Force majeure, COVID-19 and public contracts

During the current COVID-19 pandemic, the timely and proper performance of contractual obligations may be challenging. This includes contractual obligations assumed in public contracts concluded with public contracting authorities.

Public contracts concluded with public contracting authorities in Malta as a result of a public procurement procedure are generally governed by standard terms and conditions in the form of General Conditions issued by Malta’s central government authority for public procurement, the Department of Contracts.

The Department of Contracts regularly updates these standard terms and conditions and as of 12 December 2019 the latest versions of the same were:

  • General Conditions for Works Contracts version 4.0
  • General Conditions for Services Contracts version 4.0
  • General Conditions for Supplies Contracts version 4.0

These General Conditions all contain standard force majeure provisions.

Definition of Force Majeure & Epidemics

The definition for a force majeure provided in these General Conditions includes, specifically, epidemics and reads as follows:

The term “force majeure”, as used herein shall mean acts of God, strikes, lock-outs or other industrial disturbances, acts of the public enemy, wars, whether declared or not, blockades, insurrection, riots, epidemics, landslides, earthquakes, storms, lightning, floods, washouts, civil disturbances, explosions, and any other similar unforeseeable events, beyond the control of either party and which by the exercise of due diligence neither party is able to overcome.

There are a few reported cases where a force majeure clause was invoked by a contractor in a public contract. Of note is Bonnici Brothers Limited and others v. Department of Contracts decided by the Court of Appeal on 29 April 2015. In that case the Court of Appeal overturned an arbitration award which held that the increase in the price of materials used by the contractor was a force majeure, and therefore, the contractor ought to have been compensated. The claimant contractor had successfully persuaded the arbitral tribunal that the increase in price, of bitumen, thin fuel oil, heating oil, hydraulic and lubricating oil and cement was a force majeure in this case since it was significant. The Department of Contracts appealed from this arbitration award before the Court of Appeal and argued that an increase in price was not one of the force majeure events agreed to in the definition in the General Conditions (substantially the same as that quoted above).

The Court of Appeal upheld this argument and held that the parties had specifically agreed to a list of force majeure events and an increase in the price of materials was not one of those events; therefore, the arbitral tribunal went, in this respect, beyond the four corners of the public contract in its award. The Court of Appeal also remarked that the increase in price of the materials in question, despite the fact that it was “phenomenal”, was far from being unforeseeable.

Timing of the Force Majeure Event

The General Conditions specifically provide that these events must materialise after the award or conclusion of the public contract and not before.

Contractors, who participate in public procurement procedures at this time and subsequently enter into public contracts in full knowledge of the current COVID-19 pandemic, are unlikely to be able to rely on this pandemic as a force majeure event. This is the position taken by contracting authorities in replies to requests for clarifications posted on urgent procurement procedures in the past few days.

The situation might not be as clear for parties who have entered into public contracts in the past few weeks and since the COVID-19 outbreak was reportedly limited to Wuhan, China. This will have to be assessed on a case by case basis depending on the circumstances of the public contract and the preceding competitive tender procedure.

Invoking Force Majeure Events in Public Contracts

The General Conditions require the party who wishes to avail of a force majeure event, to “promptly notify” the other party with details of the force majeure event, the probable duration and the likely effect of the circumstances on the contract. Contractors who successfully show that the performance of a contractual obligation has been prevented or delayed by the force majeure, might be able to benefit from the following:

  • Extension of the time by which a contractual obligation is to be performed;
  • Modification of the public contract (subject to detailed rules on their admissibility and approval);
  • No forfeiture of the performance guarantee put up for the public contract; and
  • No liability for damages or termination for default.

If the force majeure lasts for a period of 180 days, then either party may seek to terminate the public contract by giving a further 30 days’ notice.
Similar force majeure provisions are also typically found in public concession contracts and PPP contracts.

Pending Procurement Procedures

On a final note, companies, who have participated in procurement procedures in the past few months and are still waiting for their conclusion, should be aware that contracting authorities are entitled to cancel that procedure in cases of “exceptional circumstances or force majeure render normal performance of the project impossible”. Having said that, in a recent circular, issued by the Department of Contracts has sent a clear message that public procurement is to continue as smoothly as possible during this time.

If you require any further information, please contact Clement Mifsud-Bonnici or Antoine Cremona.

The contents of this paper are intended for information purposes and do not constitute legal advice. The information provided is not intended to be used or relied upon in relation to any facts or circumstances without first obtaining legal advice.