Impact of COVID-19 on Shipbuilding and Offshore Construction Contracts: Is a Pandemic the Same as an Epidemic? Does a ‘Supervening Illegality’ Trump a Force Majeure Clause?
In the wake of the coronavirus (“COVID-19”) worldwide outbreak, the socio-economic activities in many countries have been impeded on an unprecedented scale. The shipbuilding / offshore construction industry alone has been exposed to significant difficulties, such as compulsory lockdowns, mandatory quarantines, shortage of labour, shortage of supplies and materials, and many governmental restrictions and policies issued in response to the pandemic.
Relevant governmental authorities in some countries, for example, the China Council for the Promotion of International Trade, have issued Force Majeure Certificates to many adversely affected shipyards in order to facilitate the declaration of force majeure.
This article analyses the principles of force majeure and frustration applicable under English law, and considers whether a ‘supervening illegality’ trumps a force majeure clause, and examines the various requirements that must be sufficiently satisfied for a force majeure clause to bite.
Principles of Force Majeure and Frustration
Force Majeure
In general, a force majeure clause is a contractual term that, upon the occurrence of certain specified events or circumstances beyond the parties’ control, allows the affected party to be excused from what would otherwise be a breach of contract. Typically, the affected party is excused from defective performance whilst that particular force majeure event is operating.
That said, ‘force majeure’ is not a concept in itself which is embraced by English law. It has no standalone meaning and must specifically set out the relevant events to which it applies and the consequences of those events occurring. As a result, contractual terms such as “… the usual force majeure clauses to apply...” have been held to be void under English law, for uncertainty.
The Builder in the shipbuilding context, or the Contractor in the offshore construction context, will usually be the affected party that will be entitled to claim an extension of time for delivery of the newbuild / construction project.
Frustration
In the absence of a force majeure clause, an affected party may be able to rely on the common law doctrine of frustration to bring a contract to an end. Frustration occurs when, due to a supervening event (without default of either party and for which the contract makes no provision), fulfilment of certain obligations becomes impossible or is rendered:
“a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do…”[1].
Where frustration occurs, the contract is discharged automatically by law. There is no requirement for notice or any acceptance.
The remedy of frustration is a very narrow one and, generally, English courts are very cautious of allowing the parties to invoke frustration – largely because the courts are reluctant to allow the parties to escape from that which they have freely agreed to do. One of the principal ways in which a court achieves this is to disallow the application of the doctrine of frustration where the contract itself makes provision for the event which in fact transpires.
This means that, where a force majeure clause in a contract covers the event in question, this is likely to prevent the doctrine of frustration from operating (because the ‘force majeure’ clause has effectively ‘foreseen’ the event and provided a remedy for when that event happens). However, even where specific provision is made within a force majeure clause, frustration can still operate where there is a ‘supervening illegality’ that goes against public policy (this may be a crucial distinguishing feature of a case involving COVID-19). Therefore, even where a force majeure clause makes provisions for ‘epidemic’ or ‘pandemic’, there may be arguments that a supervening illegality has occurred – i.e. the issue / cause relied upon is not the epidemic or pandemic (which is often specifically catered for in a force majeure clause), but the supervening illegality caused by the actions of government in making continued performance actually illegal.
It is well established that a contractual provision cannot exclude frustration by intervening illegality when this would be against public policy[2]. Many of the cases involve situations arising during wartime. Parallels are repeatedly drawn between COVID-19 and wartime. Therefore, although such arguments will undoubtedly face challenges, for the right case with a particular set of facts, supervening illegality may provide a valuable argument.
In the context of force majeure certificates being issued by certain countries, the question of the validity of a contract governed by English law is not affected by whether the contract is considered legal by another country.
However, one of the exceptions to this rule is where a contract is governed by English law but the law of the place of performance makes such performance illegal[3]. However, in cases where force majeure certificates are being issued, they are not making performance illegal – they are simply trying to declare that a force majeure event has occurred. An English court / tribunal will not automatically be bound by such a declaration – as the matter will be decided in accordance with English law principles. Nevertheless, depending on the jurisdiction, it may have a practical impact on the ability to enforce against the Builder / the Contractor in that particular jurisdiction. If the Builder / the Contractor does not have any operations / assets outside of that jurisdiction, this could be a real issue and make any English judgment / award of little practical significance.
However, if the law of another country also makes the performance of the contract illegal (either temporarily or permanently), then that may (subject to the particular facts) be a ground for finding the contract is frustrated, as a matter of English law.
Standard Form Contracts and Force Majeure
Subject to possible considerations of supervening illegality, force majeure clauses are likely to be effective.
In the shipbuilding context, force majeure wordings have been adopted in the SAJ, NEWBUILDCON and CMAC Forms. The table below sets out the main provisions dealing with force majeure within these forms.
- identify the occurrence of the event referred to in the relevant contract on which it seeks to rely;
- prove the causal link between the event and the delay in performance of the Builder’s / the Contractor’s obligations; and
- comply with any relevant contractual notification provisions.
