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COVID-19 contract disruption routes to success

07 April 2020
Assessing the key challenges of disrupted construction projects -- force majeure is just one consideration under COVID-19 conditions.

COVID-19 has placed us in challenging territory and the impact on construction projects within both the UK and globally is still to be truly appreciated. Whilst the UK Government has issued new guidance, there is confusion over the continuing of projects within the construction industry. 

Force majeure

Most contracts in the construction or operations phase have some form of force majeure clause which usually permits the granting of an extension of time or forgiveness for non-performance without additional payments.  

Many parties adjust the definition of force majeure to exclude from the definition a situation where the cause of delay is foreseeable at the time of contract execution regardless of whether it is within the contractor's control.  Parties who are in the throes of negotiating contracts throughout this period should consider this. Remember contractors want a wide-ranging definition of force majeure and employers want it to be narrow.

Current contracts should be reviewed not only for force majeure wording but also any duties to notify likely delay events regardless of whether the notifying party is at fault or contractually responsible.   

It is important to bear mitigation in mind and take all reasonable steps to mitigate any loss or delay that arises out of COVID-19. As a general principle of all construction contracts, mitigation will apply to the current COVID-19 situation.  The law of frustration will have to be considered in a case where COVID-19 not only delays but makes the project unachievable. This will be very much a facts driven analysis if that should arise. 

Whether your force majeure clause covers COVID-19 as an event 

Some force majeure clauses list specific events such as earthquakes, hurricanes, war or terrorism. If your clause contains the terms pandemic or epidemic, then COVID-19 is likely to be covered. Alternatively, the clause may include an 'act of government', which occurs where the government imposes travel restrictions, quarantines or closes borders. Moreover, an act of government may be another separate ground for an extension of time.  The very recent governmental decision to impose a lockdown on the UK may constitute an 'act of government'. 

Some contracts, such as the JCT Design and Build Contract 2016 (the "JCT Contract") (at clause 2-26-14) do not list the events that constitute force majeure, which brings uncertainty. As there are so many different forms of force majeure clause, there is no "usual" clause from which to form a starting point. There is also no reported case law which provides a definition of force majeure under an unamended JCT contract.  

The JCT contract lists force majeure as a relevant event, meaning that a contractor can claim an extension of time if it can show works were delayed as a result of the event. It is important to bear in mind that under JCT contracts, force majeure is not a relevant matter, so contractors are unable to claim loss and expense arising out of the event.  

It is important that you are aware of your termination rights under the contract, as some contracts will allow either party to terminate the contract if force majeure prevents performance for a certain period of time. 

You must also check your notice requirements, as some contracts will require you to give prompt notice whilst others may place a strict time limit. Under the JCT contract, notice needs to be given of force majeure when it becomes reasonably apparent that the progress of the works is being or is likely to be delayed. Current circumstances are likely to denote this.

Alternatives to force majeure 

If your contract does not contain a force majeure clause, then this is not the end of the road. You should explore the avenues available to you as contractor under your contract to seek an extension of time. 

Government action 

Consider, whether government action fits into your contractual terms. Under the JCT contract (clause 2.26.12), a relevant event includes a change of law that directly affects the execution of the works. As with force majeure, a change of law wouldn’t constitute a relevant matter, meaning contractor's would not be entitled to loss and expense. 

The JCT contract also treats government intervention as a separate delay event under clause 8.11.5. We are all very much aware of the emergency legislation that was implemented on 23 March 2020, which restricts, amongst other things, the ability of workers to travel. Even if your contract does not operate under the JCT standard form, there may be a trigger in your contract under delay events, which includes government action that directly impacts the works. 

Instruction from the employer

In the event that your employer or its representative gives an instruction to either postpone works, or close the site, under the JCT standard form contract, such an instruction is likely to constitute both a relevant event and relevant matter and so contractors could be entitled to time and money. Hint:  Employers should be careful in telling the contractor what to do in reaction to COVID-19.  Most contracts permit a direction from the employer or its representative to be interpreted as an instruction which may give rise to both time and money.

NEC contracts

The position under an NEC 3/ NEC 4 Engineering and Construction form of contract is different. There are no separate 'relevant events' and 'relevant matters', but instead 'compensation events', which may entitle contractors to an extension of time (and therefore relief from liquidated damages) and compensation (unless a contract is amended to introduce time only compensation events by way of Z clauses) for events which prevent them from meeting key dates and/or completing the works by the completion date.

The NEC equivalent of the force majeure provision is clause 60.1(19) and the effects of COVID-19 may fall within the definition of a compensation event if they give rise to an event which:

  • "Stops the contractor from completing the whole of the works; or
  • Stops the contractor completing the whole of the works by the date for planned completion shown on the Accepted programme.

and which

  • neither party could prevent; and
  • an experienced contractor would have judged at the Contract Date to have such a small chance of occurring it would have been unreasonable to have allowed for it."

Contractors are required to give early warning of issues as they arise to enable collaborative risk reduction steps to be taken. Contractors must notify the Project Manager of a potential compensation event under clause 60.3 within 8 weeks of becoming aware of the event, otherwise they may risk losing their entitlement to time or money if they fail to do so.

Only the employer has the right to terminate the contract if it is anticipated that completion is to be delayed by more than 13 weeks.

Recent guidance issued by the NEC now specifically lists a major outbreak of a virus as the type of event included within the compensation event definition. If the contract was entered into before this point and if the impact of COVID-19 prevents the contractor from completing the works when initially scheduled to do so, then the contractor could have an argument that a Compensation Event has occurred. 

FIDIC contracts

Under FIDIC contracts,  force majeure is provided for under clause 18 as an "exceptional event" which is:

"(i) beyond a Party's control; (ii) the Party could not reasonably have provided against before entering into the Contract; (iii) having arisen, such Party could not have reasonably have avoided or overcome; and (iv) is not substantially attributable to the other party."

Diseases or pandemics are not included in the non-exhaustive list of potential "exceptional events", however contractors could argue that COVID-19 meets the broad definition.

Contractors are entitled to an extension of time provided that they are prevented from performing any of the contract obligations because of the exceptional event.  In order to obtain relief, 14 days' notice of the event must be given and the contractor's entitlement to relief will be subject to their duty to minimise any delay. 

Should the execution of the works be prevented for a continuous period of 84 days (or as a result of multiple delays totalling more than 140 days) because of an exceptional event, then either party may give notice to terminate the contract. In this situation, the contractor can then recover the amounts payable for works carried out, plus the costs of plant and materials and any other costs or liability they have reasonably incurred in the expectation of completing the works.

Further Reading