Although the economic scale of the coronavirus crisis is impossible to predict with any certainty, the pandemic has already had a profound effect on business operations. With that in mind, we turn our attention to how contracting parties in the commercial and construction industries can protect themselves in existing and future contracts.
What is Force Majeure?
Force majeure is an exceptional event which is beyond the control of a contracting party and which makes performance of the contract physically or legally impossible. Force majeure clauses are used to relieve contracting parties from performance of their contractual obligations. It should be noted, however, that force majeure has no recognised meaning in UK law and will not be implied into a contract. Therefore, the express drafting used in a contract to define force majeure events is critical to the clause’s enforceability in the courts.
How have Commercial Contracts Dealt with Force Majeure Events?
A contract may use wide drafting to cover ‘events beyond the reasonable control of the parties’ or ‘acts of God’. However, contracting parties should be wary of widely drafted all-encompassing provisions. Express reference to a ‘pandemic’ as a force majeure event will provide more certainty for a contractor.
It is important to look for the concept (and not just a defined term) of force majeure in clauses such as ‘Compensation Events’ and ‘Relevant Events’ in construction standard form contracts, or ‘Relief Events’ in standard form PFI contracts (where there are also often separate force majeure provisions). It may be that the decision made by the UK Government to close businesses and implement restrictions on day-to-day life will fall within these definitions.
Ultimately, the party looking to terminate or suspend the contract must prove the outbreak of coronavirus or an immediate consequence of it, such as the Government’s actions, falls within the force majeure clause. As this point is so far untested, a party seeking to do so may face legal challenge.
What are the Consequences of a Force Majeure Event?
Even if a force majeure clause applies, its enforcement may not necessarily lead to termination of the contract. Other consequences can include suspension of the contractual obligations for a period of time, extensions of time or a renegotiation of contractual terms.
How is Force Majeure dealt with in Construction Contracts?
The standard position is that force majeure is identified as a ‘Relevant Event’ which may, subject to compliance with notice provisions, entitle the contractor to an extension of time to complete its obligations. However, the contractor is required to use its best endeavours to prevent delays. Failure to do so will mean that the contractor will not be entitled to an extension of time. This is often difficult to establish solely by reference to force majeure as a Relevant Event. However, force majeure is not a ‘Relevant Matter’ under JCT contracts and so the contractor will not be entitled to any loss and expense.
The standard drafting provides that a force majeure event may entitle either party to ultimately terminate the contract. Suspension of the works for a specified period (two months if not otherwise specified) owing to force majeure allows either party to give notice of termination unless the suspension ends within seven days. If the suspension does not then come to an end, the party may serve a further notice terminating the contract. However, if it is determined that the event is not a force majeure event, the claiming party could be subject to a claim for repudiatory breach of contract and any consequential losses.
We advise that employers work pro-actively with contractors to ensure that the requisite notices are submitted and that contractors adhere with the requirement to mitigate.
Although the NEC suite does not use the term ‘Force Majeure’, NEC3 and NEC4 list the compensation events which may entitle the contractor to an extension of time and/or to additional cost (where the way in which additional cost is recoverable depends on the chosen pricing option). These compensation events include those which stop the contractor from completing the works or prevent it from doing so by the planned completion date. These events must be ones that (i) neither party could prevent, (ii) an experienced contractor would have judged at the contract date to have such a small chance of occurring that it would have been unreasonable for the contract to have allowed for it, and (iii) is not another compensation event stated in the contract.
The employer could also terminate the contractor’s employment if the event stops the contractor completing the whole of the works or if the contractor will not meet the date of completion, with the prediction that the delay will last at least thirteen weeks.
It is common for employers to amend or delete aspects of the compensation events provisions, and parties should check the specific wording of their contract. Parties should also be mindful of the Early Warning requirements pursuant to clause 16 of the NEC. The mechanism can be used to convene a risk reduction meeting, the aim of which would be to identify actions to mitigate the risks. We advise that action in this regard be taken as soon as possible.
Unlike JCT and NEC, pre-2017 editions of FIDIC contracts expressly recognise Force Majeure, defining it as an ‘exceptional event or circumstance’ which is (i) beyond a party’s control, (ii) could not have reasonably been provided against before entering into the contract, (iii) having arisen, could not reasonably have been avoided or overcome, and (iv) is not substantially attributable to the other party. Although 2017 and subsequent FIDIC contracts have now replaced Force Majeure with an ‘Exceptional Event’, the relevant events remain the same. Although a pandemic is not expressly included, the list is non-exhaustive.
It is vital that the party whose performance will be prevented gives notice to the other party of the Exceptional Event and the obligations that will not be performed within 14 days of becoming aware of the event. The affected party should ensure that it looks to mitigate any delays arising from the event. Should the contract not be performed substantially for 84 continuous days or 140 days in total, the parties may terminate the contract. The contractor can then recover any amounts payable for works carried out, liabilities and assets.
Both the NEC and FIDIC forms exclude those matters that were essentially foreseeable. This should be borne in mind for those on the verge of entering contracts with knowledge of the coronavirus outbreak.
What should we be looking out for in our Contracts?
In such uncertain times, parties may seek to rely on force majeure clauses should their performance suffer. The lack of a definition of force majeure at common law and the restrictive approach usually taken by the courts means that it is far from certain whether parties would be successful in exiting their contracts this way. However, in view of recent Government guidance it would appear likely that parties will seek to rely on such mechanisms. Parties can prepare themselves by:
- Reviewing all contracts for force majeure clauses. Do these expressly refer to pandemics or viral outbreaks? If not, what are the catch all provisions?
- Considering what mitigating acts/alternative means can be taken to secure the operation of the contract despite the impact of coronavirus. Have the mitigating acts been documented (e.g. obtaining or seeking to obtain insurance)? Is there a clear ‘emergency policy’ that can be followed in the future?
- Considering what procedures should be complied with to rely on force majeure clauses. Are there specified notice provisions?
- Retaining all documents relating to delays/disruptions caused to the performance of the contract that can be solely attributed to coronavirus and its immediate consequences. For construction projects it will be essential to track this against the programme and to document in the site reports, meetings notes and by all the other usual means.
This article is for general awareness only and does not constitute legal or professional advice. Law and guidance relating to the COVID19 pandemic is continually being updated and the law may have changed since this page was first published. If you would like further advice and assistance in relation to any issues raised, please contact us today by telephone or email firstname.lastname@example.org.