REUTERS | Toby Melville

Recent COVID-19 related force majeure decisions: what do they mean for construction contracts?

Roughly a year has passed since the COVID-19 lockdowns were implemented. Despite much upheaval, project delays, and supply chain issues, it appears that projects across the globe may finally be getting back a sense of normality. To this day, however, much uncertainty remains for project owners, contractors and sub-contractors regarding how COVID-19 will affect their legal rights under contract. Specifically, it remains unclear how courts and tribunals around the world will treat the pandemic for the purposes of force majeure provisions because so little judicial opinion has been proffered. 

In order to successfully invoke the protections of a force majeure clause, a party must successfully argue that (i) a certain event falls within the scope of the force majeure clause and (ii) that such event was a the operative cause of a party’s failure to perform certain obligations. The exact contours of any provision will be determined by the specific language of a contract’s force majeure clause and the applicable governing law.

Generally, force majeure provisions are construed narrowly. As a result, it is typical to advise a party that if a certain catastrophic event is not explicitly specified in a force majeure clause’s language, then it is not likely that a party could rely on such an event to trigger the rights that the clause envisions. Indeed, it is uncommon to see terms such as “pandemic” or “infectious viral disease” referred to in a construction contract’s force majeure clause (whether this changes will be the subject of much debate among drafters going forward).

For example, according to sub-clause 18.1 of the FIDIC (2017) standard form, force majeure is defined as:

“an event or circumstance:

(i) is beyond a Party’s control;

(ii) the Party could not reasonably have provided against before entering into the Contract;

(iii) having arisen, such Party could not reasonably have avoided or overcome; and

(iv) is not substantially attributable to the other Party.”

Sub-clause 18.1 goes on to set out the following non-exhaustive list of exceptional events that that may constitute force majeure provided the four requirements listed above are met:

  • 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 or disorder by persons other than the Contractor’s Personnel and other employees of the Contractor and Subcontractors.
  • Strike or lockout not solely involving the Contractor’s Personnel and other employees of the Contractor and Subcontractors.
  • Encountering munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio-activity.
  • Natural catastrophes such as earthquake, tsunami, volcanic activity, hurricane or typhoon.

In the case of sub-clause 18.1, COVID-19 may well be captured if a tribunal was satisfied that conditions (i)-(iv) are met. However, in the case of a narrower and bespoke force majeure clause – such as in the cases discussed below – a party may have to argue that, in principle, the COVID-19 outbreak is comparable to the events typically set out in such a clause, and should therefore be applicable.

Such an argument is not straight-forward in the context of complex international construction disputes. Any party making such an argument would like be met with accusations that it is a sophisticated commercial entity that had the opportunity to amend such a clause during the bargaining process. Such a counter-argument may be persuasive when (and is often the case) the agreement contains a number of bespoke clauses.

Therefore, it is generally preferable to link a claim under a force majeure clause to an enumerated event, rather than relying on a catch-all clause or attempting to read the event into the enumerated events.

Recent case law

International construction parties should be aware of recent developments in COVID-19 case law, whether they are party to a FIDIC contract or a bespoke arrangement.

England and Wales

Perhaps characteristically, English courts have taken a cautious approach to the effect of the COVID-19 pandemic under force majeure provisions. As is typical, English courts will construe any force majeure provision on a case-by-case basis to determine whether it is appropriate to relieve a party of any liability. For example, in the High Court decision in Fibula Air Travel Srl v Just-US Air Srl [2020] EWHC 3048 (Comm), a party could not rely on the pandemic to invoke a force majeure clause to escape its obligations in March 2020, principally because governmental restrictions had not yet taken effect to cause the “failure or delay in the performance of any obligations under [the] agreement” that would continue for a period of ten days or longer.

This judgement suggests that, in England and Wales, in the absence of express language covering “pandemics” or “infectious disease” courts will be unlikely to accept arguments that the existence of COVID-19 is sufficient to invoke a force majeure clause. However, the case does leave the door open to arguments that the effects of COVID-19 related national restrictions may invoke force majeure protections if specific agreed upon commercial objectives were impacted. Parties contracting under English law should pay very close attention to the factual matrix of events surrounding its claim for force majeure and should link any deficient performance directly to national restrictions if possible.

