COVID-19 APAC: Impact Of COVID-19 On FIDIC Standard Forms Of Contract In The APAC Region.

Since the COVID-19 virus was declared a global pandemic, international construction projects have been affected by various COVID-19 related issues, including border restrictions, personnel in quarantine and work sites at a daily risk of lockdown. Additionally, the construction sector has been facing delays in obtaining imported materials and components, cost overruns and changes to scopes of works, which in some instances may even prevent the performance of the contract.
 

Fédération Internationale des Ingénieurs-Conseils (FIDIC) standard forms of contract are often used in the context of international construction projects in the APAC region. In order to assist contract users in managing situations arising as a result of  COVID-19, FIDIC issued its COVID-19 Guidance Memorandum for Users of FIDIC Standard Forms of Works Contract (the Guidance Memorandum) in April 2020. The Guidance Memorandum sets out seven possible scenarios which may arise as a consequence of COVID-19, and outlines the various provisions in FIDIC's main unamended forms of contract which may be relevant in the context of those scenarios.
 

This article considers the legal implications of COVID-19 on FIDIC forms of contract in the APAC region and sets out practical considerations for Contractors and Employers in delivering projects under FIDIC contracts in the current COVID-19 climate. It provides an overview of:  
 

• key issues faced by parties to construction contracts as a consequence of COVID-19;

• potential claims available to FIDIC users affected by COVID-19, including: (i) force majeure; (ii) extensions of time; and (iii) change in laws[1];

• notable developments in Australia, Singapore and Hong Kong relating to construction projects/site-related issues affecting the implementation of the Guidance Memorandum;

• the importance of issuing contractual notices and maintaining contemporary records during the pandemic; and

• the significance of seeking alternative solutions to project difficulties during these unique times.
   

FIDIC COVID-19 Guidance Memorandum: Key Issues
 

COVID-19 has had a severe impact on the day to day operations of construction projects delivered under FIDIC contracts, especially given that the Contractor has a general obligation to be responsible for the safety of all its operations and activities (SC 4.1) and holds specific health, safety and environment obligations. FIDIC contracts stipulate in particular that the Contractor shall:
 

• comply with the applicable health and safety regulations and Laws (SC 4.8) – which is relevant in instances where a local or national government has set out COVID-19 specific obligations to be complied with on construction sites;

• ensure that “suitable arrangements are made for all necessary welfare and hygiene requirements and for the prevention of epidemics” (SC 6.7); and

• limit damage and nuisance to people resulting from the Contractor’s operations and/or activities (SC 4.18).
   

This Guidance Memorandum outlines several possible scenarios likely to result from COVID-19 and sets out the relevant contract provisions applicable to each scenario. The FIDIC Contracts Committee prepared the Guidance Memorandum in order to assist parties to FIDIC contracts to avoid disputes in light of COVID-19's far-reaching effects.
 

The Guidance Memorandum must be considered in light of the particular circumstances governing each project. This includes the approach taken by international organisations, local governments and authorities; the relevant laws; the health and safety of people; and the terms of the contract entered into by the parties, including any specific amendments to the FIDIC standard forms.
 

The Guidance Memorandum outlines the potential contractual remedies available under FIDIC contracts in respect of situations most likely to arise as a result of COVID-19. The range of potential claims under FIDIC contracts as a consequence of COVID-19 is extensive, and includes:
 

1. Force Majeure;

2. Change in Laws; and

3. Extension of Time (EOT).
    

Each of these potential claims is addressed below, highlighting the key practical considerations to be taken into account when applying the FIDIC terms.
 

Force Majeure
 

FIDIC contracts contain mechanisms which address exceptional risks through force majeure. For instance, the Guidance Memorandum suggests that the remedy of force majeure could be invoked where the Contractor and/or Employer is prevented from performing obligations under the contract because:
 

• the local or national government has issued order(s)/ decree(s) preventing construction activities (including lockdown, curfew, inaccessible quarantined areas, etc.); and

• the execution of the works on-site has become impossible.
   

Force majeure is addressed under SC 19 (termed "Exceptional Events" at SC 18 in the 2017 edition). Although epidemics or pandemics are not expressly listed as an example of a force majeure event under SC 19.1, they are able to be classified as a force majeure event under FIDIC, provided they meet the requirements of a force majeure event as provided for under SC 19.1.
 

