Coronavirus – is there a contractual cure for construction?

Executive Summary

As the situation with Covid-19 worsens, there is a real prospect that construction operations on a significant number of sites will be prevented from proceeding, either because of force majeure and/or resulting from directly imposed government restrictions.

The allocation of responsibility will depend very much on the terms of the underlying contract and the extent of disruption, but it is likely that contractors will make claims for extensions of time. Contractors may also be entitled to loss and expense, though the entitlement here varies across the common standard form construction contracts. Understanding the relevant terms of your particular contract, noting that it may be subject to bespoke amendment, is key.

Parties should also be mindful of their ability to maintain effective site security and safety in circumstances where the availability of personnel could be subject to sudden change.

Introduction

There has naturally been concern from our clients and industry contacts on the potential impact of Covid-19 on their projects. While the United Kingdom has not yet seen restrictions on the movement of people into and within the UK, many countries such as Italy have and it seems likely that in the coming weeks the UK will follow suit as the Government seeks to tackle the impact of the virus. From a construction industry perspective, the impact of the outbreak on an ever increasingly globalised supply chain has already become a major concern.

Our thoughts have typically turned to whether or not the outbreak is a “force majeure” event under the relevant contract. Usually this renders performance of the contract impossible and may give the parties relief from performance of their contractual obligations and ultimately a right to terminate. 

Should the outbreak worsen, contractual provisions relating to the exercise of statutory powers or change of law may apply. The Government has already enacted the Health Protection (Coronavirus) Regulations 2020 in England, giving the Secretary of State powers to impose restrictions on people from infected areas. The Government has announced that further (as yet unpublished) emergency legislation is forthcoming, which may grant the Government stronger powers.

Below, we summarise the default position in the most commonly used industry standard forms in the UK. Our comments generally concern the forms of main contract but in most cases the same position will apply with regard to the associated sub-contact forms. It is however critical to remember that that these forms are often amended, and more often than not this means the entitlement to time and money will be limited. 

Reading your contract and, where necessary, taking specific legal advice is key to understanding the position. The commentary below applies to contracts entered under English law. 

CMS has published a range of articles on the impact of coronavirus across a numbers industry sectors. A comprehensive list of these can be found here.

Industry Standard Forms

JCT Contracts

Force Majeure

Force majeure is a Relevant Event in the JCT 2016 contracts; giving the Contractor a potential entitlement to an extension of time (clause 2.26.14).

“Force majeure” is not a defined term and has no recognised meaning in English Law and its translation from French is literally ‘superior force’. A situation would be assessed on its facts and whether the purported event prevented performance. There is no reported case law on the meaning of force majeure under the JCT forms, though it might be reasonable to expect this concept to take up some judicial time in the coming months and years as a consequent of Covid-19 related issues.

This Relevant Event is often amended, either within the clause or by giving force majeure a bespoke definition. In both cases the intention is almost always to limit the scope of the Relevant Event so that it only extends to a small list of specific events, such as nuclear contamination, sonic booms and such other unlikely occurrences. Sometimes “biological contamination” makes it into a force majeure definition but it is questionable whether or not it is reasonable to assume that the parties to a contract would have intended this to extend to a coronavirus, given that Covid-19 is but one member of a virus group that includes the relatively harmless common cold, as opposed to a major pathogen spillage/release. 

Change in law

The ‘exercise of statutory powers by the United Kingdom Government or any Local or Public Authority’ after an agreed date (usually the date of the contract or the date of the Contractor’s tender) is a Relevant Event under clause 2.26.12. This is very much a case of waiting to see what the Government does to combat the spread of the virus but on the face of it there should be a good argument that mandated lock-downs and/or other restrictions on movement of workers or activity that impacts construction falls within this ground.

Bear in mind that clause is often qualified so that the contractor would not benefit where the change was “reasonably foreseeable” as at the time of entering into contract. When it comes to Covid-19,the test of foreseeability is likely a matter of timing. Severe government measures / emergency legislation was probably not in anyone’s reasonable contemplation before January, but is currently a very real prospect.

Extent of relief

 Relevant Events that cause delay to the works may give rise to a right to an extension of time (and thus relief from liquidated damages). They do not however offer any protection for additional loss and/or expense suffered by the contactor unless they are also a Relevant Matter. Neither of the above two events is a Relevant Matter and we do not see any real scope under the standard JCT form for Covid-19 of itself to give rise to any entitlement to any other Relevant Matter.