United States

On the other hand, a decision in the Southern District of New York has read the COVID-19 pandemic as a “natural disaster” that is beyond the parties’ “reasonable control,” and thus triggered the force majeure clause JN Contemporary Art LLC v Phillips Auctioneers, LLC, No. 1:20-cv-04370-DLC (S.D.N.Y. 2020). Here, the court excused the defendant’s termination of the agreement, despite the fact that the relevant agreement did not specifically enumerate “pandemic” or “infectious disease”. As a result, it is possible that this decision could direct judicial opinion in favor of broader excuse of performance in COVID-19 disputes. Notably, JN Contemporary has not been affirmed or challenged at the appellate level. So, it is difficult to predict how influential the case will be for courts and tribunals interpreting New York law.

It appears, therefore, that we may see US courts and tribunals applying US law continue to read the COVID-19 pandemic, and the resulting governmental regulations, into force majeure clauses. Even if this is the case, an important question – one that we are all conscious of – has yet to be resolved: when does it end? Or more specifically, when will courts or tribunals consider COVID-19 to cease to operate as a force majeure event? Here, context is critical to determine whether COVID-19 was actually the operative cause of a breach of the agreement or non-performance of certain obligations.

A case in the US District Court for the Northern District of Illinois illustrates this issue succinctly. In Rudolph v United Airlines Holdings, Inc., 2021 WL 534669, at *7 (N.D. Ill. Feb. 12, 2021) the court stated that “[c]ertainly, there must be some point where a Force Majeure Event ends, and a Schedule Change or Irregular Operation begins. And to the extent that boundary is unclear, the [contract], drafted entirely by the [Defendant], must be construed in Plaintiffs’ favor.” The court also noted that the mere existence of a force majeure event was not enough and that demonstrating causation was essential. In circumstances where it could be established that the reason the defendant cancelled the plaintiff’s flights may have been economic in nature – as opposed to legitimate concerns over the pandemic – the defendant could not rely on the force majeure clause.

Saudi Arabia

The Saudi Arabian Supreme Court issued decision No. M/45/M of 08/05/1442AH (the KSA Decision) in late 2020. This decision sets out how contracts governed by Saudi law will be impacted by COVID-19. In step with JN Contemporary, the Saudi Arabian Supreme Court has confirmed that COVID-19 is considered an “emergency event” and will be deemed a force majeure event, if certain conditions are met.

The KSA Decision empowers Saudi courts to step-in and modify terms of commercial contracts in relation to force majeure, termination and others. To date, however, the practical effect of the KSA Decision remains uncertain; and so, Saudi Arabian courts and tribunals applying Saudi law will test the limits of the KSA Decision’s guidance over the coming months and years.

Practical Considerations

Notwithstanding these developments, there will be fierce debate over the extent to which pandemic related incidents or government regulations actually impact construction objectives, and for how long. To date, case law around the world has focused on singular events such as the cancellation of an event or plane route, as in JN Contemporary or Rudolph and Fibula respectively.

But construction projects are much more complex, with many interrelated components moving simultaneously on-site and off-site, and even across borders. Determining a proximate cause for supply-chain disruptions or labor shortages (for example); or determining the actual extent of the pandemic’s effect on these issues will require a sophisticated case-by-case analysis. But as restrictions have waxed and waned jurisdiction-by-jurisdiction, owners, contractors and sub-contractors will all have faced numerous conflicting challenges attempting to respond to restrictions, mitigating losses and proceeding their works. Determining the extent to which the pandemic caused examples of non-performance over the course of 2020 – and into the present – remains a judicial frontier.

As important as further judicial insight will be, the reality on the ground is that construction projects remain ongoing and in peril of delay and disruption caused by COVID-19. Owners and contractors cannot wait for future decisions to determine how to get their projects on track.

Therefore, it appears that best practice is to only rely on a force majeure clause if a party (i) can link its performance to an enumerated event and (ii) effectively demonstrate that the pandemic was the operative cause of non-performance of an obligation. Indeed, owners and contractors are both subject to the effects and uncertainties arising from the pandemic. As a result, this may be an opportune time to negotiate limited time extensions to provide some pandemic-related relief and hope that this mutual goodwill can extend throughout the life of the project. Difficult questions will arise regarding whether contractors should be required to mitigate consequences for owners or if they ought to accelerate work plans to compensate for lost time. If parties can avoid adopting an adversarial posture for the time being, these questions may be resolved amicably.

However, significant disputes arising out of construction projects during the pandemic are inevitable. Teasing out the legitimate effects of the pandemic on delay or productivity loss (for example) will be a difficult exercise for parties, lawyers and decision-makers alike. Clear and vigorous documentary evidence will be essential to properly link pandemic entitlements from non-pandemic ones.

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