COMMENT | Outbreak calls for rigorous study of construction contracts
As the epidemic intensifies, it is essential for developers, investors and contractors to know where they stand contractually in the event their projects are affected by coronavirus, writes Charlie Tomlinson from law firm Kuits.
With Covid-19 now declared a pandemic by the World Health Organization and countries deepening measures to curb its spread, the potential for significant impact on construction and engineering projects grows by the day.
We will inevitably witness significant disruption to supply chains and potential restrictions leading to shortages of labour and materials. So where do parties stand legally?
The two relevant mechanisms applicable under English Law are frustration, a legal device used to set aside contracts where an unforeseen event renders contractual obligations impossible, and, to a greater extent, force majeure, which describes unforeseeable circumstances that prevent someone from fulfilling a contract.
The important thing to know is that force majeure is treated differently across JCT (Joint Contracts Tribunal) 2016 contracts, NEC (New Engineering Contract) contracts and Fidic (International Federation of Consulting Engineers) contracts, and it is vital that you take specialist legal advice as soon as possible to understand your position and risk across your portfolio.
Could Coronavirus be a force majeure or frustrating event?
Given the high threshold applied by the courts, frustration is unlikely to be relevant in the case of coronavirus if there is an applicable force majeure provision that can be relied upon.
Whether or not coronavirus would constitute a force majeure event depends on the individual circumstances, the drafting of the relevant clause and the date the contract was entered into.
Force majeure clauses are interpreted strictly by English courts and a party will usually have to demonstrate that an event occurred that was unforeseeable and beyond its control, and which prevented the performance of the contract.
The party would also need to show it had taken all reasonable steps to avoid or mitigate the consequences of the event.
The key considerations would be:
- Was the event actually unforeseeable? Despite WHO putting coronaviruses among its top threats in 2016, it is arguable that the scale and speed of the impact of this particular virus was not something that could have been foreseen, at least for contracts formed before December 2019. Post-December 2019, the position is far less clear, and a court may well find that the potential impact of coronavirus should have been factored into contracts formed after that date.
- Does the force majeure clause (if defined) specifically refer to “disease” or “epidemic” or another “act of God”-type event? If not, and the force majeure clause contains an exhaustive list of examples, you may not be able to claim under this technique. It should be noted that if there is no force majeure clause in your contract, English law will not imply one.
- How seriously did coronavirus affect performance of the contract? Was the contract impossible to perform or merely more difficult or more expensive? If the latter, it is unlikely that it would be construed as a force majeure
- Have all relevant notice provisions been complied with? If not, your claim for force majeure could be rejected by the court.
- Have you done everything you can to mitigate the consequences of the force majeure event? Unless termination has occurred, performance should normally be resumed as soon as the effects of the force majeure event have ceased.
Future contracts – a pragmatic approach
For contracts currently being negotiated, you need to consider the following:
- The effects of coronavirus are now well-known and foreseeable and so would be unlikely to constitute a force majeure
- Frustration would probably not apply to contracts given the very high threshold imposed by the courts.
Consider including specific drafting to provide relief from the effects of coronavirus, such as disruption to supply chains, labour shortages, or
- government-imposed restrictions. Such drafting will require careful consideration and depend on the precise nature and location of the project, but it could provide for an extension of time where projects are delayed as a direct result of coronavirus, but no additional payment.
- For JCT contracts, you should consider whether there is any additional contractual recourse beyond force majeure which might afford an extension of time, in the event of government-imposed restrictions.
However, tightly worded clauses will be no consolation if the contractor goes under, taking the project with it. Where a contractor is under financial pressure, a more pragmatic approach might be required to keep the contract alive. In that event, you could provide for an extension of time and loss and expense, on the basis of actual costs incurred as a direct result of coronavirus – perhaps subject to a maximum weekly sum, thus crystallising the financial impact of the risk.
In most cases, the parties will share the same objective: to keep the project on track.
Taking a practical and commercial approach in circumstances where no single party is at fault and the ultimate aim is to resume performance of the contract would seem to be more sensible than engaging in lengthy legal disputes.
Charlie Tomlinson is head of construction, energy and engineering at Kuits.
For practical advice in assessing the current status of your contractual obligations and risk, please contact the Kuits construction, energy and engineering team on 0161 838 7868 or email email@example.com.