There is a formal procedure that must observe by which notice is given and entitlement is judged (clause 2.24).

 Either matter is also a potential termination event (clause 8.11), if it prevents the carrying out of the whole or substantially the whole of the uncompleted works for a prescribed period agreed by the parties (two months being the default position, though this is often amended).

Contractors should be mindful that they are under an obligation to constantly use best endeavours to prevent delay, howsoever caused (clause 2.25.6.1).

NEC contracts

Force Majeure

“Force majeure” is not a defined term in the NEC suite but the NEC ‘prevention’ criteria (see clauses 19.1, 60.1(19) and 91.7) sets out defined criteria to establish whether a force majeure type event has occurred and in in effect a force majeure provision.

The NEC engineering and construction contract (NEC3 /NEC4 ECC) essentially provide three criteria which must be satisfied for such a force majeure type event to be deemed to have occurred:

• The event must either have stopped the Contractor completing the works or caused a delay (by reference to the Accepted Programme);
• Neither party could have prevented it; and
•  an experienced contractor would have judged at the Contract Date to have had such a small chance of occurring that it would have been unreasonable for the Contractor to have allowed for it.

Whilst on the face of it this appears much wider than the JCT provision as it applies to “events” generically rather that ‘force majeure’ specifically, the three limbs are stringent and in practice are difficult to establish.

These provisions are also often amended (or deleted) from NEC contracts in much the same way as they are in the JCT contracts.

If the criteria are satisfied the event would amount to a compensation event under the NEC forms, giving rise to an entitlement to both time and money.

Change in law

A change in law, or exercise of a statutory power which prevents performance, could fall into the above criteria for ‘prevention’. There is also an optional clause (Option X2) which expressly makes a change in law after the Contract Date a compensation event. As with the similar JCT provision, this could be triggered by the passing of emergency legislation. However, note that this is an optional NEC clause – so the Contract Data must state that Option X2 applies.

Like its JCT counterpart, Option X2 is often amended to limit entitlement to relief where the change in law was reasonably foreseeable. In that regard, the same considerations noted above re JCT apply equally here.

Relief and procedures

The Contractor must notify the Project Manager of the potential compensation event within 8 weeks of becoming aware that the event has happened, or potentially lose its entitlement to additional time and/or money (clause 61.3).

The Contractor should also issue an early warning notice under clause 15.1.

Unlike the JCT’s mutual termination right, the NEC only allows the Employer/Client to terminate where a force majeure event is forecast to delay completion of the whole of the works by more than 13 weeks (clause 91.7). That said, a bilateral termination right does exist in the event that the parties have been released under law from further performance of the whole of the contract. However, it may be difficult for either party to rely on this as an unchallengeable right to terminate where, for example, legislation has been implemented which would only temporarily affect performance of the contract.

FIDIC Contracts

The 2017 FIDIC forms define an “Exceptional Event” as an event or circumstances which:

• is beyond a Party’s control;
• the Party could not reasonably have been provided against before entering into the contract;
• having arisen, such Party could not reasonably have avoided or overcome; and
• is not substantially attributable to the other Party.  

The 1999 FIDIC forms contain similar provisions but did not use the defined term “Exceptional Event”.

The affected party should give notice within 14 days otherwise entitlement is lost from the date of the Exceptional Event to the date notice is given.

Further notices are required every 28 days to update on extended delay and when the Exceptional Event ceases.

The parties are under an obligation to use “all reasonable endeavours” to minimise the delay.

Where the Contractor is the affected party, they are entitled to an extension of time determined in accordance with the contract and recovery of additional costs incurred.

There are limited circumstances where the Contractor would also be entitled to payment of additional costs. These include “strike or lockout”. This provision was probably written with industrial action in mind, but it is arguable that if restrictions were imposed on people’s movement this could amount to a “lockout”.

If progress is prevented for 84 continuous days, or 140 cumulative days, then either party may terminate the contract.

There is a further provision stating that if any event arises outside the control of the parties which makes performance impossible or unlawful, either party may terminate unless the parties are able to agree on an amendment to the contract that would permit the continued performance (clause 18.6). If strict Government measures were imposed, it is conceivable that a Contractor could seek to rely on this clause rather than the mechanism summarised above if it was seeking avoid completing a contract altogether.

