Corona Virus and Consequences in Construction Contact in Nepal

Executive Summary

As the situation with Covid-19 aggravates, many construction projects can be stalled because of the government restrictions imposed to control the spread of Force Majeure following novel Covid-19 pandemic.

Although contractors will still stick with the original terms and conditions of the contract, now, Contractors may claim for Extensions of Time and Cost. Contractors may also claim against loss and expense, under the terms and Condition of their Contract.  Understanding the clause of the particular Condition of Contract is the key, although the amendment can be modified.

Parties should maintain effective site security when safety personnel suddenly be transferred.

Introduction

World Health Organization (‘WHO’) has said that Coronavirus disease (COVID -19) is a new virus from that infect human and quickly spread through human population. To many it can become fatal consequences. This article is on the consequences of COVID-19 for Construction Claims in context of project in Nepal. It will highlight the Contractors’ contractual position under the FIDIC 1999, form of Contract (Pink, Yellow, Silver and Red) and Standard Condition of Contract issued by PPMO. There will be some comments about Public Procurement Act, 2007 (2063) (“PPM Act”) and the potential legal arguments available to Employers in response to these claims.

This article will focus on following questions:
• What are the related contractual clauses on that the contractor may rely to file its claim?
• What potential arguments may the employers use to reject this claim?
• What power do the Nepal courts have when considering Coronavirus as a force majeure?

Legal Context of Force Majeure

PPM Act defines “Special circumstances” as circumstance resulted from a natural or divine calamity such as drought, no rainfall, deluge, earthquake, flood, landslide and fire and from an epidemic or unforeseen or unexpected special circumstance, and this term also includes a circumstance such as war or internal conflict. Which is similar to how Force Majeure is generally defined “to include events like epidemics or pandemics, along with war, terrorist attacks, “acts of God,” famine, strikes, and fire in the list of events excusing overall performance or delay in performance”1. Here, the Special Circumstance in the PPM Act is similar to the generic definition of Force Majeure. The concept of Force Majeure, furthermore, has been widely used since the 2015 Earthquake in Nepal. However the National Civil Code 2017 (2073) (“Civil Code”) has not specifically defined the term Force Majeure. There are many reference to Force Majeure in some clauses in the Civil Code and other Acts and Regulations.

Relevant clauses in the FIDIC Red Book for Contractors

If a Contractor intends to file a construction claim under Force Majeure event due to the Corona virus on their project progress, as per the FIDIC (1999 ed.). The Contractors will need to refer to one of the following clauses:

“Clause (20.1) of the FIDIC, provides that if the Contractor considers itself to be entitled to any Extension of the Time (“EoT”) for completion and/or any Additional payment, under any clause of the FIDIC, conditions or otherwise in connection with the contract, the Contractor shall give notice to the Engineer, describing the event or circumstance giving rise to the claim. The Notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance. Moreover, in case of Force Majeure, the FIDIC requires the notice to be served within 14 days of the event. It follows that a Contractor is entitled to submit an EOT claim under any sub clause of the contract.”

Some of the related clauses in the FIDIC, on which the Contractor may seek to rely in advancing a claim under Clause 20.1, include:

  1. Clause (8.4) Extension of Time for Completion, paragraph (d), provides that the contractor shall be entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to an extension of the Time for Completion if and to the extent that completion for the purposes of Sub-Clause 10.1 [Taking Over of the Works and Sections] is or will be delayed by any of the following causes: (d) Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions.
  2. Clause (17.3) Employer’s Risks, paragraph (h), states that: “any operation of the forces of nature which is Unforeseeable or against which an experienced contractor could not reasonably have been expected to have taken adequate preventative precautions.”
    Clause (17.3) is linked to Clause (17.4) Consequences of Employer’s Risks ‘If and to the extent that any of the risks listed in Sub-Clause 17.3 above results in loss or damage to the Works, Goods or Contractor’s Documents, the Contractor shall promptly give notice to the Engineer and shall rectify this loss or damage to the extent required by the Engineer.If the Contractor suffers delay and/or incurs cost from rectifying this loss or damage, the Contractor shall give a further notice to the Engineer and shall be entitled subject to SubClause 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];’
  3. Clause (19.1) Definition of Force Majeure, as a reason for the EOT claim ‘In this Clause, “Force Majeure” means an exceptional event or circumstance:
    • Which is beyond a Party’s control,
    • Which such Party could not reasonably have provided against before entering into the Contract,
    • Which, having arisen, such Party could not reasonably have avoided or overcome, and
    • 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, so long as conditions (a) to (d) above are satisfied:
    • war, hostilities (whether war be declared or not), invasion, act of foreign enemies,
    • rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war,
    • riot, commotion, disorder, strike or lockout by persons other than the Contractor’sPersonnel and other employees of the Contractor and Subcontractors,
    • munitions of war, explosive materials, ionising radiation or contamination by radioactivity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio-activity, and
    • Natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.’

