This article follows up on a review of the commercial impact of the COVID-19 Virus on international construction projects with a Common Law focus, recently published here.
In that article, several key consequences of COVID-19 were discussed, notably:
Contractors looking for potential recourse will of course look under the specific contract for the affected project, and relevant clauses of the 1999 FIDIC Red Book were reviewed in the article.
Materials and plant procured from China may face delays due to factory closures and/ or additional customs clearance requirements;
Project personnel are unable to return to the project due to recent travel to countries with a high incidence of COVID-19 infection, exposure to suspected or confirmed cases of COVID-19, or diagnosis of COVID-19 infection; and
Preventive measures are implemented in the country where the project is sited, including for example visa restrictions, quarantine requirements, health screening, business continuity planning which requires spilt-shift working or work-from-home arrangements etc.
However, as the authors recognized: “The Common Law generally takes a hands-off approach and leaves the contracting parties to allocate risk. Many Civil Code jurisdictions take a more interventionist approach and, for contracts subject to a Civil Code, there may well be alternative routes to excuse non-performance or to recover additional cost through the applicable code.”
Indeed, Civil Code jurisdictions do typically take a different approach. Using two civil law jurisdictions, namely France and the United Arab Emirates, as examples, we consider some relevant provisions in light of the current COVID-19 situation.
The starting point that comes to mind in discussions regarding the impact of COVID-19 is force majeure – in other words, will the application of this principle afford the contractor any relief?
Our earlier article explained that this was purely a matter of contract drafting in Common Law jurisdictions since the principle is not a feature of the law. The position is generally quite the opposite in Civil Law jurisdictions. Thus, in France, the principle of force majeure has been present in the French Civil Code since its first edition in 1804, but has only been given a definition in the recent 2016 revision, taking into account the standard interpretation of the principle developed by the French courts over two centuries. Thus, Article 1218 states as follows:
"In contractual matters, there is force majeure where an event beyond the control of the debtor, which could not reasonably have been foreseen at the time of the conclusion of the contract and whose effects could not be avoided by appropriate measures, prevents performance of his obligation by the debtor."
While the COVID-19 situation may likely be argued to be beyond the control of the obligor and could in certain cases be demonstrated to have prevented the obligor's performance of its contractual obligations, it would turn on the specific facts of each claim whether:
- The relevant force majeure event could have reasonably been foreseen at the time of conclusion of the contract.
- The effects of the force majeure event could be avoided by appropriate measures. For example, if there are other suppliers (not affected by the COVID-19 situation) that the contractor could procure the same materials from, any delay in material procurement from the supplier affected by the COVID-19 situation is arguably avoidable. Accordingly, where the effect of the alleged claim event is purely an economic detriment, it is unlikely that such an event constitutes force majeure.
Article 1218 further differentiates between the effects of force majeure events which temporarily or permanently prevent performance of a party's contractual obligation.
a. Where performance of the relevant obligation is only temporarily prevented, such performance is suspended unless the resultant delay justifies termination of the contract; and
b. Where performance of the relevant obligation is permanently prevented, the contract is terminated by operation of law and parties are discharged from their obligations under the conditions provided by Articles 1351 and 1351.1, including for example, that the obligor had agreed to bear the risk of a force majeure event or if he had previously been given notice to perform.
The possibility of a termination of the contract may not be attractive to contractors if they are merely seeking additional time and/ or costs from the employer but would like to continue with and not terminate the contract. Other options for relief should then be considered.
The position set out in Article 1218 does not prevent the parties to a French law contract from modifying it by agreement, and there are cases in which parties expressly agree to a less strict criteria – thus, they may stipulate that there can be force majeure even where the performance of obligations is delayed or hindered, and not totally prevented.
However, parties to a French law contract may not exclude a remedy altogether in the event of force majeure, as this would effectively leave them without recourse in a case of impossibility.
Impossibility & Frustration
The provisions for arguing impossibility under the French Civil Code correspond broadly to the Common Law concept of "frustration". Article 1351 states as follows:
"Impossibility of performing the act of performance discharges the debtor to the extent of that impossibility where it results from an event of force majeure and is definitive unless he had agreed to bear the risk of the event or had previously been given notice to perform."
However, Article 1351 can only be invoked if the Civil code requirements with respect to a force majeure event are established.
A new provision at Article 1195, similarly introduced with the 2016 revision to the French Civil Code, is also worth considering in the context of COVID-19 as it applies where, in the event of a change of circumstances that was not foreseeable at the time of conclusion of the contract, performance of the relevant contractual obligations are not actually prevented but would be "excessively onerous."
Proof that a contractual obligation has become "excessively onerous" might, for example, be based on the disproportionately high costs of procuring the requisite materials from an alternative source, or on the difficulties of obtaining approval for an alternative supplier which is not already pre-approved, if this can only be granted after a complicated and time-consuming process.
