COVID-19 and Construction Contracts
25 March 2020
Construction projects are likely to be affected (e.g. by supply chain issues and labour shortages) by the COVID-19 outbreak. The nature and scale of any impact cannot be predicted at this point. The question as to whether contractors will be entitled to additional time and / or money will depend on the specific factual circumstances and the terms of the particular contract in question.
If a construction contract lacks an express term allocating the risk of infectious disease outbreaks, such as COVID-19, parties will need to rely on other provisions, such as extension of time and loss and expense clauses, to understand who bears the risks.
Force majeure 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 DB 2016 standard form, the contractor may be entitled to an extension of time in that ‘force majeure’ is a ‘Relevant Event’. However, the term ‘force majeure’ is not defined in the unamended JCT Contract or under Northern Irish (or UK) law. The contractor would not be entitled to recover loss and expense, such as prolongation compensation, simply because it obtains an extension of time.
NEC4 contracts do not refer to ‘force majeure’, instead including provisions which provide for a ‘Compensation Event’ in respect of 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.
In addition to force majeure, the JCT DB 2016 standard form also includes the following as a relevant event: "the exercise after the Base Date by the United Kingdom Government of any statutory power which directly affects the execution of the Works". The UK Government has broad statutory powers under public health legislation which it can activate when an event or situation threatens serious damage to human welfare. Should the UK adopt the kind of measures put in place in China or Northern Italy, such as shutting down offices or restricting working conditions or movements across borders, this Relevant Event may entitle a contractor to apply for an extension of time (but again, not loss and expense).
In a worst case scenario, as an alternative to claiming for additional time, parties may wish to consider their termination rights. Clause 8.11 of the JCT DB 2016 standard form provides for termination by either party if the works are suspended for the period set out in the contract particulars (the default position being two months). Under NEC4 (clause 91.7), the employer / client (but not the contractor) is entitled to terminate for the contract for a force majeure type compensation event.
Frustration is where something occurs after the formation of the contract which "strikes to the root of the contract" rendering it physically or commercially impossible (or illegal) to fulfil the contract. The courts are, however, usually reluctant to find that a contract has been frustrated. As a result, the threshold for proving COVID-19 has rendered a contract frustrated is likely to be higher than for force majeure (although this may change).
Points to remember
Parties currently in negotiations should consider including amendments expressly allocating the risks, (including programme delay and any associated additional costs), arising as a result of COVID-19. For projects currently underway and contracts already in place, parties should carefully review the terms of their contracts, particularly any amendments to the standard forms, in order to determine the rights of both parties in relation to extensions of time and entitlement to additional payment. This will include any obligations in respect of notification and mitigation on the part of the contractor.
*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.