If successfully invoked, such force majeure will be treated as a “permissible delay” and entitle the Builder / the Contractor to an extension of time to the delivery date.
- Does COVID-19 fall within the relevant force majeure clause?
The shipbuilding / offshore construction industry is familiar with a number of force majeure occurrences, such as industrial action or weather delays. Global pandemic, however, is obviously rare.
On a plain reading of the standard clauses, COVID-19 is likely to fall within the scope of the standard force majeure provisions – an obvious one would be the “epidemic”, but depending on the facts of the case, categories such as “requirements of government authorities”, “quarantines”, and “delays or failure in transportation” may also be relevant (provided that the root cause was COVID-19).
In relation to the FIDIC Red Book, it is arguable that an epidemic / pandemic would be covered, but the clause, and thus the position, is not certain. The LOGIC form contains an exhaustive list of force majeure events, although that does not provide for “epidemic” or “pandemic”. However, the Contractor may be able to avail itself of the defence set out in Clause 14.2(g) if there have been changes to local legislation due to COVID-19.
“Epidemic” vs “Pandemic”
One interesting question is whether a “pandemic” would fall within any provisions specifically dealing with “epidemic” but not mentioning “pandemic”. There may be an argument that a pandemic is an order of magnitude in excess of an epidemic[4].
The courts tend to construe force majeure clauses strictly[5], which means the event being relied upon, must clearly fall within the terms of the force majeure clause. If there is any ambiguity, the force majeure clause is unlikely to apply. Therefore, there may be arguments available that pandemics are far more serious events that were not intended to be included by the parties. That said, the Collins English dictionary indicates that the difference between such terms in normal language is not that striking. The Collins dictionary definition of “epidemic” is:
“…a particular disease somewhere [that] affects a very large number of people there and spreads quickly to other areas”.
Whereas “pandemic” is:
“…an occurrence of a disease that affects many people over a very wide area”.
Therefore currently such arguments would, in reality, be difficult to sustain. However, as the situation develops and public awareness and understanding of any potential difference between the phrases becomes more entrenched, such arguments may have more force.
Of course, it would always be necessary to decide whether any ‘sweep-up’ language such as “or any other causes beyond the parties’ control” applies. This will then entail arguments as to whether the “ejusdem generis” applies. “Ejusdem generis” is Latin for “of the same kind”. The rule is usually expressed as:
“…where several words preceding a general word point to a confined meaning the general word shall not extend in its effect beyond subjects ejusdem generis (of the same class).”[6]
Therefore, applying the “ejusdem generis” rule, if “epidemic” is provided for but not “pandemic”, then it is certainly arguable that the force majeure clause would bite and pandemics would be covered.
In any event, from a drafting perspective, it would be safest for the Builder / the Contractor to include both phrases in their force majeure clauses.
2. Causation
In line with general principles, the Builder / the Contractor, who seeks to rely on a force majeure provision, can only avail itself of such a provision if the causation requirement is satisfied. In this respect, it must be proven that the relevant event is an operative cause of the non-performance[7].
The difficulties in proving causation are well known in shipbuilding and offshore construction contracts. These projects (particularly in the offshore context) tend to be complicated and span many years. Delays will almost certainly occur due to the cumulative effect of a number of different causes, for example, other force majeure events, error in the initial or FEED designs, the late provision of contractual information or Company / Buyer Furnished Equipment, or the cumulative effect of various or large change orders.
Therefore, all of the usual issues in respect of evidential requirements and global claims presentation will apply equally to delays caused by COVID-19. However, two principles that, in the context of causation, may affect the applicability of force majeure clauses deserve particular attention. The Builder / the Contractor may face difficulties in establishing causation if the following circumstances exist:
a) the force majeure event was occasioned by the Builder’s / the Contractor’s breach of contract or negligence; and/or
b) the Builder / the Contractor has failed to take reasonable steps in advance to avoid or mitigate the impact of the force majeure event.
a) The Builder’s / the Contractor’s breach of contract or negligence
Echoing the maxim that “no person may take advantage of their own wrong”, it is well established that “a person cannot rely upon their own act or negligence or omission or default as force majeure”[8].
Therefore, unless clear words to the contrary are employed, the parties to a shipbuilding / offshore construction contract will not generally be taken to have agreed that the Builder’s / the Contractor’s act of negligence or breach of contract should fall within the ambit of the force majeure provision.
Therefore, in relation to a ‘prior breach’, subject to any express agreement to the contrary, the prevailing view is that the Builder / the Contractor, who wishes to rely on a force majeure clause, can only do so, if at the time of the force majeure event, it had not committed a breach of contract which itself causes delay[9].
