Coronavirus and Construction Contracts
During the course of a construction project time and money are often at the top of the stakeholders’ list of concerns and with the outbreak of COVID-19 parties are turning their attention to the consequences of having to stop work for a period of time. We have been contacted by several clients for advice in this regard and this brief note outlines the potential contractual options. As ever, the factual scenario and the terms of the particular contract will affect any advice.
- Force Majeure
Force majeure, at its simplest, can be described as matters that are outside the control of the parties, which could not reasonably have been foreseen at the time of the contract being entered into and whose effects prevent performance of the contract.
Under the JCT Design & Build Contract, for example, force majeure is a ‘Relevant Event’ which may entitle a contractor to an extension of time. It is not however a ‘Relevant Matter’ entitling the contractor to loss and/or expense.
By contrast the NEC 4 contracts do not expressly refer to force majeure, but contain similar provisions within its compensation events, with Clause 60.1(19) describing events which stop the contractor completing the whole of the works, which neither party could prevent and which could not reasonably have been allowed for at the contract date.
It goes without saying that the contractual notice requirements and other mechanisms must be followed properly in the above instances, for example an early warning notice and risk reduction meeting under the NEC and a notification ‘forthwith’ under the JCT forms. Further, the duty to mitigate delays (best endeavours under the JCT forms) must be complied with.
It is likely that the foregoing will cover COVID-19 for contracts already entered into prior to the outbreak, however if you are not yet under contract the requirement for the event not to have been reasonably foreseen may not be met and therefore you might not be able to rely upon force majeure provisions. Our advice is therefore that for contracts currently under negotiation the parties discuss and agree how this risk is to be dealt with under the contract and ensure that the drafting is clear. At its simplest this may include expressly referring to COVID-19 in the force majeure definition, however more complex drafting could be required depending on the agreed allocation of risk as to time and money.
- The Exercise of Statutory Powers
In the event that the UK Government’s response to COVID-19 escalates and enhanced steps are taken to reduce the spread of the virus, it is conceivable that statutory powers are used to prevent projects from proceeding. If that does happen then the parties would look to Relevant Event 2.26.12 of the JCT DB 2016 (again not a Relevant Matter).
Under clause 8.11 of the JCT DB 2016 contract in the event that the Works are suspended for the continuous period stated in the Contract Particulars (2 months unless the parties have expressly provided otherwise) as a result of a force majeure event then either party may give 7 days’ notice to terminate the employment of the Contractor (note that a further notice terminating is required).
Clause 91.7 of the NEC4 contracts gives the Client the ability to terminate the contract for a force majeure type compensation event, but not the Contractor.
Frustration of a contract may occur where a serious event occurs without default or either party after the formation of the contract which is unexpected but which renders it physically or commercially impossible to fulfil the contract. The parties are discharged from further performance as a result. It is important to note however that there are very few cases in this jurisdiction in which a party has successfully argued frustration and at this stage we see it as unlikely that COVID-19 would render a contract frustrated, but this will of course need to be monitored closely.
- Pragmatic, Commercial Solutions
The construction industry often talks about collaborative working and indeed an obligation on the parties to act in a spirit of mutual trust and co-operation underpins the ethos of the NEC suite of contracts. In our experience competing stakeholder interests sometimes, if not often, act as a bar to the parties acting in this way.
If the outbreak of COVID-19 escalates and has an adverse affect on the construction industry then it is unlikely that any stakeholder will emerge entirely unscathed, and we would encourage parties to work together to find a commercial solution, which may be outwith the terms of the contract, to deal with the inevitable disruption that this may cause. As ever we are available to assist with documenting such arrangements.