The Egyptian construction industry during Covid-19

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The consequences of the global uncertainty caused by the Covid-19 pandemic vary over time and across jurisdictions. The intricate relationships between employers, contractors, sub-contractors, owners and end users increase the complexity of the legal consequences.

This article considers the Egyptian construction industry during Covid-19 and the relevant principles of Egyptian law. It describes the effect of Covid-19 on Egyptian construction contracts, particularly whether it has disturbed economic equilibrium.

Overview of the construction industry before and during Covid-19

The construction industry is an integral part of both developed and developing economies because of its contribution to economic growth and employment. In the Arab Republic of Egypt, since 2014 the construction sector has had more investment than other sectors. The construction sector grew by 9.7 per cent in 2015, 7.4 per cent in 2014, 5.9 per cent in 2013, 3.3 in 2012 and 3.7 in 2011.¹ According to the Global Construction Outlook report in the third quarter of last year, the construction sector in Egypt is predicted to expand by 11.3 per cent a year on average until 2023. On 11 May 2020, the Ministry of Planning and Economic Development published Seven Years of Building, a report in which it stated that more than EGP 4tn has been invested in projects from July 2014 to December 2021.²

Since 2014 mega construction projects have been on the rise in Egypt, including the New Administrative Capital, the Suez Canal Economic Zone, several water and power plants, road expansions and others.³ The accelerated growth of the construction industry may give a false indication of overall economic performance. In Egypt, the construction sector contributes to 5-10 per cent of overall GDP growth and absorbs 11-20 per cent of the total official employment. By some estimates that include informal labour this rises to 40 per cent.⁴

The Egyptian Elites, who, according to a model by Acemoglu and Robinson (2006),⁵ are the de facto holders of political power, envision further development in the construction industry. However, contractors continue to face exhaustive costs and legal burdens because of the economic reform programme that led to the devaluation of the Egyptian pound, and the high degree of informality in the construction sector. There are regulations for construction enterprises, employment and the process of construction, yet there are those who work without the required permissions or monitoring, and informal buildings that do not fulfil safety or other related requirements. Contractors have also faced rising costs as they are forced to adapt to the pandemic.

Egyptian law regulates the construction sector through several scattered rules under Civil Law No 131/1948, which contains a sector-specific regulation for construction contracts (Articles 646-673), Unified Building Law No 119/2008 and its executive regulations, introduced to make the sector less informal by providing a framework for the permissions and procedures required of parties in the sector, and the Egyptian Contractors Federation Law No 104/1992.

Also, as more than 30 per cent of construction projects in Egypt are in the public sector, Public Contracting Law No 182/2018 (regulating contracts concluded by public entities) plays a vital role in regulating construction projects.⁶

Besides these rules, a significant number of contractors resort to the FIDIC forms of contracts, noting that FIDIC can be a more reliable option for foreign parties that try to limit the risks of first-time deals in new jurisdictions.

Before Covid-19, the legislative authority introduced various laws to regulate issues facing contractors, the most prominent being Law No 84/2017, which governs the compensations paid under agreements for public contracting, supplies and services. This law established a committee to study damages and compensation claims by contractors against public authorities due to monetary decisions, an example being the currency devaluation between 1 March and 31 December 2016.

In the midst of Covid-19, policy-makers imposed short-term measures to enhance the conditions of the construction sector. For example, the government announced a financial support package of EGP 100bn (US$ 6.5bn) to vulnerable sectors including construction.⁷ The Prime Minister encouraged construction companies to work at full capacity while taking all the precautionary measures,⁸ and on 4 April 2020, the presidency recommended postponing the launch of mega-projects including the New Administrative Capital to 2021 owing to Covid-19.⁹

Economic disturbance?

The key question is whether Covid-19 can be characterised as a disturbance to the economic equilibrium in contracts for construction projects in Egypt.

Equilibrium is defined as a pattern that persists, unless disturbed by external or internal forces. The most pertinent definition of a contract for the purpose of economic equilibrium is Shavell’s definition that a contract is a ‘specification of actions that named parties are supposed to take at various times, generally as function of the conditions that hold’.¹⁰

The fact is that contracts are generally incomplete – each construction contract in Egypt or elsewhere may have shortcomings based on the parties’ negotiations, foreseeability, expertise, experience and even luck. Simply put, parties may face many conditions and circumstances that they did not foresee, contemplate or regulate for, and these are the factors that disturb the equilibrium in contracts. There are two main doctrines that affect this equilibrium: force majeure and hardship.

Under each doctrine, one of the parties may face a ‘contractual holdup’. This refers to situations in which a party accedes to a disadvantageous demand, owing to its position of substantial need.¹¹ The holdup may be caused by a disturbance of the economic equilibrium in the contract because a disturbance leads always to anti-competitive activities by one of the parties. Thus, contractual holdup justifies the legal intervention, namely: (1) terminating the contract; (2) mitigating the obligations of the party facing a contractual holdup; and (3) compensation that the harmed party may get from the other party.

