Q&A: How will coronavirus impact construction contracts?
What are some of the contractual provisions that construction contractors could rely on if they are impacted by the coronavirus disease (Covid-19)? By Elizabeth Vago
What are the potential impacts?
Primarily, delay to projects due to material shortages or restrictions on movement of workforce, the shutdown of sites or illness of workers on site.
What should you do?
Look at the operational provisions in your contract.
- Provide an updated or revised programme if there is disruption and flag to the client that the programme may not be met.
- Give early warnings of delays and/or cost overruns if the contract requires this. You could lose your entitlement to an extension of time or additional costs if you don’t do this promptly.
- Provide regular progress reports if the contract requires it and clearly set out all impacts that the disease has had on the project.
Can you make a claim?
None of the standard form contracts (e.g. JCT and NEC3/4) refer expressly to epidemics or spread of diseases.
So, contractors may have to rely on other clauses in their contracts such as:
- force majeure and prevention;
- change in law;
- instruction by the engineer;
- delay in delivery of materials;
- delay as a result of the engineer's flexible working arrangements; or
- special circumstances.
If you have an unamended NEC contract, coronavirus may be a Compensation Event. However, it will depend on the form of NEC contract i.e. fixed price, target cost etc. Under an unamended JCT Design and Build Contract, Clause 2.26.14 of the JCT Design and Build Contract identifies “force majeure” as a Relevant Event which entitles the contractor to an extension of time and an event which entitles either party to terminate the construction contract under clause 8.11.1, but it is not a Relevant Matter and gives no entitlement to losses and expenses.
Is it Force Majeure?
Steps to take:
- Look at the definition of force majeure in the contract. Is the event covered? If so, make sure that you give the right notice to your client with all of the necessary contractually required information.
- When looking at whether or not an event amounts to a force majeure, the following questions should be asked:
- Are you relying on the outbreak of the virus itself or something relating to the virus (such as governmental restrictions imposed to contain the outbreak)
- Does the event meet the relevant contractual test?
- Consider the consequences of invoking a force majeure clause because typically, the clause will specify that neither party is liable for a failure to perform its contractual obligations where that failure is caused by the force majeure event and parties are often required to mitigate the effect of the force majeure event. Failure to mitigate may undermine a party's ability to rely on the force majeure clause.
What about Frustration or Prevention?
What if the effects of Coronavirus itself or the effects of government action e.g. mandatory quarantines) have prevented or frustrated the performance of your contract, or made performance impossible? If you can neither make a claim nor classify Coronavirus as an event of force majeure, frustration might release you from further performance. However, it is difficult to establish frustration. It cannot be used if you already have a force majeure clause, there is an alternative method of performance available, it has become too expensive to perform the contract or because a supplier has let you down.
Frustration is a more radical remedy than force majeure because rather than suspending performance, frustration can lead to the contract being automatically discharged by operation of law.
Mistaken assertions of force majeure or frustration
It is important to remember that if you are planning to assert force majeure or frustration, then if it turns out to be incorrect, this could amount to a breach (or anticipatory breach) of the contract and the injured party could claim damages or be entitled to terminate the contract.
There may be a number of remedies under your contract that can be used to grant relief from performance if the coronavirus has an adverse impact on any of your construction projects. However, it will very much depend upon the exact wording of the contract itself and the impact of the virus on the project and any other surrounding circumstances.
Elizabeth Vago is a partner at law firm Spencer West LLP.