COVID-19 and the Construction Industry – what does your contract say?
Published on 16th Mar 2020
The effect of COVID-19 is being felt across the world. As governments struggle to contain the outbreak, businesses are also being hit with the fallout from associated disruption.
Projects that are currently under construction may be affected by the outbreak in a number of ways. Supply chains are likely to be disrupted as a result of measures taken to control the outbreak, particularly in China, which will impact the availability of steel and other key materials used in construction. Added to this, measures such as quarantine, self-isolation and restrictions on transport could all have a severe impact on the ability for contractors to complete projects on time and within budget.
In order to determine how these factors will affect both the timings and cost of projects currently under construction and in planning stage, the terms of the relevant contracts need to be carefully analysed.
In the UK, the key provisions that might be triggered in contracts based on the commonly used (un-amended) JCT, NEC and FIDIC forms of contract are as follows:
Time and money
If the contractor can prove that the progress of works is being or is likely to be delayed by a specific delay event (known as a "Relevant Event"), the contractor may be entitled to an extension of time to complete the works (and therefore relief from liquidated damages). The particular Relevant Events (as listed in the majority of the longer standard form JCTs, including the Standard Building Contract and Design & Build) which may be applicable in the context of the COVID-19 outbreak include:
1. The exercise after a set contractual date by the UK government of any statutory power which directly affects the execution of the Works.
Any actions taken by government in a bid to control the outbreak may well fall within this definition, for example, a nationwide lockdown which requires closure of the site would have a direct effect on the execution of the works.
2. Force majeure.
The term ‘force majeure‘, which we discuss in this Insight and in these FAQs, has no recognised meaning in English law, and isn't defined in the un-amended JCT. Whilst there are no reported cases dealing with the interpretation of force majeure in the context of the JCT and little guidance from the English courts generally, in Lebeaupin v Crispin , the judge considered the meaning of the term force majeure, finding that such a term is used with "reference to all circumstances independent of the will of man, and which it is not in his power to control". In light of the lack of guidance, there is scope for argument either way regarding whether or not force majeure would be deemed to have occurred under the terms of the JCT.
If either of the Relevant Events listed above is deemed to have occurred under a particular contract, the contractor would also need to prove that the Relevant Event was the cause for the delay; and use its best endeavours to prevent any such delay.
An extension of time does not automatically entitle the contractor to financial compensation (such as additional preliminaries and delay claims from sub-contractors), and the COVID-19 outbreak is not caught by the standard list of "Relevant Matters" which would entitle the contractor to loss and expense. It is therefore unlikely that the client would be liable to pay compensation in these circumstances.
In addition to granting an extension of time, either party to the contract has a right to terminate the contract if either of the Relevant Events listed above cause a suspension of the works for a specified period of time (the default period being two months). A party seeking to rely on these rights of termination would, however, need to be confident that any reliance on these rights of termination was properly exercised. Otherwise, the terminating party may find themselves in repudiatory breach of the contract, and liable for the losses suffered by the other party.
Time and money
Under the NEC4 suite of contracts, the contractor is entitled to an extension of time (and therefore relief from liquidated damages) and compensation on the occurrence of specific "Compensation Events". The effects of COVID-19 may fall within the definition of Compensation Event if they give rise to an event which:
- stops the contractor completing the works at all or by an agreed date;
- neither party could prevent; and
- the contractor would have judged as having such a small chance of occurring it would have been unreasonable for the contractor to consider it when they entered into the contract.
Up until news of the outbreak was first widely reported in January 2020, it would be unreasonable to have expected a contractor to make allowance for the potential effects of COVID-19. Recent guidance issued by the NEC specifically lists a major outbreak of a virus as the type of event included within this limb of the Compensation Event definition. As such, if the relevant contract was entered into before this point, and if the impact of COVID-19 stops the contractor from completing the works when initially scheduled, the contractor would have a strong argument that a Compensation Event has occurred.
Occurrence of a Compensation Event would also give rise to a right for the client to terminate the contract.
Time and money
Under the most recent editions of the FIDIC contracts, the contractor is entitled to an extension of time to complete the works:
- where there is an unforeseeable shortage in the availability of personnel or goods which is caused by epidemic or government actions;
- where the contractor has diligently followed the procedures laid down by the relevant legally constituted public authorities, which delays the contractor's work, and was not reasonably foreseeable (before a set contractual date); or
- where there has been an "Exceptional Event", being an event which is beyond the parties' control, could not have been reasonably provided against before entering the contract, cannot be reasonably avoided or overcome, and is not substantially attributable to the other party.
The occurrence of certain Exceptional Events will (in addition to an extension of time) entitle the contractor to their costs as a result of the disruption caused by the event, but it is difficult to see how those particular events would be triggered as a result of the COVID-19 outbreak. As such, a client is unlikely to be liable for any such costs.
Should the execution of the works be prevented for a continuous period of 84 days because of an Exceptional Event, then either party may give notice to terminate the contract.
Irrespective of the terms of a contract, should the contract become impossible to perform as a result of the COVID-19 outbreak, the common law rule of frustration may apply to absolve the parties to the contract of their obligations entirely. This rule has, however, been given an extremely narrow application by the courts, and will not apply (for example) where the contract is merely more expensive to perform, more onerous to perform, or where an alternative method of performance is possible. It is therefore unlikely to come to the aid of a contractor as a result of the outbreak of COVID-19.
What should I do next?
- The terms of any relevant construction contracts should be checked carefully, as the default provisions referenced above are often amended by the parties. If extensions of time, payment of the contractor's loss or expense or termination rights might be available to either party to the contract, any procedural matters (such as notice periods or requirements) should be carefully considered and followed.
- If you have entered into any other third party agreements relevant to the works (such as agreements for lease, development agreements, or funding agreements), assess whether, to the extent that there is any scope for delay or additional cost to be payable under the construction contract, you are protected against the consequences of such delay or additional cost in the context of any such agreements.
- Engage with contractors where contracts might be affected. Leaving aside contractual risks, practical implications will need to be managed, particularly where there are third party contractual obligations to meet. Proactive discussions with contractors may be the best way to ensure a timely resolution to any potential disruption, and avoid the cost and delay associated with engaging in disputes in connection with the outbreak.
- Check your insurance policies. The government last week officially listed COVID-19 as a "notifiable" disease, and though this does not automatically mean that businesses will be able to claim under any applicable insurance policy, conversations should be started with insurance brokers in order to determine what losses might be covered.
- Continue to monitor developments in the spread of COVID-19 and associated containment measures for any potential further impact on your project. As the virus presents an ever-changing picture in terms of global implications and consequences, new measures may trigger additional contractual provisions not discussed above. For example, recently announced UK government plans to introduce emergency legislation could constitute a change of law that triggers additional relief for contractors.
Contracts not yet entered into
For new contracts currently being negotiated (or recently entered into), the analysis surrounding some of the events listed above alters as a result of the foreseeability of disruption of the outbreak of COVID-19. As the news and potential impact of the outbreak becomes better understood, disruption that may be caused by the outbreak might have on the works becomes (to some degree) foreseeable. Given the changing nature of current circumstances however, what has become (or might yet become) foreseeable at what point in time may be the subject of debate.
As a result of this uncertainty (and the conflicting authorities concerning this point), it may be worth considering whether express provisions should be included to expressly allocate the risks as arising as a result of COVID-19.