Coronavirus and force majeure clauses in construction standard form contracts
Recent government advice has put the UK into lockdown and we have been asked to avoid non-essential travel and increase social distancing. Similar restrictions are being made across the world as the impact of the coronavirus is felt by many nations. It is clear there will be difficulties in the construction industry. Parties will no doubt struggle to fulfil their contractual obligations. In addition, there are uncertainties around whether the supply chain will be able to deliver; any breaks will result in delays to or the suspension of programmes.
It seems highly probable that the coronavirus pandemic itself will be found to constitute a force majeure. This will only be applicable if the contract was entered before the coronavirus outbreak. Alternatively, contracts will be “frustrated”. This means they literally cannot be performed.
Delay and frustration in construction contracts
Delay for a force majeure event
- Force majeure clauses are written into contracts, as there is no common law concept that covers a contract being fulfilled due to unforeseeable circumstances.
- Parties’ rights will therefore depend upon the specific wording of their contract.
- Events which constitute a force majeure are often set out within the contract. The clause can be widely drafted to include all events which were not reasonably foreseeable when entering into the contract and which could not have been provided against.
- Force majeure clauses will usually set out the parties’ rights, obligations of notice and suspension, and the consequences that flow from the force majeure.
As the number of coronavirus infections is rapidly increasing in the UK, and we have now seen the government impose a lockdown, there is naturally debate surrounding whether the coronavirus pandemic can be considered a force majeure event. If it is, this would give rise to the same contractual rights that might apply in the case of other force majeure events, such as war, terrorism, natural catastrophes and so forth. This calls into question the strength of existing and future construction contracts, and whether they provide sufficient protection in the event of the pandemic having an adverse effect on the progress of construction projects.
Contractors have a duty to mitigate delay. In the current circumstances, this may require finding an alternative work force and new material suppliers. A legal redress might be frustration. For this to be successful, the claimant would need to prove circumstances have not only made the contract obligations more difficult to perform, but have made the contract impossible to perform. This is a high bar of proof, and this is not an easy win.
Delay due to government directives
There is debate surrounding whether the government directive to lockdown and maintain social distancing constitutes a further delay event. Where construction sites are closed given the works are non-essential, this will almost certainly improve the prospects of a contractor claiming delay under a statutory power clause. Where certain sites are not being closed in response to government directives, the restrictions are having a clear effect on the supply chain and labour force. It seems to us that there may be legitimate delay claims based on the current restrictions in place.
If you do not have a force majeure clause in your existing contract, then the doctrine of frustration of contract could apply. This will be applicable only if the contract is rendered impossible to fulfil or significantly different from the original contract.
Coronavirus and its knock-on effects must make performance of the contract ultimately impossible, or it must considerably alter the party’s purpose for entering into the contract.
For example if the contract is a two year building project, a delay of six months does not significantly alter the original contract. However, if the contract is a two week building project or renovation, a delay of six months is a significant change. Frustration cannot be claimed if circumstances make performing the contract more difficult or more expensive. It can only be claimed if you can show that you cannot complete the contract obligations.
The point of frustration of contract is that it is only to be enforced if a contract becomes unlawful or literally impossible to perform. A party could not attempt to rely on frustration where it is purely becoming more difficult or costly to perform its obligations, as ultimately the obligations can still be performed. This is to ensure contracts are not terminated unnecessarily. For example, if there is no government intervention but one supplier is no longer able to provide, the contractor could find another supplier even if it is more costly or inefficient to do so. Or, for example, in the case of a contract with more than a one year programme, a delay of a few months is not necessarily going to prevent the contract from being performed, albeit it may be delivered later. However, where a lockdown closes all construction sites and puts deliveries to a complete halt and the programme is only a few months long, naturally the contract may be frustrated.
We believe this is a high threshold to meet. It is our view that unless, and until, the UK government takes drastic measures to reduce all activities, we are not yet at the point that we can say that a contract is frustrated. This is notwithstanding that the government has imposed a lockdown to some extent, only allowing people to travel to work if they cannot do their jobs from home and limiting outings.
