Covid-19: Can the Financial Burden be Transferred to PPP Procurers and Offtakers?
Covid-19 is affecting every part of our lives. We have seen a dramatic increase in the number of clients asking us to review the force majeure provisions in their contracts. Given the uniqueness of the situation, we believe it will throw up some unique claims, many of which will be hotly contested by Procurers and Offtakers. One such question is whether the financial risk of Covid-19 can be passed to procurer’s of projects and offtakers?
TYPES OF FORCE MAJEURE
In an EPC Contract, Force Majeure essentially provides time relief resulting in an extension of time to the scheduled date for completion.
In a PPP project, the key document is the Project Agreement. In a Middle East context, the Project Agreement typically splits Force Majeure events into two separate categories: Natural Force Majeure Events and Political Force Majeure Events. The type of relief granted by the Project Agreement will depend on whether the event or circumstance is a Natural Force Majeure Event or Political Force Majeure Event.
A Natural Force Majeure Event typically results in time relief similar to an EPC Contract.
In the case of a Political Force Majeure Event, it is typical for both time and monetary relief to be granted. Monetary relief often includes increased costs (eg demobilization costs or additional equipment hire costs). It also typically includes payment of the Unitary Charge in two circumstances. First, where the Political Force Majeure Event has delayed the completion of construction and therefore the date on which the Project Company is able to generate revenue from the asset. Second, where the Political Force Majeure Event occurs during the services period of the Project and the Project Company is not able to generate revenue due to the interruption of services.
WHAT TYPE OF FORCE MAJEURE EVENT IS COVID-19?
The starting point is to review the definition of Force Majeure in the Project Agreement. The list of Natural Force Majeure Events in a typical Middle East Project Agreement comprise:
· natural disasters or acts of God
· epidemic or plague
· strikes, works to rule or go-slows
· accident or explosion
The list of Political Force Majeure Events in a typical Middle East Project Agreement comprise:
· acts of war or insurrection, armed conflict, act of foreign enemy or blockade
· acts of rebellion, riot, civil commotion or act of terrorism or sabotage
· boycott, sanction or embargo
· Change in Law
· act or omission of a Governmental Authority
Neither list includes a reference to pandemic. However, the list of Natural Force Majeure Events refers to epidemics. As the spread of a virus will be an epidemic before it becomes a pandemic, it seems that there is a good argument that Covid-19 would fall within the category of an epidemic, as referred to in the list of Natural Force Majeure Events. Even if it does not, the list of Natural Force Majeure Events are simply examples of what might constitute a Natural Force Majeure Event. The list is not exhaustive. Provided the other criteria for a Natural Force Majeure Event are satisfied, eg that the circumstance was unforeseeable and beyond the control of the affected Party, Natural Force Majeure relief should be granted.
In the case of a Political Force Majeure Event, the list of events are exhaustive. In other words, if the circumstance or event is not listed in the definition, as mentioned above, it will not be treated as a Political Force Majeure Event and there will be no time or monetary relief.
It is clear from the list of Political Force Majeure Events above that neither a pandemic nor epidemic is listed. However, in recent days we have been advising clients to carefully examine the reference to “any act or omission of a Governmental Authority” mentioned in the list of Political Force Majeure Events. The reference to a Governmental Authority is simply a reference to the government of the country of the Project or any arm of that government.
A Party typically relies on this particular form of Political Force Majeure Event where a Government Authority arbitrarily withdraws a permit or refuses or delays the issue of the permit in the first place.
As a result of the Covid-19 outbreak, some governments and municipalities have given clear instructions that citizens should stay at home. In other cases, citizens have been encouraged to remain at home. Where a clear instruction has been issued, will this amount to an act of a Governmental Authority? Where it has simply been an encouragement, will that amount to an act of a Governmental Authority?
An encouragement to remain at home does not easily lend itself to a strong claim for Political Force Majeure relief. However, a clear instruction may well be different and could fall within the rubric of an act of a Governmental Authority. However, the instruction would have to be examined very carefully. Given that this would be an attempt to transfer the financial risk of Covid-19 from the Project Company to the Procurer, we suspect that the Procurer would seek to strongly resist such a claim.
Our recommendation to our clients is to carefully review these provisions. These are unchartered waters and our expectation is that the uniqueness of the situation will throw up unique claims.
For further insights from Nexsoma Legal, look at our other articles on our insights page: www.nexsomalegal.com.