SC 19.1 defines force majeure as an exceptional event or situation which:
 

• " is beyond a Party's control;

• such Party could not reasonably have provided against before entering into the Contract;

• having arisen, such Party could not reasonably have avoided or overcome; and

• is not substantially attributable to the other Party."
   

Although SC18.1 in the 2017 Edition does not list exceptionality as a criterion, it is arguable that the defined term “Exceptional Events” itself implies this condition.
 

Assuming the above criteria are fulfilled, and the event in question prevents the performance of contractual obligations [2], a restrictive application of force majeure is possible.
 

Provided the notice requirements have been satisfied under SC19.4 [3], a party which successfully establishes force majeure may be entitled to:
 

1. relief from the performance of the affected contractual obligations for as long as the force majeure event prevents it from performing them [4];

2. an EOT, if it can establish that completion of the works will be delayed because the Contractor has been prevented from performing any of its contractual obligations as a result of the event [5]; and

3. terminate the contract under SC19.6 [6]. This right is available to both parties and may be exercised if the execution of “substantially the whole of the Works” is prevented for a continuous period of 84 days, or for multiple periods which total more than 140 days, by reason of the same force majeure event. This latter element is relevant in the event that subsequent "waves" of the COVID-19 virus lead to additional disruptions to supply chains and workforces. 
    

Importantly, both parties have an obligation to minimise any delay in the performance of their contract as a result of force majeure. In addition, force majeure does not apply to either party's obligation to make payment to the other [7].
 

In the event that, owing to COVID-19, governments/ local authorities implement a ban on all construction activities, COVID-19 is likely to be classified as a force majeure or an exceptional event. However, if governments/ local authorities do not impose such a ban, the Guidance Memorandum suggests that it may be difficult for a party to satisfy the test for force majeure. This is because the requirement that a party "could not reasonably have avoided or overcome" the event may be difficult to fulfil in circumstances where the implementation of the relevant health and safety measures could in fact overcome the relevant COVID-19 event.
 

There are a number of other contractual avenues which warrant consideration in circumstances where force majeure can be asserted, some of which are outlined below. However, it is important for parties to FIDIC contracts to bear in mind that only force majeure entitles them to terminate their contract for a force majeure event which extends over a period of time.
 

Change in Laws
 

Under SC 13.7 [8], a Contractor is entitled to claim additional costs if it can identify changes in laws or regulations arising as a result of COVID-19 which have affected construction activities.
 

FIDIC’s broad definition of “Laws” means that emergency laws/decrees being issued in different jurisdictions around the world are likely to constitute a change in Laws (CIL). Regulatory actions from "any legally constituted public authority" are also covered by FIDIC's definition of "Laws" and can therefore apply to national parliamentary acts and state-wide actions, as well as municipal orders at local levels. As such, claims for disruption costs may be possible if a Contractor can demonstrate that the CIL in question had a direct effect on the performance of construction activities.
 

The Guidance Memorandum addresses the scenario where a national or local government has issued a CIL specific to COVID-19 related health and safety measures (such as social distancing, supply of face masks and hand sanitisers, alternative transportation arrangements, the availability of facilities, working hours for personnel, etc.) which restrict construction activities on sites. While such restrictions would not generally prevent the Contractor from executing the works, the Contractor is nevertheless likely to suffer delay and/or additional cost as a result of the CIL. SC 13.7 [9] provides time and monetary relief where there is a change in law affecting the performance of the Contractor's obligations.
 

A CIL may also be treated as a Variation due to the "adjustment to the execution of the Works" [10] which it may bring about, or to the "changed or new applicable standards" [11] which it may represent.
 

Extensions of Time
 

COVID-19 could result in claims for an extension of time or disruption costs under FIDIC contracts [12]. This is particularly the case if COVID-19 has resulted in:
 

• unforeseeable shortages in the availability of personnel or goods caused by the epidemic or governmental actions;

• delays due to measures imposed by local authorities to curtail the effect of the COVID-19 virus;

• the suspension of construction activities; and

• delays in decision making due to the Employer's actions.
   