Notwithstanding the aforementioned, Egyptian law specifically regulates force majeure (Articles 165, 215 and 373 of the Civil Code) and hardship (under Articles 147(2) and 658(4) of the Civil Code) and provides certain conditions that must be fulfilled to successfully invoke either doctrine. In all cases, the governing rule in the Civil Code is party autonomy (Pacta sunt servanda) which means that the contract cannot be revoked or altered without the mutual consent of the parties or for the reasons prescribed in law (Article 147(1) of the Civil Code).

Force majeure under Egyptian law

Article 165 of the Civil Code provides:

‘If the person proves that the prejudice has resulted from an external cause which is out of his hands, such as a surprising event, force majeure, the fault of the injured, or the fault of a third party, he shall not be obliged to compensate the prejudice suffered, unless there is a provision or an agreement the contrary.’

Its Article 215 reads:

‘If the specific performance is impossible for the debtor, he shall be condemned for the payment of damages because of the non-performance of his obligation, unless he proves that the impossibility of execution is due to an external cause which is beyond his control. The same rule applies if the debtor has delayed performance of his obligation.’

Furthermore, Article 373 states that ‘the obligation expires if the debtor proves that its fulfilment has become impossible for a foreign reason to which it has no power’.

In the specific context of construction contracts, Article 667 of the Civil Code provides that: ‘the Employer would be liable to compensate the Contractor for the lesser of (a) the costs of any works already completed by the Contractor and (b) the benefits received by the Employer as arising from such completed works’.

According to the Court of Cassation, two conditions are required to invoke force majeure: an unforeseeable event and impossibility of performing contractual obligations.

Unforeseeability is determined at the conclusion of the contract, for example, if the parties concluded a contract during the pandemic then they ought to have predicted the effect it may have in the near future. Under the Court of Cassation ruling, the prediction criterion is objective, taking into consideration ‘the view of the most vigilant and observed’. For example, in the view of the most vigilant person, during the early weeks of the pandemic in Egypt, most forecasting indicated that the country would face a full lockdown. The fact that to date Egypt has not enforced a full lockdown does not mean that the full consequences of the pandemic were not predicted because the more strict view was foreseeable.

In this regard, the Court of Cassation in the Challenge No 677/69 JY dated 10 April 2012 held that:

‘the text of Article 165 of the Civil Code describes the force majeure and the sudden event as a foreign cause that the person has no hand in, however the force majeure needs to be specified, as the event must be unpredictable and unavoidable, not only in the view of the respondent, but also in the view of the most vigilant and observed person, and the criterion here is objective, also the condition that the event is impossible to avoid means that if the event may be avoided by a party even if it was unpredictable it will not be considered as a force majeure. The event shall make the performance of the obligations absolutely impossible, meaning that it is not impossible for the debtor only, but it would be impossible for anyone who is in the position of the debtor.’

The impossibility of performance means that the contracting party cannot perform its obligation at all. It is not only limited to construction but also applies to related sectors, such as manufacturing and transportation. An event that affects any related sector may affect the parties’ ability to perform their obligations. In this regard, the Court of Cassation in the Challenge No 865/53 JY dated 30 January 1991 held that:

‘the force majeure event that leads to the termination of the contract – and according to what was settled in the court’s decisions – is the one that makes the execution of the contract absolutely impossible for a foreign reason to the debtor, which leads to the fact that if the force majeure represents a temporary obstacle to the performance, then it will have no effect but to suspend the performance of the obligation during the period of the event’.

By applying these conditions to Covid-19, all possibilities remain on the table. Scientists and scholars have warned that the world may face many problems, including pandemics. Studies, conferences and even documentaries have indicated that countries are not ready to deal with the next pandemic. It should be noted that discussions about the second wave of Covid-19 make its existence and magnitude foreseeable and hence it may not fall within the scope of force majeure. Discussions about the second wave usually refer to the second wave of the 1918 Spanish flu pandemic, which was worse than the first wave. The second wave of Covid-19 is also predicted to be worse than the first one. In relation to contracts that were executed in January or about that time, at the beginning of the pandemic when the Chinese city of Wuhan was fully quarantined and the number of active cases was increasing exponentially, one could argue that force majeure would not apply because the pandemic was foreseeable.

The impossibility of performance must be examined on a case-by-case basis. However, despite the partial lockdown in Egypt, contracting parties may not be able to claim impossibility in performance because of government policies that sought to clear issues facing contractors by directing construction companies to work at full capacity.

Nevertheless, impossibility of performance may have occurred in some contracts, though certain rules in Egypt may make it challenging to claim force majeure in construction contracts because of Covid-19. However, a more comprehensive analysis would be required once there is less uncertainty about the impact of Covid-19.

Is there room to invoke hardship?

There has been no reporting on the significant impact of Covid-19 on construction contracts in Egypt, but it is clear that many projects will be delayed and that costs may increase as a result. Delays may be caused by volatile workflows. In our view this will not necessarily lead to the application of force majeure because work is still possible, but it may result in the obligations of the parties being considered to be onerous. In this regard, the President announced that the launch of mega-projects would be postponed, suggesting that there are further issues to consider especially where the public sector is involved.¹²

Under Article 147(2) of the Civil Code:

‘if exceptional and unpredictable events of a general character occurred, that makes the performance of contractual obligations, without becoming impossible, becomes excessively onerous in such a way as to threaten the debtor with exorbitant loss, the judge may, according to the circumstances, and after taking into consideration the interests of both parties, reduce to reasonable limits, the obligation that has become excessive, any agreement to the contrary is void’.

