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MDA ADVISORY NOTE ON COVID-19 – FIDIC RED BOOK 1999

6 April 2020

The nation-wide lockdown enforced in terms of the Disaster Management Act 57 of 2002 is upon us. Subject to any extension of the time period for the lockdown, it is currently effective until 0:00pm on Thursday 16 April 2019.

Construction sites in South Africa have been affected. Numerous enquiries have been received regarding the impact of the nation-wide lockdown and the notifications and requirements in respect if the FIDIC agreements.

In response to these enquires, we have put together this note that examines the provisions of an unamended FIDIC Red Book 1999. To the extent that we have received queries from parties to FIDIC Red Book contracts in Botswana and Eswatini, we shall briefly deal with this below.

At the outset, there appears to be confusion as to whether a “Force Majeure” event has occurred or not.

“Force Majeure” is defined in Clause 19.1 of the FIDIC Red as follows:

“In this Clause, “Force Majeure” means an exceptional event or circumstance:

a) Which is beyond a Party’s control;

b) Which such Party could not reasonably have provided against before entering into the Contract;

c) Which, having arisen, such Party could not reasonably have avoided or overcome; and

d) Which is not substantially attributable to the other Party.

Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, as long as conditions (a) to (d) above are satisfied:

  1. War, hostilities (whether war to be declared or not), invasion, act of foreign enemies;
  2. Rebellion, terrorism, revolution, insurrection, military or usurped power or civil war;
  3. riot, commotion, disorder, any blockade or embargo, strikes or lock outs by persons other than the Contractor’s personnel;
  4. Munitions of war, explosive materials … except if use by Contractor;
  5. Natural catastrophes such as earthquake, hurricane, typhoon, volcanic activity.”

Clause 19.2 provides that:

“In the event that a Party is prevented from performing any of its obligations under the Contract by Force Majeure, such Party shall give notice to the other Party of the event or circumstance constituting the Force Majeure. The notice shall be given within 14 (fourteen) Days after the Party became aware, or should have become aware, of the relevant event constituting Force Majeure.

The Parties shall, having given notice, be excused from performance of such obligations for so long as such Force Majeure prevents it from performing them.

Notwithstanding any other provision of this Clause, Force Majeure shall not apply to obligations of either Party to make payments to the other Party under the Contract.”

In order for an event to be classified as a “Force Majeure” event, the requirements of all four sub-paragraphs (a)-(d) of clause 19.1 must be satisfied.

Where these four requirements are met, the party to the Contract who is affected by the event may give a notice to the other party in terms of Clause 19.2 within 14 days of such party becoming aware of an event of Force Majeure which is preventing him from performing his obligations under the Contract. If he gives this notice, and the event is a Force Majeure event (as defined), then the party who issued the notice is excused from performing his obligations that he cannot perform while the Force Majeure event is occurring.

Then, whether or not the Contractor is the party who is prevented from performing his obligations under the Contract, and subject to compliance with the provisions of Clause 20.1, the Contractor will be entitled to an extension to the Time for Completion – but with no Cost (see Clause 19.4 [Consequences of Force Majeure]). What this means essentially is that the Contractor will have longer to complete the Works, but will not be entitled to any additional Cost as a result.

Until recently, we were seeing the impact of COVID-19 affecting delivery of materials and Goods from China. This situation has now changed, and the publication of Regulations under the Disaster Management Act is the event that is affecting the Contractor’s obligations to perform the Works.

The immediate (and perhaps most obvious) course is to invoke contractual provisions regulating a “Force Majeure” situation, where these are available in terms of the relevant contract. The lockdown ticks all the boxes:

a) Which is beyond a Party’s control; [tick]

b) Which such Party could not reasonably have provided against before entering into the Contract; [tick]

c) Which, having arisen, such Party could not reasonably have avoided or overcome; and [tick]

d) Which is not substantially attributable to the other Party. [tick]

However, the FIDIC Red Book has a clause that specifically deals with instances of changes to legislation within the Country (this being the country where the Permanent Works are being executed).

The Contractor is required to comply with the Laws of the Country.

Clause 13.7 of the FIDIC Red Book states:

“The Contract Price shall be adjusted to take account of any increase or decrease in Cost resulting from a change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws) … made after the Base Date, which affect the Contractor in the performance of obligations under the Contract.