Unforeseeable Shortages
 

SC 8.4(d) [13] allows a Contractor to claim an EOT, where there have been “[u]nforeseeable shortages in the availability of personnel or Goods (or Employer-Supplied Materials, if any) caused by epidemic or governmental actions”. If, as a result of COVID-19, the Contractor has experienced shortages in the availability of personnel or goods, or if the Contractor is compelled to follow procedures that have been initiated by a public authority – such as additional healthy and safety tests or the compulsory quarantine of certain individuals travelling from overseas or interstate – these circumstances could give rise to an EOT under SC 8.4 [14].
 

The Guidance Memorandum addresses this scenario and provides that where there has not been a CIL preventing construction activities on site, but the Contractor faces difficulties in mobilising its personnel who fear for their safety, and in obtaining goods due to issues in the supply chain, the Contractor is entitled to an EOT. Under this scenario, it is important to note that a Contractor invoking SC 8.4 [15] may only claim an EOT. As described above, Contractors may be entitled to claim both an EOT and costs under SC 13.7 [16] if they can identify a CIL of the country of the site which caused them to incur costs and delays.
 

Delays Caused by Local Authorities
 

SC 8.5 [17] provides relief in the event of delays caused by public authorities, for example, as a result of public authorities making repeated health and safety inspections on the construction site.
 

The Guidance Memorandum considers the scenario where a Contractor has followed the processes set out by the “relevant legally constituted public authorities in the Country”, and those procedures delay or disrupt the Contractor’s work. In this situation, the Guidance Memorandum states that, provided the delay or disruption caused by the COVID-19 measures: (i) was not reasonably foreseeable at the time of submitting the Tender; and (ii) caused a critical delay to the works, the Contractor will be entitled to an EOT.
 

Suspension of Works
 

Under SC 8.8 [18], FIDIC contracts allow an Employer to suspend construction activities. During the pandemic, an Employer could have elected to suspend activities on the site as a preventative measure in order to curtail the spread of the virus. The Employer's decision to suspend activities on site by preventing anyone to access the site is likely to be strengthened by a CIL or force majeure.
 

In the absence of a CIL or force majeure event, however, the Guidance Memorandum provides that an Employer's suspension of construction activities will not be justified. Moreover, the Contractor will be entitled to an EOT for delays suffered and/or payment of additional costs incurred [19].
 

The parties should bear in mind that during such a suspension of the works, the Contractor is under the obligation to protect, store and secure the works against any deterioration, loss or damage.
 

Delays in Decision Making
 

SC 8.4(e) [20] provides that the Contractor is entitled to an extension of time caused by "any delay, impediment or prevention caused by or attributable to the Employer, the Employer’s Personnel, or the Employer’s other contractors on the Site". This is a catch-all clause which may be applied to several situations on a project. For instance, this clause would arguably apply in a situation where the Employer does not respond to requests for information or submittals in a timely manner, thereby delaying the Contractor.
 

The Guidance Memorandum considers the scenario where there has not been a CIL or any real impact on the availability of personnel or on the supply chain, but the Employer's personnel (including the Engineer or the Employer’s Representative, as the case may be) are, as a precaution, working remotely and as a consequence the Contractor suffers delay and/or incurs additional cost due to the Employer's delayed decision making.
 

In such a situation, the Guidance Memorandum provides that, unless the Employer is successful in arguing force majeure, the Contractor may be entitled to an EOT under SC 8.4(e) [21], in case of any delay, impediment or prevention caused by or attributable to the Employer, or the Employer's Personnel. However, SC 8.4 [22] only allows an award of time and does not provide for costs to be reimbursed. Any financial remedy would depend upon the particular circumstances and whether the Contractor can establish an entitlement to financial compensation under the contract or at law.
 

The APAC Region: Impact of COVID-19 on Projects Delivered Under FIDIC Contracts
 

The importance of considering a contract in the context of its governing law should not be understated. As such, we have set out below a brief overview of the impact that COVID-19 has had on projects delivered under FIDIC contracts in certain countries within the APAC region, namely Australia, Singapore and Hong Kong. Each of these jurisdictions has been affected by COVID-19 and has reacted to the pandemic in different ways, which has likewise led to different impacts on their construction sectors.
 