Its Article 685(4) provides that in lump-sum construction contracts:

‘if the economic equilibrium between the respective obligations of the employer and of the contractor disturbed due to exceptional general events that were not predicted at the time of the conclusion of the contract, the judge may grant an increase of the contract’s remuneration or order the termination of the contract’.

Egyptian law thus identifies three conditions to invoke the hardship doctrine: (1) the contract in examination shall be an executory contract, meaning that the performance of the contract would continue for a period of time; (2) the circumstances shall be exceptional, general and unforeseeable; and (3) the performance of contractual obligations, without becoming impossible, becomes excessively onerous such that the debtor is threatened with exorbitant loss.

The conditions under Article 147(2) are similar to those under Article 658(4), which relate to construction contracts in particular. The main difference relates to the consequences of invoking the articles. According to Article 147(2), the judge may only reduce an excessive obligation after taking into consideration the interests of both parties. Thus, the parties cannot seek to terminate an onerous contract by invoking Article 147(2). Nevertheless, as an exception to this rule, in the context of construction contracts the judge may order termination if the conditions for unforeseen circumstances have been satisfied.

Some of these conditions may be fulfilled in the context of Covid-19 and others may not be. The first is satisfied because the performance of a construction contract is always over a period of time. The second may be partially fulfilled as Covid-19 would generally be considered to be exceptional, though depending on the date of entry into the contract it may have been foreseeable. The judge would examine the third condition on a case-by-case basis, while being mindful of the intervention of the Egyptian government to minimise costs for contracting parties.

Conclusion

Egypt still has active Covid-19 cases and limited protective measures and government intervention, leading us to believe that it is impossible to be certain of the future. At a macro level, it could be predicted that the economic conditions in Egypt will worsen significantly due to the inconsistency of workflow, the incurred costs related to fighting Covid-19 and the related opportunity costs. However, if the pandemic passes without the need for more protective measures, Egypt could be one of the few countries to be unaffected at a macro level.

Ultimately, human lives are the cornerstone of economic activity, and preserving lives ought to be the first priority. For employers and contractors in Egypt, force majeure may not be invoked yet because impossibility is not absolute and unforeseeability is questionable. Although the doctrine of hardship (unforeseen exceptional circumstances) shares the same unforeseeability condition, which is questionable in the present Covid-19 circumstances, it may still be possible to invoke because the main obligations of the parties to the construction contracts are required to be performed. The President’s postponement of some projects to 2021 implies that the government has recognised that Covid-19 has affected the performance of construction contracts.

Notes

1 Egypt Economic Report Bank Audi (2016).

2 Al-Masry Al-Youm, ‘Egypt publishes report of building projects from 2014 to 2021 worth LE4 trillion’ Egypt Independent (11 May 2020) https://egyptindependent.com/egypt-publishes-comprehensive-report-of-building-projects-from-2014-to-2021 accessed 20 June 2020.

3 Egypt Mega Projects Flanders Investment and Trade (2018).

4 M Essam and M Ehab ‘Construction Supply Chain, Inter-Sectoral Linkages And Contribution To Economic Growth: The Case Of Egypt’ (Egyptian Center for Economic Studies, 2015).

5 D Acemoglu and J Robinson, ‘Economic Origins of Dictatorship and Democracy’ (Cambridge University Press, 2006).

6 CAPMAS (Central Agency for Public Mobilisation and Statistics) ‘Bulletin of Statistics of Construction and Building for the Public Sector (2016/2017)’ (Egypt: CAPMAS, 2013a).

7 Doaa A. Moneim, ‘Egypt’s Central Bank engages contracting sector in EGP 100 bln initiative amid Covid-19 crisis’ Ahram Online (14 May 2020) http://english.ahram.org.eg/NewsContent/3/12/369296/Business/Economy/Egypts-Central-Bank-engages-contracting-sector-in- accessed 20 June 2020.

8 MENA, ‘Egypt’s PM orders continued work of factories, companies to meet citizens’ needs’ Ahram Online (7 April 2020) http://english.ahram.org.eg/NewsContent/3/12/366865/Business/Economy/Egypts-PM-orders-continued-work-of-factories,-comp accessed 20 June 2020.

9 ‘Egypt postpones launch of mega projects to 2021 due to coronavirus – presidency’ Reuters (4 April 2020) www.reuters.com/Article/health-coronavirus-egypt-projects/egypt-postpones-launch-of-mega-projects-to-2021-due-to-coronavirus-presidency-idUSL8N2BS0FO accessed 20 June 2020.

10 S Shavell and L Kaplow, Economic Analysis of Law (Harvard Law School and National Bureau of Economic Research, 2003).

11 S Shavell, ‘Contractual Holdup and Legal Intervention’ (June 2007) 26 Journal of Legal Studies 325–326.

12 See n 9 above.

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