The rationale is succinctly summarised below:
“In such a case it is hard to see that it would be fair and reasonable to postpone the contractor’s time. Indeed…it is hard to envisage any extension of time being fair and reasonable unless the contractor was able to establish that, even if he had not been in breach in overshooting the completion date, the particular relevant delaying event would still have delayed the progress of the works at an earlier date…” [10]
This is of particular relevance as the COVID-19 situation develops. With the understanding of COVID-19 improving day by day, it is becoming clear that employers can take steps to manage the COVID-19 situation and, in particular, the impact on their workforce and the work. For instance, social distancing, good hygiene, testing and the use of Personal Protective Equipment allows an employer (to a certain extent) to manage the situation. The position is obviously complex, and it is complicated further by the different advices and approach followed in different parts of the world.
Nevertheless, as the situation develops, it will certainly be harder for the parties to simply fall back on a defence based on delays caused by COVID-19.
b) The Builder / the Contractor failed to take reasonable steps to mitigate
In a similar vein, depending on the wording of the relevant clause, the Buyer / the Employer may be able to advance arguments on the basis that the Builder / the Contractor has failed to take reasonable precautions to avoid or to mitigate the effect of the outbreak of COVID-19.
Under English law, the general principle is that the party that wishes to rely on a force majeure clause must have taken all reasonable steps to avoid the effect of the force majeure event:
“…the accepted construction of a force majeure clause of this nature…requires that the party claiming its protection proves that there were no reasonable steps which it could have taken to avoid being prevented from performing its obligation by the incident or event said to be within the clause. The extension of that investigation to matters before the contract seems to me to be both logical and just so far as concerns actions [which] could reasonably have been taken to assist performance of obligations assumed…” [11] (emphasis added)
In this regard, the Builder / the Contractor may face similar challenges. The exercise in ascertaining what reasonable endeavours could be adopted to avoid, overcome or mitigate force majeure events will be highly fact sensitive. However, it is recognised that all matters of relevance could potentially be taken into consideration[12].
3. The Requirement of Notice
Most shipbuilding / offshore construction contracts impose obligations on the Builder / the Contractor to notify the Buyer / the Employer within strict time limits of both the occurrence and ending of the relevant force majeure event. The compliance with the contractual notification time limits cannot be underestimated, as the Builder / the Contractor in default of such notification provisions risks having its claim for postponement barred completely[13].
Concluding Remarks
Whilst the outbreak of COVID-19 (along with a number of knock-on events) may well be taken to amount to a qualifying force majeure event under English law, arguments may well arise as to the boundary with frustration and, in particular, supervening illegality.
The Builder / the Contractor will continue to face challenges in establishing the causal link between COVID-19 and the delay and / or the non-performance. However, problems in cases in dealing with causation in delay and disruption claims is par for the course in such complex projects, and undoubtedly these problems will be dealt with in the usual way.
Much will turn on a detailed examination into the facts and circumstances of the particular case. However, all concerned must keep in mind the fluid nature of this dynamic situation. The constantly improving understanding, both socially and scientifically, of COVID-19 means today’s contractual effects and solutions will change as the expectations and legal requirements on shipbuilders and contractors change and develop along with the global response to COVID-19.
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Disclaimer: Specific legal advice should always be taken. The information provided within this article does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only.
[1] As per Lord Radcliffe in Davis Contractors Ltd v Fareham U.D.C. [1956] A.C. 696, 729.
[2] Ertel Bieber & Co v Rio Tinto Co Ltd [1918] A.C. 260. The desire to uphold the public interest was also strongly reflected by Beatson J in Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Ltd [2010] EWHC 2661 (Comm), [2011] 1 Lloyd’s Rep. 195 at [100] – As set out in H. Beale, Chitty on Contracts 33rd Edition (Sweet & Maxwell, 2019) at para 23-024.
[3] Ralli Bros v Compania Naviera Sota y Aznar [1920] 2 K.B. 287.
[4] See Bulletin of the World Health Organization “The classical definition of a pandemic is not elusive”.
[5] SHV Gas Supply & Trading SAS v Naftomar Shipping & Trading Co Inc [2006] 1 Lloyd’s Rep. 163.
[6] Chitty on Contracts 33rd edition, 13-100; see also Sandiman v Breach (1827) 7 B. & C. 96, 100; R. v Nevill (1846) 8 Q.B. 452.
[7] Adyard Abu Dhabi v S.D. Marine Services [2011] EWHC 848 (Comm).
[8] Lebeaupin v Richard Crispin & Co. [1920] 2 K.B. 714.
[9] Hull Central Dry Dock & Engineering Works Ltd v Ohlson Steamship Ltd (1924) 19 Ll.L.Rep. 54.
[10] Balfour Beatty Building Ltd v Chestermount Properties Ltd (1993) 62 B.L.R.1.
[11] Channel Island Ferries Ltd v Sealink U.K. Ltd [1988] 1 Lloyd’s Rep. 323.
[12] Seadrill Ghana Operations Limited v Tullow Ghana Limited [2018] EWHC 1640 (Comm).
“85. As a matter of language “reasonable endeavours” is a phrase which enables account to be taken of all matters which bear upon the question whether it is reasonable to expect a party to take certain steps to avoid or circumvent a force majeure.”
[13] Adyard Abu Dhabi v S.D. Marine Services [2011] EWHC 848 (Comm).