IChemE

The IChemE forms define “Force Majeure” as including any circumstances beyond the reasonable control of the parties which prevents or impedes the due performance of the contract (clause 14.6 in the Red Book). This expressly includes epidemic and Government action. Interestingly, this makes IChemE the only standard form to make specific reference to the outbreak of illness. The reference to government action would capture any emergency legislation or the other exercise of powers restricting movement.

Where the Contractor is delayed by an event of Force Majeure he must notify the project manager as soon as possible after becoming aware and there is then a consultation to confirm any extension. Both parties must use reasonable endeavours to minimise any delay, whatever the cause.

Parties are responsible for their own costs if delayed by Force Majeure (clause 14.8).

If performance of the Works is substantially prevented by Force Majeure for a period of 120 days, either party may terminate the contract.

In addition, there is a provision stating that where any legislation is brought into force after the contractor’s tender that causes an increase or decrease in the cost of carrying out any part of the works, the contract sum can be amended by an appropriate amount by the Project Manager. This could be triggered by any new legislation passed by the Government in response to the current situation.  

Other considerations

Most of the queries we are receiving from clients have understandably been focussed around the extension of time and cost consequences that the virus could give rise to, but clients should not limit their considerations to these points. For example, building contracts often contain provisions on the contractor to maintain security on-site, ensure health and safety standards continuously and/or not to abandon the site. These are matters that do not strictly related to the extensions of time (which are the focus of this article) but they could be made impossible to perform if the Government imposes strong restrictions. Parties should give thought to what measures can be put in place to honour these obligations, but above all ensure site safety, in the event they are suddenly prevented from attending the site. 

Conclusions

Covid-19 is likely to lead to contractual fall-out under each of the standard forms summarised above but they go about things in a different way, with different risk balances.

There is a reasonable likelihood that a “force majeure” event could occur and give rise to an extension of time. In all cases, this could give rise to a termination right after a prescribed period. The position on loss and expense will vary from form to form.

Other construction contracts, whether bespoke or standard form, will take variable approaches to force majeure events and the forms summarised above are routinely amended.

In any event, we would recommend always taking the following steps in dealing with a possible force majeure event:

 Review the terms of the relevant contract:

• these forms are frequently amended. Your contract may follow the above position broadly but have crucial differences;
•  there will usually be specific processes to be followed under the contract, including the service of notices, when dealing with such events – getting this wrong could bar claims or limit protection;
• termination rights could be triggered if the event persists, but there is great variety in the length of time;
• parties have duties to mitigate both at law and prescribed by contract – the JCT places a heightened “continuous best endeavours” obligation, where other forms have lesser standards;

Keep detailed records to assist in substantiating (or refuting) any claim for additional time and/or money

Consider a negotiated solution. Contract terms may not provide an appropriate answer to every possible event and where parties are prepared to act reasonably, it may be that a mutually acceptable way ahead which is not in the contract can be agreed. 

A time for collaboration?

The impact of Covid-19 will be significant across all levels of the supply chain and it is unlikely to be a risk that can simply be pushed down the chain. It may be that Government intervention is needed to assist the construction industry through this difficult period – whether by requiring public sector construction clients to share in / gratuitously offer relief for the risk of delay and cost overruns arising from Covid-19, or otherwise. 

Employers/developers need to consider the wider implications for their projects. It may be that on any particular project the supply chain has contractually taken all risk of Covid-19, but if this is sufficiently severe as to endanger the solvency of the supply-chain, struct enforcement of these provisions is hardly in the wider interests of the employer/developer or the project. As we saw from the Carillion episode a few years ago, you can have as many contractual rights as you like but they mean nothing if your counterparty in unable to manage them and/or bear the financial consequences of breach.

Over the coming days we will be having conversations with senior public sector representatives to offer our proposals as to how Government and the public sector can work with the construction industry to seek to minimise and mitigate the impact of Covid-19.  Readers are invited to get in touch with the authors if they would like to provide input in this regard.

This article was co-authored with CMS colleagues Chris Dickson and Andrew Wood.

Further articles and notes on the impact of Covid-19 from colleagues at CMS have been collated here. This includes articles looking at the impact on employment law, the construction industry, freedom of movement, finance, aircraft leasing, hotels and tourism, state aid, supply-chain disruption, landlords and tenants, GDPR, insurance, outsourcing and covers many jurisdictions including UK, Netherlands, Russia, Slovakia, Belgium, France, China. These will be updated and extended as the stuation develops.