In the event that the requirements of Article 1195 are satisfied:
a. The contractor may ask the employer to renegotiate the contract (or in the case of a subcontract, the subcontractor may request renegotiation of the contract), unless it has accepted to bear the risks associated with a change of circumstances; and
b. If the employer accepts to enter into discussions with the contractor with a view to renegotiate the contract but parties fail to reach an agreement, the parties may:
- Agree to terminate the contract at a mutually acceptable time and set of conditions; or
- Jointly apply to court for an adaptation of the contract. In the absence of an agreement within a reasonable time, the court may, at the request of one single party, revise the contract or put an end to it subject to such conditions as it shall determine.
Importantly, Article 1195 is not a public policy provision, therefore parties can decide either to:
set aside its provisions, in which case the contractor facing a change of circumstances would not able to request a renegotiation on this basis; or
amend its provisions, and notably define the criteria upon which a change of circumstance will qualify as a change of circumstances or the level of hardship which will be considered as rendering the performance of the contract excessively onerous, and also prohibit a single party to seek an order from a court on that basis.
A wide range of options is thus available to parties for addressing the difficulties which have arisen in the contract. In particular, the ability to apply to court for a revision of the contract – which not unusual in Civil Law jurisdictions but almost unheard of in Common Law countries - is a fair way of addressing the risks and effects of the unforeseen circumstances while allowing the contract to continue.
United Arab Emirates
The relevant underlying concepts in UAE law are largely similar to those characterising French law. However, there are some significant differences that ought to be noted.
Force Majeure & Impossibility
Unlike French law, there is no specific definition of "force majeure" under UAE law. Article 273 of the UAE Civil Code (Federal Law No 8 of 1985) only requires:
a. Parties to be in a binding contract; and
b. That the force majeure event makes performance of the contract impossible.
The concept of impossibility has been dealt with by the UAE courts as relating to an external cause or event wholly preventing the performance of contractual obligations. It is not merely sufficient that such an external cause affects the performance of one party, but rather that the impact of the event renders the entire performance impossible by any party. Furthermore, impossibility extends beyond being faced with additional challenges or burdens associated with performance of a contract; difficulty in performing contractual obligations will not constitute grounds for successfully advocating impossibility of performance.
As to the effects of relying on a force majeure event pursuant to Article 273, UAE law provides that:
a. In the case of total impossibility of contract performance, the corresponding obligations cease and the contract shall be automatically cancelled;
b. In the case of partial or temporary impossibility of contract performance, the part of the contract that is impossible to perform shall be extinguished, but the obligor (for example, the main contractor in a construction contract with the employer) is nonetheless entitled to cancel the contract provided that the obligee is so aware. This is different from the relief provided under the French Civil Code which only allows termination of the contract in the case of temporary force majeure if any suspension of contract performance results in a delay which justifies such termination.
In the event that an employer alleges any losses suffered as a result of the contractor's non-performance of its contractual obligations, the contractor could potentially rely on the following provisions of the UAE Civil Code:
- Article 287, which stipulates that if the loss is caused by (among other things) force majeure, the obligor will not be liable for such loss in the absence of a legal provision or agreement to the contrary;
- Article 386, which also stipulates that the obligor is not liable to pay compensation for his non-performance if he proves that the impossibility of performance arose out of an external cause in which the obligor played no part.
Exceptional Circumstances of a Public Nature
The concept of "unforeseen circumstances" under French law does not require the impossibility of contract performance but provides relief in instances of an obligation becoming "excessively onerous" to the obligor. This is somewhat similar to the provisions for "exceptional circumstances" under UAE law. Article 249 of the UAE Civil Code provides that:
a. If exceptional circumstances of a public nature that could not have been foreseen occur; and
b. Even if not impossible, the obligor's contractual obligation becomes oppressive so as to threaten him with grave loss,
then a judge (or arbitral tribunal) is able to reduce the oppressive obligation to a reasonable level if justice so requires. Such adjustment of the obligation shall be in accordance with the circumstances and after weighing up each party's interests.
It is noteworthy that this is a mandatory provision under UAE law which parties will not be able to exclude by contract.
Prevention of contract performance
In any case, Article 893 of the UAE Civil Code allows contracting parties in a muqawala contract (i.e. contract for services, including for example construction contracts) the right to require cancellation or termination of the contract whenever a cause arises preventing the performance of the contract or completion of that performance. In such circumstances, a muqawala contract will terminate by consent of the contracting parties, or by order of the court (in accordance with Article 892).
In certain circumstances where parties seek to cancel or terminate a contract but are unable to meet the requirements for establishing a force majeure event (pursuant to Article 273) or unforeseen exceptional circumstances which makes contract performance oppressive (pursuant to Article 249), this Article 893 of the UAE Civil Code may be helpful.
As can be seen above, even though fundamental principles may be similar in civil law jurisdictions, it is still important to examine the specific provisions of the relevant laws and how they could potentially apply to the current COVID-19 situation. In situations where contractors wish to seek relief from contractual obligations and strict performance, or indeed choose too advance claims related to contractual compensation arising from the effects of the COVID-19 situation, contractors should still (as in the case of raising any other claim) identify the basis of the claim (i.e. whether in contract or at law) and what their entitlement is, how the COVID-19 situation factually supports the claim in the light of the specific circumstances, and what the resulting time and/ or cost implications are. In other words, it is not sufficient simply to rely on the existence or occurrence of COVID-19.