How to qualify the COVID-19 outbreak from a legal perspective?

The novel coronavirus outbreak in Wuhan in the PRC, or (“COVID-19”) as it was named by the World Health Organization (“WHO”), is increasingly disrupting businesses on a worldwide scale. Since January 2020, the outbreak has spread throughout the PRC and new pockets of infection are now confirmed in numerous other countries across the globe.

Although COVID-19 appeared in PRC and has developed devastating effects in this country, it has also had a tremendous economic impact globally. While concerned governments have attempted to contain the spread of COVID-19 through quarantines, travel bans and other restrictions, their protective measures have inadvertently created an economic crisis with labour shortages, factory closures and supply chain disruptions in countries that are otherwise free from the infection. The widespread outbreak of the COVID-19 not only causes serious risks to human life. It has also severe and detrimental effects for industries around the world and in particular those, which like construction, use labour or products from the PRC as part of their supply chain.

The WHO has since 30 January 2020 recognized the COVID-19 outbreak as a “public health emergency of international concern” but has so far refrained from using the term “pandemic”.

To date, the Chinese authorities have implemented draconian measures as a response to COVID -19 and locked down entire cities with the total number of persons under quarantine orders exceeding 50 million. Wuhan is most affected but the rest of the PRC is also under severe restrictions, preventing the resumption of crucial economic activities.

PRC Law provides for a definition of the legal concept of force majeure and excuses non performance of contractual obligations resulting therefrom.

The China Council for the Promotion of International Trade (“CCPIT”), accredited with Beijing’s Commerce Ministry announced at the end of January 2020 that companies in China could request a force majeure certificate if their business with overseas partners was affected by the COVID 19 outbreak. Such force majeure certificates are designed to enable affected parties to be excused for failing to timely perform their contractual obligations due to extraordinary circumstances beyond their control. Such certificates have already been widely issued and they will probably be accepted by courts on the Chinese domestic market and abroad for international contracts governed by PRC Law. It remains to be seen if they will be given effect with respect to contracts governed by other systems of law and in particular common law;

Force Majeure is not a common law legal concept

The term “Force Majeure” originates from French Law. It is considered as a legal concept under most civil law systems and can be invoked by an affected party in civil law jurisdictions regardless of any relevant contractual provision.

By contrast, Force Majeure is only an imported legal feature under common law jurisdictions where it has not been given any specific meaning or legal effect, except as the terms may be contractually agreed.

Force majeure clauses are commonly used in contracts governed by the law of England and Wales (“English Law”) and other common law jurisdictions because such contractual concept is designed to obtain temporary relief and is generally preferable to its alternative, the common law concept for frustration, which leads only to the termination of the contract.

As noted by the High Court in Tandrin Aviation Holdings Ltd v. Aero Toy Store Llc & Anor [2010] EWHC 40 (Comm):

“Whether a force majeure clause in a contract is triggered depends on the proper construction of the wording of that clause; “force majeure” is not a term of art.”

In order to provide to the parties a useful risk management tool, Force Majeure should be clearly defined in the contract together with the rights and remedies deriving therefrom. The freedom of contract prevails under English Law, which allows the parties to tailor the Force Majeure clause as they see fit.

Since Force Majeure clauses are creatures of contract under English Law, their interpretation will be governed by the normal rules of contractual construction. It is important to note however that such clauses will be construed strictly by the courts.

No Force Majeure provision under English Law will be implied in a contract where it has been omitted. Properly drafted, a Force Majeure clause governed by English Law should provide a sophisticated mechanism for dealing with the consequences of exceptional events that are beyond the control of the Parties. Such clause is however generally incorporated as an afterthought in a standardised form and it is seldom customised to accommodate the new perils resulting from globalisation.

For a provision that is so commonly found in construction and EPC contracts, it is surprising how differently it is treated in the various standard forms, not only in relation to the meaning of the term but also the procedure to be complied with and the relief available to the affected party.

A Force Majeure claim will often prove difficult to raise, challenging to substantiate and rarely successful, although the process may lead to a negotiated settlement.

Case study – COVID-19 and Clause 19 (Force Majeure) of the FIDIC Suite (1999 edition) in a contract governed by English Law

This difficulty of invoking Force Majeure in relation with COVID-10 will be illustrated with one of the most commonly used Force Majeure Clause in international EPC contracts, namely Clause 19 (Force Majeure) of the Rainbow FIDIC suite of Contract, 1999 edition. The new FIDIC 2017 edition is still not commonly used and its Clause 18 (Exceptional Event) contains no notable improvement for the like of COVID-19.

• Clause 19.1 defines the term “Force Majeure” as being:
• (a) an exceptional event or circumstance,
• (b) beyond the Party who has been affected by it,
• (c) against which such affected Party could not have reasonably provided against before entering into the Contract;
• (d) which having arisen such affected Party could not reasonably have avoided or overcome; and
• (e) it must not have been substantially attributable to the other Party.

Such generic definition is followed by a non-exhaustive list of categories of events that could fall within the above generic definition of Force Majeure. Such list is only illustrative which means that any listed event should satisfy the five criteria set out above.

• Such illustrative categories of event include the following:
• (i) war, hostilities (whether war be declared or not), invasion, act of foreign enemies;
• (ii) rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war;
• (iii) riot, commotion, disorder, strike or lockout by persons other than the Contractor’s Personnel and other employees of the Contractor and Subcontractors;
• (iv) munitions of war, explosive materials, ionizing radiation or contamination by radio-activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio-activity; and
• (v) natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.

