- Coronavirus and its impact on Construction Sector Contracts
Coronavirus and its impact on Construction Sector Contracts
Coronavirus and its impact on Construction Sector Contracts18th March 2020 - Published by Construction team
As the outbreak of coronavirus COVID-19 is declared a pandemic by the World Health Organisation, the potential for significant impact on construction and engineering projects grows by the day.
We will inevitably witness significant disruption to supply chains and potential restrictions leading to shortages of labour and materials.
It is therefore essential for developers, investors and contractors to know where they stand contractually in the event that their projects are affected by coronavirus.
The two relevant mechanisms applicable under English Law are Frustration and Force Majeure.
The English common-law doctrine of frustration provides that a contract is frustrated when an event occurs that is not the fault of either of the parties, but which renders performance of the contract impossible. However, frustration is interpreted by the courts very narrowly and parties will not be entitled to relief just because performance of the contract becomes more difficult, costly or time-consuming. Even government imposed restrictions on labour or materials may not constitute a frustrating event if those restrictions are only temporary.
“Force majeure” is traditionally defined as:
- something which is beyond the control of the party seeking to suspend a particular contractual obligation;
- something which could not reasonably have been foreseen; and
- something which renders performance impossible.
While force majeure has no defined meaning in English Law, it is generally considered to be a contractual term entitling a party or parties to suspend performance or to claim an extension of time for performance, in the event of a specified event beyond its control, and is often included in contracts. However, the operation and effect of a force majeure clause differs from contract to contract.
Under the JCT Design and Build contract 2016, force majeure constitutes a “Relevant Event” which may entitle the contractor to claim an extension of time. It would not, however, constitute a “Relevant Matter”, and so would not allow the contractor to claim loss and expense. The contractor would also be required to constantly use its best endeavours to prevent any delay.
In the event that force majeure leads to a suspension of the works, there is a mechanism for the parties to terminate the contract, but, of course, this may not be in the best interests of the project.
Interestingly, force majeure is not defined in the JCT contract and whether or not a force majeure event has occurred would depend on a number of factors (discussed below).
There is also an alternative Relevant Event in JCT contracts which applies where the government or a local authority exercises any statutory power that directly affects the execution of the works. Therefore, in the case of coronavirus, if the government introduces emergency powers, for example to order parts of the country into ‘lockdown’, this may be a Relevant Event. However, if the government merely recommended a restriction but was not actually exercising a statutory power, this would not apply.
NEC3 / NEC4
NEC contracts do not have a force majeure clause. Instead, such an event would be a compensation event, defined according to the following three stage test:
- it stops the contractor from completing the works;
- neither party could prevent it; and
- an experienced contractor would have judged the event (at the contract date) to have such a small chance of occurring that it would have been unreasonable for the contractor to have allowed for it.
Under NEC contracts, an event that stops the contractor from completing the works may entitle the contractor to additional time and money. Arguably, this could cover disruptions to supply chains and labour resources, or government actions that prevent the contractor from completing the works. A compensation event would also entitle the parties to terminate if the event prevents completion or threatens to delay it by more than 13 weeks.
However, a contractor is likely to be required to give early warning of any such compensation event and the procedures for notification under the contract would need to be strictly observed.
The FIDIC contracts define force majeure as an exceptional event or circumstance which is beyond the control of the party affected and which the party affected could neither have foreseen or provided against before entering into the construction contract nor avoided once it had arisen. The event must also not be the fault of the other party.
However, the FIDIC ‘exceptional events’ only allow for an extension of time or additional costs in the event that notice has been given within 14 days after the party became aware, or should have been aware, of the exceptional event.
If the exceptional event is prolonged, there may be an option to terminate.
It is important to note that many construction contracts, whether JCT, NEC or FIDIC, are heavily negotiated and amended. The relevant contractual clauses will therefore require careful analysis and whether or not a force majeure event has occurred will depend on the circumstances of the case.
Could Coronavirus be a force majeure or frustrating event?
Given the high threshold applied by the courts, frustration is unlikely to be relevant in the case of coronavirus if there is an applicable force majeure provision that can be relied upon.
Whether or not coronavirus would constitute a force majeure event depends on the individual circumstances, the drafting of the relevant clause, and the date the contract was entered into.
Force majeure clauses are interpreted strictly by English courts and a party will usually have to demonstrate that an event occurred which was unforeseeable and beyond its control and which prevented the performance of the contract. The party would also need to show it had taken all reasonable steps to avoid or mitigate the consequences of the event.
The key considerations would be:
- Was the event actually unforeseeable? Despite the World Health Organisation putting coronaviruses among its top threats in 2016, it is arguable that the scale and speed of the impact of this particular virus was not something that could have been foreseen, at least for contracts formed before December 2019. Post December 2019, the position is far less clear, and a court may well find that the potential impact of coronavirus should have been factored into Contracts formed after that date.
- Does the force majeure clause (if defined) specifically refer to “disease” or “epidemic” or another “act of God” type event? If not, and the force majeure clause contains an exhaustive list of examples, you may not be able to claim force majeure. It should be noted that if there is no force majeure clause in your contract, English law will not imply one.
- How seriously did coronavirus affect performance of the contract? Was the contract impossible to perform or merely more difficult or more expensive? If the latter, it is unlikely that it would be construed as a force majeure event.
- Have all relevant notice provisions been complied with? If not, your claim for force majeure could be rejected by the court.
- Have you done everything you can to mitigate the consequences of the force majeure event? Unless termination has occurred, performance should normally be resumed as soon as the effects of the force majeure event have ceased.
Future contracts – a pragmatic approach
For contracts currently being negotiated, you need to consider the following:
- The effects of coronavirus are now well-known and foreseeable and so would be unlikely to constitute a force majeure event.
- Frustration would probably not apply to contracts given the very high threshold imposed by the courts.
- Consider including specific drafting to provide relief from the effects of coronavirus, such as disruption to supply chains, labour shortages, or government-imposed restrictions. Such drafting will require careful consideration and will depend on the precise nature and location of the project, but could provide for an extension of time where projects are delayed as a direct result of coronavirus, but no additional payment.
- For JCT contracts, you should also remember to consider whether any statutory power has been exercised by the government or local authority that might trigger the alternative Relevant Event discussed above.
- However, tightly worded force majeure or Relevant Event clauses will be no consolation if the contractor goes under, taking the project with it. Where a contractor is under financial pressure then a more pragmatic approach might be required to keep the contract alive. In that event, you could provide for an extension of time and loss and expense on the basis of actual costs incurred as a direct result of coronavirus perhaps subject to a maximum weekly sum, thus crystallising the financial impact of the risk.
In most cases, the parties will share the same objective: to keep the project on track. Taking a practical and commercial approach in circumstances where no one party is at fault and the ultimate aim is to resume performance of the contract would seem to be more sensible than engaging in lengthy legal disputes.
For practical advice in assessing the current status of your contractual obligations and risk, please contact the Kuits construction, energy and engineering team on 0161 838 7868 or contact us.