Australia
 

In Australia, the federal, states and territories governments have sought to support the continuing viability of the construction industry. In New South Wales for example, under Ministerial Orders, construction sites were exempted from lockdowns by being defined as "essential gatherings" [23] and working hours were extended to ameliorate the effects of delay and disruption caused by the pandemic. The full impact of COVID-19 on the Australian construction industry is yet to be seen. No doubt, we will see a significant number of claims and disputes arising as parties seek to protect their commercial positions. To date, the key impacts on the Australian construction sector can be summarised as follows:
 

1. The construction sector has suffered delays in receiving supplies from neighbouring countries which have been badly affected by the pandemic, such as China and Indonesia, and which had temporarily shut down their freight services.
    

2. As at the date of this article, restrictions are still in place in Australia for overseas and interstate travel. Travellers are required to be in mandatory quarantine upon arrival, and social distancing measures are in place across the country.
    

3. Under work health and safety laws across Australia an Employer is required take every step it reasonably can to eliminate or minimise the risk of employees and others contracting COVID-19 [24]. Safe Work Australia has published guidelines on how the Australian building and construction industry can minimise the risk of exposure to COVID-19 [25]. These guidelines require the Employer to have adequate and accessible facilities to support the implementation of measures to achieve physical distancing and good hygiene. Additionally, the National Cabinet announced National COVID-19 Safe Workplace Principles to underpin Safe Work Australia's workplace health and safety guidance [26]. (WHS Measures)
    

These restrictions add an additional layer of potential delay and risk to construction projects, as construction projects across the country tend to rely heavily on the mobility of personnel and the supply of project materials from overseas and interstate. For example, the WHS Measures undoubtedly affect the progress of projects which had commenced prior to the announcement of the pandemic. The scenarios addressed in the Guidance Memorandum are a useful guide as to the remedies available under a FIDIC contract in response to the WHS Measures. It is likely that they would constitute a CIL, potentially entitling the affected party to additional costs and/or time. The requirements under the WHS Measures would also potentially entitle the Contractor to an EOT under SC 8.4(d) [27].
 

In an effort to curb the effects of COVID-19 on the construction sector, the Australian federal, states and territories governments have taken a number of steps, including:
 

1. Commonwealth of Australia
 

The Australian Government Department of Finance issued the COVID-19 Procurement Policy Note in May 2020. The purpose of the Policy Note is:
 

• to assist entities which are considering undertaking procurement in the current COVID-19 environment; and
   

• for entities to pursue relief regimes so that public entities pay suppliers as quickly as possible to ensure suppliers do not experience avoidable cash flow issues [28].
   

2. States and Territories
 

a) Essential gatherings
 

In response to the COVID-19 outbreak, each Australian state and territory government has introduced secondary legislation which permit the imposition of various restrictions on "non-essential gatherings" to reduce the risk of spreading the virus, based on circumstances relevant to that jurisdiction [29]. States and territories have tended to treat construction sites as essential gatherings, thereby ensuring their continued operations. Nevertheless, Contractors are to ensure that construction workers comply with WHS Measures where possible.
 

b) Construction Work Days
 

In NSW, on 31 March 2020, the NSW Minister for Planning and Public Spaces implemented the Environmental Planning and Assessment (COVID-19 Development – Construction Work Days) Order 2020, which allowed commercial developments to be carried out on weekends and public holidays as long as work was limited to weekday hours and did not involve high noise-generating works. On 8 April 2020, the NSW Minister for Planning and Public Spaces extended these new weekend and public holiday construction work day hours to include public infrastructure projects with the Environmental Planning and Assessment (COVID-19 Development – Infrastructure Construction Work Days) Order 2020. This Order will be in place until the crisis is over, or until a further order is made amending these measures.
 

Similarly in Victoria, on 2 April 2020, the Lord Mayor of Melbourne announced provisional measures to allow extensions of working hours on City of Melbourne building sites for commercial, large residential and mixed-use developments in certain cases [30].
 

By allowing construction works to be carried out on weekends and public holidays, the aim is to ensure workers can practice social distancing without a loss of productivity or jobs on construction projects.
 

Although the abovementioned regulations may go some way to cushion the construction sector from the full impact of the pandemic, they do not eliminate its negative effect altogether.
 

Singapore
 

Singapore's construction sector has been hard hit by the COVID-19 outbreak. On 3 April 2020, the Singapore Government announced a stringent set of "circuit breaker" measures to combat the COVID-19 pandemic, which took effect from 7 April 2020 (Circuit Breaker) [31]. These Circuit Breaker measures included, among other things, the suspension of activities at workplaces other than certain prescribed "essential services". Only a limited number of construction works and projects were deemed to be "essential services" and were permitted to continue.
 