If the Contractor suffers (or will suffer) delay and/or incurs (or will incur) additional Cost as a result of these changes in Laws … the Contractor shall give notice to the Engineer and shall be entitled subject to Clause 20.1 [Contractor’s Claims] to:

a) 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

b) Payment of any such Cost, which shall be included in the Contract Price.

After receiving this notice, the Engineer shall proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine these matters.

Clause 3.5 [Determinations] requires the Engineer to consult with each Party in an endeavour to reach an agreement. If an agreement is not achieved, the Engineer then makes a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.

The Regulations published under the Disaster Management Act may be a change in Legislation. We have, in the past, seen successful challenges to this allegation and hence it is difficult to say that each and every adjudicator / arbitrator will find that the regulations are in fact a change in Legislation.

If Contractor’s are of the view that it is a change in Legislation, then Clause 13.7 applies. The Contractor is required to give this notice to the Engineer in terms of Clause 13.7 if the Contractor suffers (or will suffer) delay and/or incurs (or will incur) additional Cost as a result of these changes in Legislation. The Contractor does not actually have had to suffer delays or additional Costs he can issue the notice in anticipation thereof.

The Engineer is then required to give effect to Clause 3.5 [Determinations]. At this stage, a meeting would occur between the Engineer / Employer / Contractor to reach agreement on the impact of the change in Legislation on the Works and it would be useful to implement measures at this stage to minimise the impact of the change in Legislation.

The Contractor still has to comply with Clause 20.1 [Contractor’s Claims] in order to be entitled to as extension of time and Cost. This includes being able to show that he did actually suffer a delay and that Costs were actually incurred, and needs to include in his calculation any Cost savings as a result and measures he has taken to mitigate these Costs as well.

With regards to any additional compensation that may be claimed by the Contractor under the FIDIC Red Book we have already determined that (subject to compliance with Clause 20.1):

a. The Contractor is not entitled to “Cost” as a result of a Force Majeure event.

b. The Contractor is entitled to “Cost” (reasonably incurred) as a result of a change in Legislation.

The FIDIC Red Book is quite specific as to when a Contractor is entitled to payment of Cost, however Clause 20.1 does allow the Contractor to make a claim for additional payment “otherwise in connection with the Contract”. We could not anticipate what such a claim would be by the Contractor, but he does have to notify the Engineer of the event or circumstance giving rise to the claim within the 28-day notice period.

Instructions issued by the Engineer may result in a Variation. In this regard it is noted that in terms of Clause 1.13 [Compliance with Laws], the FIDIC Red Book places an overarching obligation on the Contractor to comply with the Laws. The Engineer should not have to issue instructions to the Contractor regarding compliance with these Laws, and if he does so this may be seen as a Variation.

We have come across some instances where the Engineer has issued a notice of suspension of the Works in terms of Clause 8.8, the cause of the suspension being “Force Majeure”. In this instance, the Contractor would be required to protect, store and secure such part of the Works against any deterioration, loss or damage. We are not convinced that this is the correct way to handle this situation, particularly in light of the wording of Clause 8.8 – “If and to the extent that the cause is notified and is the responsibility of the Contractor, the following Sub-Clauses 8.9, 8.10 and 8.11 shall not apply”. We know that the lockdown is not the responsibility of the Contractor, but does this imply then that it is the responsibility of the Employer?

The remedies for the Contractor in terms of Clauses 8.8, however, remain the same in terms of time and Cost as for a change in Legislation. The Contractor’s compliance with the Laws would be the primary obligation. If the notice of suspension was issued and the suspension was effective prior to the nationwide lockdown, these days of suspension prior to the nationwide lockdown would be claimable by the Contractor as a separate event giving rise to time and Cost.

In South Africa, the COVID-19 global pandemic is not the event causing the temporary closure of construction sites and the ceasing of related on-site construction activities for the lockdown period.

Contractors executing Works on South African construction sites have an overarching statutory obligation to comply with the “Laws” including especially the nationwide lockdown and subsequent regulations issued in terms of the Disaster Management Act 57 of 2002.

This is the event causing the closure and it may be a change in Legislation, open to dispute by an Employer as to whether or not it is a change in Legislation or simply an operation of the Legislation currently in place.

