The Impact of Coronavirus on Construction and Commercial Contracts

Introduction

Whilst the eyes of the world’s media focus on daily increases in the number of Coronavirus cases and the emergency measures being taken by national governments to combat its transmission, little attention has been paid to the impact of the virus on construction and commercial projects. Although the economic scale of the crisis is impossible to predict with any certainty, Coronavirus will no doubt impact 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. In particular, we look at how Force Majeure clauses can be used to suspend or terminate a contract should it become impossible to perform.

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 wording used in a contract to expressly provide for Force Majeure events is critical to its enforceability in the courts. The drafting of a Force Majeure clause needs to expressly define the type of exceptional events the parties have no control over.

How have Commercial Contracts Dealt with Force Majeure Events?

Some commercial contracts may include reference to a ‘pandemic’ or similar medical crisis as a Force Majeure event. If not, a contract may encompass such events in wider drafting such as ‘events beyond the reasonable control of the parties’ or ‘acts of God’. However, contracting parties should be wary of widely drafted all-encompassing provisions. The party looking to terminate or suspend the contract must prove the outbreak of Coronavirus falls within the contract’s Force Majeure clause and, as this point is so far untested before the court, 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 to carry out the obligations or a review and renegotiation of terms under the contract.

Force Majeure clauses will generally serve to suspend contractual obligations until the Force Majeure event has passed. Some contracts, however, allow parties to terminate the contract after it has become commercially unviable to resume the contract.

How is Force Majeure dealt with in Construction Contracts?

Force Majeure clauses are often found in construction contracts, although how they work on a practical level varies depending on which standard form contract is being used.

JCT

The standard position under JCT contracts is that force majeure is identified as a ‘Relevant Event’ which may, subject to compliance with relevant notice provisions, entitle the contractor to an extension of time to allow it to complete its obligations under the contract. However, the contractor is also 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. Practically speaking, it is often difficult to establish entitlement to an extension of time solely by reference to force majeure as a Relevant Event owing, in part, to the debate that would undoubtedly ensue as to whether the event truly was force majeure.

Force majeure is not a ‘Relevant Matter’ under JCT contracts so, although the occurrence of a force majeure event may entitle the contractor to an extension of time, the contractor will not be entitled to any loss and expense.

The standard drafting also 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 within that seven-day period, the party may serve a further notice terminating the contract.

Using the force majeure provisions in JCT contracts should be approached with caution. If it is determined that the event in question is not a force majeure event, the party claiming force majeure could be subject to a claim for repudiatory breach of the contract and any consequential losses.

The main challenge with force majeure in the JCT context is the absence of a definition or any clear-cut examples, leaving the court to determine the term’s meaning on a case by case basis. With a lack of case law in the specific context of JCT contracts, a contractor would need to provide the requisite evidence to rely on force majeure for an extension of time. This is of course an ever-evolving situation but it seems likely that, as at the date of this article, contractors could seek to rely on the force majeure provisions. As such 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 the effects of any potential delay.

Parties could, as an alternative, include an express definition of what constitutes force majeure or indeed expressly reference Coronavirus but, as discussed above, care must be taken to ensure any such drafting benefits the parties.

NEC

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 (in a similar way to ‘Relevant Events’ in the JCT contracts) and/or to additional cost. These compensation events include those which stop the contractor from completing the whole of the works or prevent it from doing so by the planned completion date. For a contractor to rely on such events, they 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.

In such an event, the employer can 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.

Unlike JCT contracts, the NEC standard form entitles a successful contractor to an extension of time to complete the works and additional payment. It is common for employers to amend this provision or even delete it due to the uncertainty of how long such an event should occur for. Consequently, anyone wishing to rely on the Coronavirus outbreak as a Force Majeure event will need to check their specific contract to ensure that the provision remains and, if it does, the exact remedies available.

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 that can be taken to mitigate the risks of the Coronavirus. We advise that action in this regard be taken as soon as possible.

FIDIC

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, including war, terrorism and natural catastrophes. Although a pandemic is not expressly included, the list is non-exhaustive.

If parties under FIDIC contracts are affected by Coronavirus, 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 also ensure that it looks to mitigate and minimise 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 currently on the verge of entering contracts and who of course have knowledge of the Coronavirus and the potential impacts.

What should we be looking out for in our Contracts?

The extent of the economic impact of the Coronavirus remains to be seen. In such uncertain times, parties may seek to rely on Force Majeure clauses should their performance suffer. However, the lack of a definition of Force Majeure at common law and the restrictive approach usually taken by the courts in interpreting these clauses means that it has been far from certain whether parties would be successful in exiting their contracts this way. However, in light of the Government guidance issued in the last few days it would appear increasingly likely that parties will seek to exercise and 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 or 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 abided by if Force Majeure clauses have to be relied upon in the near future. Are there specified notice provisions that must be complied with?
  • Retaining all documents relating to delays or disruptions caused to the performance of the contract that can be solely attributed to Coronavirus. Ensure that it is clear how these disruptions were caused by the outbreak. 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.
  • Considering how widely to draft Force Majeure clauses in new contracts. Seeking legal advice in this respect is essential.

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  covidhelp@sharpepritchard.co.uk.

Posted in Commercial, Construction, Coronavirus (COVID-19), Latest news and blog, Oliver Slater.