The Circuit Breaker is being replaced in three progressive phases, with the first two phases of relaxed measures already in effect from 1 and 19 June 2020, respectively. Upon the stabilisation of COVID-19 cases in Singapore, the Singapore Government will announce the third phase of relaxed measures. However, construction companies continue to face specific challenges as Singapore exits Circuit Breaker and gradually re-opens economic activities. Post Circuit Breaker, Contractors are experiencing varying degrees of difficulties as a result of the site, office and workforce restrictions and new regulations imposed by the authorities, including the requirements to train workers and appoint Safe Management Officers and Safe Distancing Officers to implement safety measures while working at construction sites [32].
 

The remedies outlined in the Guidance Memorandum in relation to delays and disruption costs encountered by a party as a result of a CIL and delays in the supply of goods and labour at construction sites, are most relevant for Contractors which have experienced such delays during the Circuit Breaker period and to a lesser extent, pre and post-Circuit Breaker where Contractors are delayed or disrupted to varying extent.
 

In addition to the remedies stated in the Guidance Memorandum, Contractors who are affected by similar circumstances could also rely on the COVID-19 (Temporary Measures) Act (the Act) which was passed in Singapore on 7 April 2020. The Act provides temporary relief for parties unable to perform their contractual obligations between 1 February 2020 and 19 October 2020.
 

Relief under the Act only applies to certain scheduled contracts entered into before 25 March 2020, including:
 

• a construction contract or supply contract, defined by reference to section 2 of the Building and Construction Industry Security of Payment Act (Cap 30B) (2006 Rev. Ed.); and
   

• a performance bond or equivalent for construction and supply contracts.
   

A party to scheduled contract is entitled to relief if it satisfies the following criteria:
 

• the party is unable to perform a contractual obligation due to be performed on or after 1 February 2020;
   

• the inability is materially caused by a COVID-19 event, which is defined essentially as either the COVID-19 pandemic or any law made as a result of COVID-19. The law passed as a result of COVID-19 is not limited to that promulgated by the Singapore Government and can be passed by any national government; and
   

• the party has served a notification for relief on all contractual counterparties, as well as any surety or guarantor (if applicable).
   

The service of a notification for relief under the Act is crucial. Only when such a notification is served can the Contractor avail itself to the relief under the Act.
 

Where the Contractor has met the conditions above, the Contractor is exempted from liquidated or other delay damages, which otherwise would have arisen as a result of delays during the period 1 February 2020 and 19 October 2020.
 

The Act, however, does not expressly deal with the granting of an EOT for completion of works under a contract. For this, the Contractor will have to rely on the relevant EOT provisions highlighted in the Guidance Memorandum. These rights under the Contract provisions remain unaffected. The Act expressly states that it does not affect the taking of any other action in relation to the party's inability to perform a contractual obligation (due to a material extent by a COVID-19 event), including an action pursuant to a force majeure clause in the contract where applicable.
 

Apart from liquidated damages, the Act also limits an Employer's right to call on performance bonds. Where the Contractor is unable to perform a contractual obligation due (materially) to a COVID-19 event and has served a notification for relief, the Act prevents calls on performance bonds until 7 days before the date of expiry of the relevant bond. A Contractor which is concerned that this 7 day period is approaching can make an application to the issuer of the bond for an extension and serve a notification for relief under the Act, in which case the Act intervenes to automatically extend the bond to a date 7 days after the period of temporary relief, i.e. 26 October 2020.
 

The Act therefore imposes a limit on an Employer's ability to make a claim under SC 4.2 [33], which relates to Performance Security, in the event the Contractor is unable to perform its obligations due to a COVID-19 event.
 

Hong Kong
 

The construction industry in Hong Kong has been severely affected by the COVID-19 virus. To date, the Hong Kong Government has not enacted any COVID-19 specific legislation or regulations concerning the construction sector. Nevertheless, construction activities continue to be seriously affected due to various Hong Kong Government legislative enactments and regulations which have an indirect effect on the industry, such as entry restrictions into Hong Kong, compulsory quarantine measures and social distancing requirements. Such measures were unprecedented in their implementation, scope and impact, and have led to potential disputes arising from delays to the works and additional costs suffered by those in the industry.
 