The consequence of frustration of contract is that the contract will be terminated and the parties will no longer have to perform any of their obligations. As regards payment, the parties may be able to recover any monies paid that they believe they are entitled to receive back, or to be released from making payment.
JCT standard form contracts
Contractors have a clear obligation to give a notice of potential delay, and/or a notice of actual delay in order to apply for an extension of time caused by a relevant event delay. The timeline for an employer’s response to an extension of time application is only triggered when the full particulars of the delay are submitted by the contractor.
Force majeure under JCT standard form contracts usually entitles contractors to ‘delay’. Some employers might have changed the standard clauses to make it clear that you will not be entitled to an extension of time under the force majeure if there is a concurrent delay event for which the contractor is culpable.
Exercise of statutory power under JCT standard form contracts means that contractors can provide a notice of delay. They will be entitled to extensions of time (as above) if the exercise of any statutory power by the government or local or public authority is made that directly affects the works. Practically speaking, any government imposed lockdown is likely to constitute a relevant event, for which an extension of time could be claimed for the impact on the programme of the imposed lockdown.
Force majeure can give either party a right to issue a notice of suspension of the works for a period stated in the contract particulars. If none stated, it is usually two months. After the expiry of this period either party can give a notice to the other that unless the suspension is lifted within seven days, that party may terminate the contractor’s employment. If the suspension is not lifted, for whatever reason, a further notice will terminate that employment.
The general contract law principles of frustration will apply here.
NEC4 standard form contracts
Notifying compensation events and consequences
Force majeure could be considered a compensation event under NEC4 standard form contracts. The contractor must notify of a compensation event which has happened or which they expect to happen, unless the project manager has notified the contractor.
If the contractor does not notify within a specified time of becoming aware, he is not entitled to any change in price, completion date or key date.
If the project manager decides that it is a compensation event, the contractor may submit quotations. If the project manager does not decide within a specified time, the compensation event is usually treated as accepted. If the effects are too uncertain to reasonably forecast, the project manager can state assumptions which can later be corrected by notification.
In the standard form, only the employer may terminate the contract if a force majeure event occurs. The event must have stopped the contractor from completing the works at all, or from completing the works by the date in the accepted programme and completion is forecast as a specified amount of time.
If the contract is terminated, the employer can take over the works. The contractor will leave the working areas and remove its equipment. The contractor is entitled to normal payments for works undertaken, and usually the cost of removing equipment if agreed.
Either party may terminate if, under the law, the parties have been released from further performance of the whole of this contract.
Advice and practical implications
You may well be considering where this situation leaves you at this time.
Our advice would be to consider the following factors:
- Take an active approach to put measures in place, review existing contracts and create a list of all contracts.
- As regards to notices, you will want to make sure that you serve your notices for extension of time claims, suspension, or termination on time. Upon receipt of notices, you should respond generically to ensure your right to respond appropriately is preserved.
- Pay particular attention to developments on site and whether the progress of the works is being affected by the pandemic. If progress appears to be affected, you may consider taking legal advice. You may also want to put measures in place so you are prepared if the programme is otherwise impacted.
- For new contracts, you might wish to consider amending your definition of ‘relevant events’ to include COVID-19. We would be more than happy to assist you with this, depending on the type of contract being used.
- You will want to check your current insurances and whether this includes business continuity insurance and how far the policy extends, i.e. will it cover COVID-19?
- Please do bear in mind that site security and insurance should remain in place. However, if matters do progress to the point of termination, then this and certain other knock-on effects set out in the relevant contract no doubt apply.
We have a specialist team ready, willing and able to discuss your requirements and concerns. Our solicitors can assist you with contract reviews and drafting in response to the coronavirus pandemic. We can also help you deal with specific claims and disputes. Whether you are mid-contract or about to enter into contract, please get in touch with us.