COVID-19: THE IMPACT OF A PROLONGED LOCKDOWN UNDER FIDIC CONTRACTS – BE WARY OF 18 JUNE 2020
As announced by President Cyril Ramaphosa on 23 April 2020, the lockdown in South Africa was eased to level 4 from 1 May 2020. This will result in a gradual reopening of the economy with a number of sectors resuming operations.
On 29 April 2020 the Government published Regulations which, among others, permit the operation of some businesses with effect from 1 May 2020 (Latest Regulations). In terms of Regulation 28 (1) read with Table 1 to the Latest Regulations, the following construction services will resume under lockdown level 4:
- civil engineering for public works projects (including water, energy, sanitation);
- public works civil engineering and construction works;
- road and bridge projects, including local road repairs; and
critical maintenance and repairs.
As is apparent from the above, not all construction projects will resume under lockdown level 4, with priority being given to public works projects as well as critical maintenance and repair works. More importantly, it is understood that any improvement beyond level 4 will be dependent on human behaviour and the rate of infections over the next weeks or months.
In any event, parties whose contracts are subject to the FIDIC Conditions of Contract are advised to be mindful of the potential impact of a prolonged lockdown period under those Conditions of Contract, subject to amendments thereto.
Sub-clause 19.6 of the FIDIC General Conditions of Contract (the 1999 Edition) provides that: ‘If the execution of substantially all the Works in progress is prevented for a continuous period of 84 days by reason of Force Majeure of which notice has been given under Sub-Clause 19.2 [Notice of Force Majeure] or for multiple periods which total more than 140 days due to the same notified Force Majeure, then either Party may give to the other Party a notice of termination of the Contract. In this event, the termination shall take effect 7 days after the notice is given, and the Contractor shall proceed in accordance with Sub-Clause 16.3 [Cessation of Work and Removal of Contractor's Equipment].’
The above wording has been retained under sub-clause 18.5 of the FIDIC General Conditions of Contract (the 2017 Edition), save that reference is now made to an Exceptional Event instead of a Force Majeure event.
The above clause is intended to afford the Parties an opportunity to terminate their contracts once it becomes apparent that a notified Force Majeure event or Exceptional Event will endure for and beyond a continuous period of 84 days or for multiple periods of more than 140 days. It is also worth noting that a day is defined as a calendar day.
Subject to any specific amendments of this clause in the particular conditions, parties whose contracts are based on the FIDIC Conditions of Contract should be mindful of the impact of a prolonged lockdown on their contracts.
Firstly, for those projects that will not resume operating under lockdown level 4, in our view the cumulative periods of the initial lockdown period of 26 March to 16 April 2020, the extension thereto until 30 April 2020 and the continuation of the lockdown (albeit under level 4) without any cessation will be treated as a ‘continuous period’.
Secondly, a continuous period of 84 calendar days of the lockdown period calculated from 26 March 2020 will expire on 18 June 2020. Accordingly, if construction works on a project ceased on 26 March 2020 and do not resume until or beyond 18 June 2020, a right to terminate the contract by either party would be triggered.
Thirdly, although we remain optimistic about curbing the spread of the COVID-19 virus, we have unfortunately seen an increase in COVID-19 infections post the release of the lockdowns in other jurisdictions. This has necessitated the implementation of further lockdowns.
The Government of South Africa has stated unequivocally that if our rate of infections increases under lockdown level 4, it will swiftly revert to lockdown level 5 restrictions. Parties resuming operating from 1 May 2020 under lockdown level 4 should therefore be alive to the possibility of work on their projects ceasing for multiple periods should such resurgences occur in South Africa. In the event that such multiple lockdown periods exceed 140 calendar days, either party would be entitled to terminate the contract.
In these unprecedented times, it is anticipated that some parties may not desire to terminate their contracts immediately after the expiry of the 84 day period or multiple periods which total more than 140 days, and may wish to consider the timing of transitioning into the next level(s) of the lockdown.
This will be particularly relevant for commercial building projects, which under the draft framework published for comments prior to the Latest Regulations will in all likelihood only resume operating under lockdown level 3, and private residential projects, which will probably only resume operating under lockdown level 2.
The ideal position for those parties who do not wish to terminate their contracts after the expiry of the applicable period would therefore be to agree to a short extension of such period.