Since January 2020, the Hong Kong Government has introduced various general measures and new laws to address the COVID-19 pandemic, including:
 

• imposing entry restrictions on non-Hong Kong residents; and

• imposing a 14 day compulsory quarantine requirement on all inbound travellers[34].
   

Such measures and restrictions have been gradually relaxed since mid-May and various exemptions have been introduced. However, there is a possibility that the full restrictions may be reinstated as the risk of community transmission of the virus has escalated recently.
 

Under the current Hong Kong law [35], Employers have a duty to ensure, so far as is reasonably practicable, the health and safety at work of their employees. These duties extend to the provision and maintenance of safe places of work [36]. As a result of the pandemic, the Development Bureau of Hong Kong (DEVB) and the Construction Industry Council of Hong Kong (CIC) have reminded the industry to strengthen protective measures on construction sites, such as maintaining good personal hygiene, conducting regular temperature checks of workers, installing hand sanitisers, etc[37].
 

The impact of these measures on the Hong Kong construction industry is significant. Projects have suffered from:
 

• disruption of the supply chain (particularly if the raw materials were to be imported from Mainland China) and operations;

• shortage of labour due to travel restrictions and quarantine requirements;

• rises in costs as Employers are required to step up health and safety measures on site; and

• temporary suspensions of works on the Employer's own initiative.
   

As mentioned above, Hong Kong has enacted various pieces of legislation and regulations putting in place numerous restrictions causing delays and additional costs in the context of construction activities. However, these changes do not directly restrict construction activities on site. Therefore, it is unlikely that an affected party can claim force majeure, but it may be entitled to claim a CIL and seek time and monetary relief EOT as stated in the Guidance Memorandum.
 

On 23 February 2020, DEVB announced that as projects in Hong Kong have been affected by the limited supply of construction materials from mainland China due to the pandemic, the works departments (such as the Civil Engineering and Development Department, Drainage Services Department, etc.) would:
 

• proactively review the progress of construction activities with Contractors to determine if they are able to rearrange certain work procedures to minimise the impact on construction activities; and

• allow a reasonable extension of time (in accordance with the terms of the contract), if the project suffered any delays in the progress of public works projects due to COVID-19 [38].
   

With the Hong Kong Government (being the major employer in the market) initiating such measures it is hoped that, as stated in the Guidance Memorandum, parties to a construction contract are able to jointly work through any issues that result from the pandemic, before expending time and costs in employing direct contractual mechanisms to obtain potential time and monetary relief.
 

Conclusion            
 

While FIDIC offers an excellent framework for dealing with exceptional events, no one could have contemplated the scale and effect of the COVID-19 pandemic. The Guidance Memorandum is nevertheless a useful tool, showing affected parties that they may have recourse to several avenues under their contracts. It highlights the need now, as ever, for parties seeking relief to adhere to the FIDIC notice requirements and other contractual obligations.
 

Beyond the issuance of initial notices, we are now entering an interesting phase where parties need to think about causation. Parties seeking relief (i.e. disruption costs, EOTs, etc.), will be required to establish entitlement and a causal link. This involves keeping up-to-date records of the impact of COVID-19 on the relevant construction activities. It is an important time to be disciplined about maintaining proper records and recording events contemporaneously.
 

Interestingly, the Guidance Memorandum is silent on the issue of termination. Rather, it underlines the importance of parties maintaining a co-operative approach in finding a path forward by focusing on the win-win for the project. Although the right to terminate will undoubtedly arise in the COVID-19 context, parties will need to consider any proposed termination carefully in light of their duty to mitigate losses.
 

The continued effects of the pandemic on construction projects will largely depend on the pattern the COVID-19 virus takes. Various projections of the pandemic's path have been put forward, with recent projections anticipating a series of peaks and troughs in the coming months. COVID-19's trajectory will have an inevitable impact on the remedies available to affected parties. It is important now more than ever for parties to seek legal advice early, as availability and timing of remedies in the context of a constantly evolving global situation require a proactive and pragmatic approach.

 

 

 

For further information, please contact:

 

Jon Howes, Partner, Clyde & Co

Jon.Howes@clydeco.com

 

Footnotes