of critical correspondence and other communications to justify actions if disputes arise later. This can be particularly important in establishing that you have done all that was reasonably possible to mitigate the impact of events on your performance.

Inform your counterparty

You will be in a much stronger position to recover time and cost if you update your counterparty on an ongoing basis, both before and after you have given formal notice, telling them what the problems are and what you are doing to address them.  This is again very important in the context of mitigation: give your counterparty ample opportunity to comment on or otherwise confirm the proposed mitigation measures as this will make it harder for them to object later down the line.

If there is no force majeure clause

Consider the governing law of the contract:

• Under PRC law, force majeure is available as a matter of law pursuant to Articles 117 and 118 of the PRC Contract Law.  The affected party is temporarily exempted from the liabilities in the event of force majeure, and is required to serve notice together with evidence to the other party within a reasonable period of time.   Indeed, just at the time of writing, it has been reported in the media that the Legislative Affairs Commission of the PRC National People’s Congress Standing Committee has, through its spokesperson, clarified that the performance of contract obligations prevented by governmental preventive and control measures in containment of the virus constitutes contract performance prevented by force majeure.
• On the other hand, under English law, if there is no express force majeure or equivalent relief, contracting parties will be at the mercy of the rigid English doctrine of frustration of contracts and the inflexibility of the Law Reform (Frustrated Contracts) Act 1943.  Proving a contract has been frustrated is far from straightforward.

Follow the news 

The situation is highly dynamic and there may be many developments over the coming weeks. Whether or not events today amount to a force majeure does not mean that they will count the same way tomorrow. We will be keeping a close watch on developments and will provide further briefings as the situation changes.

_{[1] UBH (Mechanical Services) v Standard Life Assurance: unreported, 5 July 1988 (Court of Appeal) / Rhodia International Holdings Ltd v Huntsman International LLC (2007) EWHC 292 (Comm)
[2] Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102}