COVID-19 and Construction Contracts
On 20 March 2020, we published our article in relation to the effect COVID-19 is having on companies in fulfilling their contractual obligations and the operation of any Force Majeure clauses; which can be found here.
The challenges created by COVID-19 will also likely affect the construction industry in this country; either by affecting the availability of workforce, delays in delivery of materials or by closing down sites completely. Any delay or losses resulting because of COVID-19 need to be examined, by both the Contractors and Employers, to ascertain what relief may be sought under the contract.
Is it relevant to your project? Unfortunately, the answer is – it depends on your contract.
Force Majeure
Force Majeure clauses are usually included within construction contracts to provide a more attractive mechanism for controlling disruptive events than the common law principle of frustration.
As mentioned in our previous article, Force Majeure translates to a ‘superior force’. This has a legal meaning within French law and is a defined term; however, in English law, it does not. It is not a common law principle and you have to refer to a contractual clause for the precise meaning (if any).
Most English contracts will contain a Force Majeure clause which will allow suspension or termination of performance when an event outside either of the parties’ control prevents a party from performing their obligations under the contact.
If there is no specific Force Majeure clause, the common law (independent to the contractual provisions) must be considered.
Frustration
The existing common law principle in English law is ‘frustration’. Frustration of a contract allows parties to be relieved of their legal obligations because the contract has become impossible to perform (rather than just more difficult or more expensive). Frustration can be distinguished from a Force Majeure clause as, generally, a Force Majeure will entitle a contractor to an extension of time to complete the works or provide the option to terminate; whereas if the contract is frustrated, the parties are automatically released from their obligations.
Care must be taken when seeking to claim frustration; it is a high hurdle to overcome and the act of incorrectly claiming that performance is frustrated may itself be a breach of contract! There is no single definitive test, but it requires a drastic event that completely changes the circumstances of the contract; which will need to be examined closely in each individual case.
Construction Contracts
Force Majeure is commonly encountered within construction contracts.
One of the most common standard form contracts is the JCT suite. In the JCT contracts, Force Majeure is not a defined term but is considered a Relevant Event (something that causes a delay to the completion date) that may afford the Contractor an extension of time or allow the Contract to be terminated. But, under the JCT Standard Building Contract, a Contractor is not entitled to claim loss and expense simply because it is granted an extension of time. A contractor would need to separately show that the delay caused by COVID-19 is also a Relevant Matter, but none of the ordinary Relevant Matters apply, meaning that a claim for loss and expense is much less likely to succeed than an extension of time claim.
Other standard form contracts, such as the FIDIC and NEC suites of contracts take a different approach and do not use the words ‘Force Majeure’ but contain comparable clauses. The FIDIC contract grants an entitlement to extension of time and/or recovery of costs where there has been delay caused by reasons beyond the Contractor’s control. The NEC Engineering and Construction contract refers to compensation events (which are not defined, but example events are listed) which are not the fault of the Contractor and change the cost or time of the Works.
As a Force Majeure event is often no further defined in standard form contracts (especially JCT contracts), it is not immediately clear whether it will be applicable in relation to the impact of COVID-19 (particularly as the Government advice is changing daily).
The test for a Force Majeure event usually requires at least:
- For the event to be beyond the reasonable control of the affected party;
- That the prevention of the party’s performance is caused by the event; and
- That the affected party has taken reasonable steps to avoid or mitigate the consequences of the event.
Issues to consider
If you have a construction contract which is being affected by COVID-19, there are a number of important things to consider, including:
- Does the contract include a definition of Force Majeure?
- Are there any example situations included within the contact of what amounts to Force Majeure and do any of those examples fit the description of the COVID-19 situation?
- How has COVID-19 directly impacted the performance of the contract or are there concurrent issues?
- If COVID-19 has affected your supply chain, do each of these contracts contain a relevant Force Majeure Clause?
- Is performance of the contract now prevented or is there another way it could be completed (even if it is more expensive)?
- What have you done to reduce the effects?
- Have you complied with the notice provisions within the contract if you intend to rely upon it?
- Will you be able to recommence works as soon as the Force Majeure event has finished, or will there be further delays (not caused by the Force Majeure) further down the line?
We will continue to publish updates as and when the situation becomes clearer and further Government advice is published