It is important to note that the above list does not include the term “epidemic” or “health emergency” or anything similar, which is the primary manifestation of the event to be claimed for the COVID 19 outbreak. It fails as well to refer to “quarantine”, “transport and visa restriction” or “imposed suspension of industrial activity”, which are the widespread economic results of such event.

This absence of relevant terminology in the list is not fatal to the merits of a claim for delay. The affected Contractor will however have to demonstrate that COVID-19 complies with all the requirements of the generic definition of Clause 19.1. This is no easy task and there is plenty of room for challenge in this respect, particularly with regard to the impossibility to provide against the event before entering into the contract. The Contractor is generally responsible for its choice of labour and supply chain and past epidemic outbreaks such as the 2002 SARS have already significantly affected PCR and other countries – although not on the same scale.

The failure to classify the event in a paragraph of the illustrative list will definitely be detrimental to any claim for the corresponding Cost as set out below with regard to Clause 19.4.

Pursuant to Clause 19.2, relief is only available where the Contractor is or will be “prevented” from performing any of its obligations by reason of an event that satisfies all the above conditions of Clause 19.1 and subject to notification to the other Party within 14 days of becoming aware of the event or circumstance.

In Fairclough Dodd & Jones Ltd v J.H. Vantol Ltd [1957] 1 W.L.R., the Court held that the word “prevented” means that relief was only available where a shipment remained impossible up to the end of the contract period.

The affected Party having given notice in due course of a qualifying Force Majeure event shall be excused from performance of the relevant obligations for so long as such event lasts. It is important to note that for relief to be granted, the event must cause physical or legal prevention and not simply economic unprofitability. It is expressly stated in Clause 19.2 that Force Majeure shall not apply to the obligations of either Party to make payments to the other Party under the Contract.

Pursuant to Clause 19.4, the Contractor will be entitled to an extension of time for delays arising from being prevented from performing any of its contractual obligations in respect of all categories of Force Majeure events, subject to a duty to minimize delay under Clause 19.3. Considering the ever expanding developments for an unknown duration of the COVID-19 outbreak, such duty to minimize delay is an additional hurdle difficult to overcome by the Contractor. Furthermore, in case of labour and supply chain disruptions, finding alternative resources will be challenging. New pockets of infection are being regularly reported and acted upon by the competent authorities, which is likely to compromise most commercially acceptable replacement solutions.

The recovery of Cost associated with delay is problematic. The Contractor will only be able to recover Cost (excluding profit) in relation to some types of Force Majeure: for all category (i) events and for category (ii), (iii) and (iv) events of Clause 19.1, if they occur in the country where the site is located. The Contractor shall not be entitled to recover Cost arising in relation to category (v) events (natural catastrophes).

Clause 19.4 is silent as to what financial remedy the Contractor should be entitled to in the event of an exceptional event which satisfies the generic criteria in the first paragraph of Clause 19.1, but does not fall within any of the listed categories of the same provision. A restrictive construction of this clause is likely to prevent the recovery of Cost.

Considering that the devastating economic effects of the COVID 19 outbreak affects mainly the supply chain of the construction industry – and therefore subcontractors, Clause 19.5 is likely to prove unhelpful to most main contractors. It reads:

“If any Subcontractor is entitled under any contract or agreement relating to the works to relief from force majeure under terms additional or broader than those specified in this Clause, such additional or broader force majeure events or circumstances shall not excuse the Contractor’s non-performance or entitle it to relief under this Clause”.

Main contracts and subcontracts for labour and supplies are seldom back-to back, particularly with regard to Force Majeure provisions.

Moreover in the case where the main contract is governed by English Law and the subcontracts are governed by PRC law, there is a risk that the Chinese subcontractors will be entitled to rely on the force majeure certificates issued by Chinese authorities, but the main contractor will be prevented from claiming the benefit of such certificates under the main contract by Clause 19.5.

Pursuant to Clause 19.6, either Party may give notice terminating the Contract in the event of prolonged Force Majeure defined as more than 84 days for one event or more than 140 days in total) that “substantially” prevents the execution of all the Works. This provision may encourage the parties to find an amicable settlement in order to avoid termination.

Since Clause 19 (Force Majeure) is likely to prove unfriendly to the Contractor for obtaining relief and compensation in relation to the COVID 19 outbreak, the use of other provisions of the contract should be investigated.

Case study – COVID-19 and the Claim provisions of the FIDIC Suite (1999 edition)

Actually, Clause 8.4 (Extension of Time for Completion) seems suitable since it expressly refers to “epidemics” and its consequences as a cause of delay for the entitlement of the contractor to an extension of time (“EoT”). It paragraph (d) reads:

“Unforeseeable shortages in the availability of personnel or Goods caused by epidemics or governmental actions”.

Since this paragraph is appropriate to describe the COVID 19 and the main issues deriving therefrom, it should not be overlooked. Clause 8.4 should entitle the Contractor to raise a claim for an EoT pursuant to the conditions of 20.1 (Contractor’s Claims).Cost associated with COVID 19 could also be claimed at the same time under Clause 20.1.

In order to secure its entitlement to relief and leave all options open, the Contractor may, in its notice of claim, refer to Clause 8.4 (d) together with Clause 20.1 as well as to Clause 19.1, considering the exceptional reach, length and magnitude of the event. Both procedures are different and the Contractor should then try to agree with the Engineer on the best way to proceed in order to avoid duplication of efforts.

Each contract is unique and the impact of the COVID 19 outbreak will vary from one case to the next. Having carefully considered their specific circumstances, some Contractors might say: Why take the difficult road of a Force Majeure claim when it is possible to take the easier path of a conventional claim?