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We are currently faced with very uncertain economic times due to the Coronavirus and it is impossible to say for certain what the longer-term impacts will be on the construction industry. In times like these, it is worth turning our attention to contracting parties to better understand how they can protect themselves in both existing contracts and future endeavours.
In such uncertain times, parties may seek to rely on Force Majeure clauses if their performance suffers due to the impact of the Coronavirus pandemic. The nature of Force Majeure, however, is worth exploring as currently it has no recognised meaning in UK law and oftentimes will not be implied into a contract.
Obviously, an expressed reference to a ‘pandemic’ as a force majeure event will provide more clarity for a contractor but, unfortunately, most contracts will use wide drafting language to cover ‘acts of God’ or ‘events beyond the reasonable control of the parties’.
Therefore, we must dig a little deeper to find the concept of Force Majeure within a contract. Phrasing such as ‘Compensation Events’ and ‘Relevant Events’ in construction standard form contracts, or ‘Relief Events’ in standard form PFI contracts.
In the case of the Coronavirus pandemic, the UK Government decision to cease businesses and hinder day-to-day operations may satisfy these requirements. It is the job of the party looking to postpone or suspend the contract to evidence the impact of the Coronavirus (either by direct impact or as a direct effect) falls within the force majeure clauses.
As this point is so far untested, a party seeking to do so may face legal challenges.
In any event, even if a force majeure clause applies, this doesn’t necessarily translate into a termination of contract. It may result in a suspension, extension or renegotiation. The party looking to invoke the force majeure must be prepared for these potential outcomes.
The standard position across Joint Contract Tribunal (JCT) is that force majeure is identified as a ‘Relevant Event’. With the correct notice provisions and when compliant, the contractor may be allowed an extension of time to complete the obligations initially outlined. However, the contractor must evidence how they are preventing any further delays. Failure to do so may mean the contractor will not be able to execute an extension of time.
However, force majeure is not a ‘Relevant Matter’ under JCT contracts meaning the contractor will not be entitled to any loss and expense. In standard JCT contracts, either party may ultimately terminate the contract if there is a suspension of work for a specified period of time.
Similarly, New Engineering Contracts (NEC) does not use the term force majeure but, does include wording around compensation events that may entitle a contractor to an extension of time and/or to additional cost. Compensation events include a scenario where the contractor is unable to complete work or is prevented from completing work by the planned completion date. To qualify as a compensation event, the event must be one that;
It isn’t unusual for employers to amend or delete aspects of the compensation provisions and parties should check the specific wording within their contracts.
Unlike JACT and NEC, the pre-2017 editions of the International Federation of Consulting Engineers (FIDIC) contracts explicitly recognise force majeure, defining it as an ‘exceptional event or circumstance’. Although a global pandemic, such as COVID-19, isn’t explicitly included, the list is non-exhaustive.
It is imperative that the party whose performance may be impacted gives notice to the other party of the Exceptional Event/Circumstance within 14 days of becoming aware of the event.
The party that is affected by the Exceptional Event/Circumstance, should look to mitigate delays arising from the event. If the contract cannot be performed substantially for 84 continuous days or 140 days in total, the parties may terminate the contract. At this point, the contractor can look to recover any amounts payable for works carried out as well as any liabilities and assets.
It is worth noting that the NEC and FIDIC forms exclude situations that were foreseeable. For example, parties entering into a contract now, should be mindful of the learnings from the coronavirus outbreak. Is it worth including a Global pandemic under an Exceptional Event/Circumstance?
As highlighted, the undefined nature of force majeure at common law means that it is far from certain that parties would be successful in exiting a contract this way. However, the coronavirus outbreak has forced parties to review their terms with regards to force majeure and, with recent Government protocols, it is likely that parties will seek to rely on such mechanisms.
Parties impacted by COVID-19 may look to review their contracts. Here’s what you should consider when doing so:
Time will tell how much of an impact there is to construction projects and how the rights, remedies and obligations are interpreted in practice but what constitutes a foreseeable event has probably changed forever.
