Covid-19, force majeure and construction contracts
Further to our update last month - Coronavirus a force majeure event? - we have received many queries from clients in respect of their on-site and future construction contracts and what the position is in respect of delays or suspensions due to Covid-19 (or Coronavirus).
In this update we consider the current domestic situation and the position under the JCT and NEC forms of contract. As these forms are usually amended we would advise that you review your terms carefully and seek legal advice before seeking to exercising any contractual right, especially suspension or termination, as cases may turn on particular drafting and circumstances.
Currently the government has advised:
- against unnecessary social contact and public travel and to work from home where possible;
- to self-isolate if an individual or someone in their household show symptoms of the virus; and
- that schools and nurseries will close from Friday 20 March for all children save for vulnerable children and those of key workers (which have now been defined).
Whilst, it has not, as yet, brought in any mandatory restrictions on the movement of people or enforced the closure of sites, such measures seem inevitable given the steps other countries have taken.
Even before such mandatory restrictions are undertaken the above measures are likely to create a shortage of labour and materials and this is only likely to worsen. Parties are therefore reviewing their contractual terms to see where the risk lies for these delays and whether works can be suspended (or terminated).
The JCT 2016 Design & Build standard form lists force majeure as a Relevant Event therefore enabling the Contractor to claim an extension of time, if it can show that works were delayed as a result of such an event. However, it is not a Relevant Matter and so the Contractor would not be able to claim loss and expense.
The issue is that the standard form does not define 'force majeure'. As advised in our last update:
"A force majeure clause relieves parties to a contract from their contractual obligations under certain extreme circumstances. Derived from the literal French translation for 'superior force', force majeure clauses are found in most commercial English law contracts but the term 'force majeure' does not actually have a recognised meaning under English law."
As such it will be construed in accordance with ordinary principles of contractual interpretation. Under the JCT it would not include war, strikes, fire, weather or a change in law after the base date which directly affects the works, as these are covered separately. There is authority to say that an epidemic could be a case of force majeure. Furthermore, it is likely that a judge or adjudicator would have sympathy with a contractor seeking to rely on such a provision. However, each case may be fact specific and dependent on current circumstances. The burden of proving force majeure, and that is has caused delays or the works to be suspended, will fall on the contractor as the party seeking to rely on it.
If the government notifies mandatory restrictions on movement which causes delays to works then this would fall under the Relevant Event of a change of law, which would be more clear cut. However, again, this would not constitute a Relevant Matter so the Contractor would not be entitled to loss and expense.
- are subject to the Contractor using its best endeavours to prevent the delays; and.
- also trigger the ability of either party to terminate if the works have been wholly or partly suspended as a result for a certain period of time (usually 2 months but the parties may have varied this in the Contract Particulars).
If, however, the Employer gave an instruction to postpone works or instructed the Contractor to close the site then such an instruction constitutes both a Relevant Event and Relevant Matter and so the Contractor could be entitled to both time and money.
The NEC4 Engineering and Construction form of contract doesn’t refer to 'force majeure' per se, but it does refer to similar events. The event must be one that:
- stops the Contractor from completing the whole of the works or completing the whole of the works by the date for planned Completion shown on the Accepted Programme;
- neither party could prevent; and
- an experienced contractor would have judged at the contract date to have such a small chance of occurring it would have been unreasonable to have allowed for it.
If those criteria are met, then the Contractor could be entitled to a compensation event (and so time and money) provided it follows the relevant contractual provisions for notifying to avoid the time bar provisions. Under the NEC the issue is therefore likely to be foreseeability, which may turn on the contract date. The assessment of that compensation event would be on the basis that the Contractor has mitigated the effects on the event.
However, only the Client has the ability to terminate the contract if it is forecasted to delay Completion by more than 13 weeks (presumably as the same event entitles the Contractor to more time and money and so it does not need the ability to terminate).
If the PM gives an instruction to stop any work this would give rise to a compensation event and either party may terminate the contract if an instruction to re-start has not been given within 13 weeks.
The optional X2 clause (which is only included if selected by the parties) covers changes of law and so would cover the government notifying mandatory restrictions on movement brought in after the contract date. Again this would give rise to a compensation event.
There are further provisions if the parties are released under the law for performance for the whole of the contract. However, the government restricting movement to cause works to be delayed would not necessarily release the parties from performance for the whole of the works.
If a construction contract does not provide for force majeure (or any other avenue for claiming additional time or money) then parties may look to the doctrine of frustration. This allows a party to terminate a contract where an event which:
- occurs after the contract is made;
- destroys the fundamental purpose of the contract as it is entirely beyond what was contemplated by the parties when they entered the contract;
- makes it physically or commercially impossible or illegal to fulfil the contract; and
- is neither party's fault.
Given the severity of the remedy, courts impose a high bar in determining whether a contract has been frustrated. Courts will first try and find a remedy by applying the express terms of the contract before resorting to the doctrine of frustration. Parties therefore rarely succeed in claims for frustration.
- Check your contractual provisions carefully and seek legal advice if it is not clear what your contract provides for in the current circumstances.
- Make sure you follow all the contractual processes, especially any notification requirements.
- We would recommend seeking to agree a commercial solution to give certainty and share the risk. This would hopefully ensure project teams remain viable and relationships and projects can be maintained and restarted as soon as this crisis is over. Such an agreement should be carefully drafted and adapted to your particular contact.
- If an agreement cannot be reached:
- keep detailed records to substantiate or refute any claim; and
- be wary of termination triggers.
- If you are currently negotiating a contract you need to make sure you expressly provide for Covid -19 and its possible effects under the contract. You should avoid blanket wording and try to identify the precise risks that the contractor is seeking to address.
As the situation with Covid -19 is constantly changing we will keep this update under review and issue further updates in due course.
Please click here to view our last update.