Some of the related clauses in the PPMO Standard Form of Contract, on which the Contractor may seek to rely in advancing a claim, include

Relevant clauses in the PPMO Condition of Contract Contractors may use

Section 56 of PPM Act, which allows for Extension of Time if Force Majeure events have occurred. This right does not grant automatically the rights of the Contractor but by giving timely notice and demonstrating their entitlement to extension of time. Additionally, in PPMO Form of Condition of Contract (“CoC”), the Force Majeure is defined in the Contract as “means of an exceptional event or circumstances which is beyond a Party’s control, which such Party could not reasonably have provided against before entering into the Contract, which having arisen, such a Party could not reasonably have avoided or overcome, and , which is not substantially attributable to the other Party.”

The fact that corona virus itself is officially classified as an epidemic/pandemic may not be relevant. The relevant trigger may in fact be the government action that causes the parties no longer to be able to perform the contract: i.e. mandatory “Lock down”2 order that the GoN has ordered through a decree to contain the spread of COVID-19 virus. In Nepal, the lock down order has been strictly implemented by Provincial Government and the Local Government under the Infectious Disease Act, 2020 (1964).

If the provision of the Contract has a Force Majeure Event, the Contractor can advance their claim under on the Force Majeure and Compensation Event Clause to claim extension of time and additional cost. Additionally, in common law the Doctrine of Commercial Impossibility can be used. The lockdown has made impossible for the party to fulfill its obligation because of the order of the Government, which can be argued as commercial impossibility.

Employers Arguments

As noted above, the Contractor has a contractual entitlement to submit a claim under any of the contractual clauses set out above. Nevertheless, will Coronavirus Event be a Force Majeure Event and provide a valid basis on which to submit a claim for the purpose of these provisions?

Force majeure also protects employers. It exonerates the employer from obligation for payment during any period of suspension. Further, the Employer can also terminate the Contract on the basis of doctrine of Frustration, if the Covid- 19 Lockdown keeps extending, there is a chance that there becomes a point where it is impossible to perform the obligation in the contract without being a fault of either party, hence the Employer may then terminate the Contract on the basis of frustration if the event of force majeure has gone on beyond a specified time. 4If the GoN publishes any notice/directives or instructions then the employers may reject the Contractors claim for entitlement of any benefit under Covid-19, this,in result may not be considered as a valid reason to entitle contractors to make claims related to the EOT, and Prolongation costs, (if applicable).

It is pertinent to note that Force Majeure is an event that is impossible to avoid, and the criteria of what constitutes Force Majeure, will fall to be decided according to the sole discretion of the Arbitrator or Court. This means that the Arbitrator and Court will have a wide discretion to determine whether the Coronavirus shall be considered a valid reason for contractors to delay the work on site or not. The Arbitrator or Court may be expected to take into account the WHO and the Prohibitory Lockdown Notice mentioned above, and this may serve to undermine the basis of Coronavirus as a Force Majure event. The EOT claims as matters stand, unless new evidence emerges to cast doubt over those reports, or a governmental decree, instructions, or directions, are issued, for example, which mandate the suspension of works on site in order to contain the virus or to counteract its spread, or a delay in material supply due to closing the relevant manufacturing industries.

Whether a force majeure clause in a contract is triggered depends on the proper construction of the wording of that clause – including, in particular, the definition of Force Majeure/ Act of God/ etc.

 

 

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