In March 2023, the International Federation of Consulting Engineers (“FIDIC”) published a Guidance Memorandum (“Guidance”) outlining relief mechanisms under FIDIC contracts to respond to some of the recurring challenges faced in the construction industry as a result of the COVID-19 pandemic and the war in Ukraine. Such challenges include goods and labour shortages, inflation and disruption arising out of various governmental actions.
The Guidance sets out 10 scenarios and discusses the potential remedies available to the parties under the various FIDIC General Conditions as well as in law. Some of the key points made by the Guidance are as follows.
In the context of COVID-19 and the war in Ukraine, Force Majeure/Exceptional Events (“FM/EE”) clauses are amongst the most frequently debated provisions across the FIDIC suite of contracts. For the purposes of a FM/EE, a contractor needs to demonstrate that the event relied on is one that:
- is beyond a party’s control;
- the party could not reasonably have provided against before entering into the contract;
- the party could not reasonably have avoided or overcome;
- is not attributable to the other party; and
- prevents performance of contractual obligations.
Entitlement to FM relief is likely to turn on many occasions on conditions (3) and (5).
With respect to (5), the fact that performance is rendered more difficult or onerous does not necessarily meet the threshold of the contractor being “prevented” within the meaning of the FIDIC General Conditions. FM/EE provisions are not hardship provisions. They only provide relief when performance is prevented, not when it is made more onerous or expensive.
With respect to condition (3), reaching the threshold for showing that the FM/EE event could not be reasonably avoided or overcome arguably becomes more challenging for contracts entered into later into the pandemic. As the Guidance suggests, by late 2020, a contractor should have known about COVID-19 and its implications and ought to have taken mitigation measures to avoid or overcome COVID-19 outbreaks. FM entitlement will thus likely depend on whether such measures were reasonably robust. By way of example, if construction materials had to be imported from a country where a border closure came into effect after the contract was formed, which prevented site deliveries for a given period, a contractor would notably need to show that it could not have reasonably avoided or overcome such issue by sourcing the materials in a timely manner from an alternative supplier in another country.
Identifying precisely what is said to impact contractual performance is key. This is because the remedies available to a contractor differ, notably, depending on whether it claims entitlement for a natural or a man-made event. For example, under both the 1999 and 2017 FIDIC contracts, the contractor can be entitled to an extension of time (“EOT”) but not the cost of the consequences of a natural event. By contrast, cost relief under FIDIC contracts for FM/EE can be obtained for certain man-made events, such as e.g. trading bans or border closures, in reliance on the applicable regime for changes in the Laws of the Country.
It should also be borne in mind that the governing law may provide additional remedies for the contractor, in particular, in jurisdictions having general hardship provisions. Under French law, for example, a party may ask for the contract to be renegotiated, revised or terminated where the equilibrium of the contract is unforeseeably altered in such a way by external circumstances that it becomes excessively onerous.
Extension of Time
Under several of the FIDIC forms, a contractor may be entitled to an EOT if completion of works is delayed e.g., due to unforeseeable shortages in the availability of personnel or goods caused by an epidemic or by governmental actions. In this context, “unforeseeable” is defined as not reasonably foreseeable by an experienced contractor by the date for the submission of the tender or the Base Date, namely 28 days before the latest date for the submission of the tender.
Most construction contracts provide that the contractor is paid the price tendered, together with any adjustments provided for in the contract. Ordinarily, a contractor cannot claim for additional cost merely because the works cost more to execute.
However, FIDIC forms do provide cost relief in particular circumstances. One such scenario is an optional clause named “Adjustment for Changes in Costs” that provides that the employer shall bear at least part of the increased cost due to inflation on the cost of goods and labour. Parties may also decide that the employer bears the risk of inflation and seek to integrate the same in the contractual price adjustment formulas. However, even then, the full impact of actual inflation may not be fully captured.
Where the contract does not provide a remedy for the full inflation cost or at all, contract users should keep in mind that there may be additional remedies at law.
Disputes in the construction industry, often resolved by arbitration, are on the rise as the ongoing war in Ukraine, coupled with the effects of the COVID-19 pandemic, continue to exert pressure on supply chains and labour availability, thereby leading to severe price fluctuations and disruption to ongoing projects.
Given that these are relatively recent phenomena, they have, as of yet, received limited judicial consideration. In that context, the FIDIC Guidance is a valuable tool (i) for construction industry players, both pre- and during contract execution, to allocate and/or recalibrate contractual risk; and (ii) for arbitral tribunals resolving ensuing disputes. Overall, in these situations, close regard must be paid to the factual matrix, contractual wording and the applicable law.
For further information, please contact:
Maria Mitaeva, Linklaters