The fact remains – we are in unchartered territory and Employers and Contractors should not sit back in the comfort of the belief that they have entitlements under the Contract that a third-party adjudicator or arbitrator may not agree with. Employers and Contractors alike should submit their notices under the contract, but more importantly, have discussions regarding the best way to deal with this situation, which would ultimately enable the Contractor to be ready and able to return to the Site as soon as the lockdown is over to avoid further delays to the Works. There is no right or wrong answer.

FIDIC Red 1999 contracts where the Permanent Works are being executed in Botswana

Botswana declared a Public Health Emergency in terms of the Public Health Act (Cap.63.01) contained in the Government Gazette Extraordinary Vol. LVIIL No. 23 dated 20 March 2020. Construction sites were not shut down, and Contractors could continue working, whilst abiding to the Government of Botswana’s guidelines on preventing the spread of the pandemic (for example, site meetings to be attended by fewer people, the provision of hand sanitizers, masks and other safety measures on Site).

The declaration of a Public Health Emergency has been followed by a declaration by the President of Botswana of a state of public emergency, to be in existence from midnight on 2 April 2020 until further notice. The President has stated that he intends to swiftly issue a Proclamation declaring a State of Emergency and summon Parliament to meet within seven (7) days thereof, as well as sign and publish the State of Emergency Regulations.

While the State of Emergency is in place “a period of extreme lockdown” will be in place for a period of 28 days. All individuals across the country will be expected to adhere to a more

severe form of social distancing where movement out of the home is only restricted to those performing essential services and transporting essential goods.

In this regard, up until midnight 2 April 2020, the impact that the pandemic has had on construction sites was:

a. To the extent that the 20 March 2020 Public Health emergency declaration affected the performance of the works by the Contractor, he would have issued a notice to the Engineer in terms of Clause 13.7. The Contractor is required to give this notice to the Engineer in terms of Clause 13.7 if the Contractor suffers (or will suffer) delay and/or incurs (or will incur) additional Cost as a result of these changes in Laws. The Contractor does not actually have had to suffer delays or additional Costs, he can issue the notice in anticipation thereof.

b. To the extent that the pandemic had affected the Contractor’s inability to obtain materials and goods, he would have issued a notice in terms of 8.4 read with clause 20.1 – (d) Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions..” Subject to compliance with the provisions of Clause 20.1, the Contractor would be entitled to time, but no cost.

c. Employers affected by the period of extreme lockdown would have submitted their notices in terms if clause 19.2.

Now that the President has declared a period of extreme lockdown, this will shut down construction sites and the provisions of Clause 13.7 may apply. The issuance by the Contractor of a Clause 13.7 notice is followed by the requirement for the Engineer to give effect to Clause 3.5 [Determinations]. At this stage, a meeting would occur between the Engineer / Employer / Contractor to reach agreement on the impact of the change in Legislation on the Works. The Contractor could explain how it anticipates being delayed and the parties could agree on methods to mitigate this delay, whether or not the Employer agrees to the application of Clause 13.7 to this scenario. It enables the parties to achieve agreement now on the parties’ respective obligations for payment during the lockdown period, securing cash flow for contractors during the lockdown period and enabling them to return to the site to recommence the Works and ramp up to acceptable production levels as soon as possible, and further, saves a dispute on this situation later

FIDIC Red contracts where the Permanent Works are being executed in Eswatini

Eswatini are currently in a similar position to South Africa and Botswana prior to their respective lockdowns.

His Majesty King Mswati III and Ingwenyama has commanded Government to introduce a partial lockdown on selected sectors of the economy to curtail the spread of coronavirus with effect from 27 March 2020.

For those businesses that do not fall within the specified essential services sectors, they have been encouraged to scale down by minimising their working hours. Businesses that cannot comply to WHO and Ministry of Health guidelines are expected to shut down until the situation normalises.

This may impact the progress of the Contractor’s works to the extent that the Contract is for Permanent Works being executed in Swaziland.

The Contractor would have issued a notice to the Engineer in terms of Clause 13.7. The Contractor is required to give this notice to the Engineer in terms of Clause 13.7 if the Contractor suffers (or will suffer) delay and/or incurs (or will incur) additional Cost as a result of these changes in Laws. The Contractor does not actually have had to suffer delays or additional Costs, he can issue the notice in anticipation thereof.

To the extent that the pandemic had affected the Contractor’s inability to obtain materials and goods, he would have issued a notice in terms of 8.4 read with clause 20.1 – (d) Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions..” Subject to compliance with the provisions of Clause 20.1, the Contractor would be entitled to time, but no cost.