Coronavirus: Impact on building contracts

As at the date of this article, and based on the World Health Organization’s (WHO) declaration, Covid-19 is a public health emergency of international concern. Notwithstanding the human toll, the impact of Covid-19 on businesses is being felt increasingly worldwide. The construction industry in the UK is no exception.

We have been receiving an increasing number of enquiries from our clients on how to manage the potential risk of disruption caused by Covid -19. Who pays if there is a disruption in the supply chain and, subsequently, a delay to the programme? Is the force majeure relief available for Covid-19? Who bears the risk under a construction and engineering contract?

JCT Design and Build Contract, 2016 edition:

  • One of items under clause 2.26 which would entitle the contractor to an extension of time (a ‘Relevant Event’) in the event of a delay is force majeure. What is force majeure?
  • The JCT contract does not define force majeure. Generally it will cover exceptional events that are beyond the parties’ reasonable control, that if it arises, prevents the party from performing its contractual obligations.
  • This means that if a Covid-19 epidemic is accepted as falling within the definition of force majeure, the contractor will be entitled to an extension of time, provided it gives notice to the employer in accordance with the contract.
  • In addition, force majeure may entitle either party to terminate the contract under clause if the suspension lasts longer than the period stated in the contract.
  • However, force majeure is not a ‘Relevant Matter’ under clause 4.21 and will not give entitlement to the contractor to claim loss and expense under clause 4.19.
  • However, relying on force majeure as a ground for an extension of time, without a specific definition, presents a risk because of the uncertainty as to just how narrowly a court will interpret the term.
  • Even if a Covid-19 epidemic was specifically covered as a force majeure event, the party seeking to rely on it would usually have to prove that Covid-19 has prevented it from performing its obligations under the contract and that it has taken reasonable steps to mitigate the effects of the force majeure event. For example, if a delay occurred due to absence of labour or supply of materials, could it be argued that the contractor should have been able to source the labour or materials from elsewhere?

NEC4 Engineering and Construction Contract:

  • Under the NEC4 Contract, the main effects of Covid-19 might be a delay to the completion or to the key dates, costs increase or impairment to the performance of the works. The contractor must therefore give early warning promptly as soon as it becomes aware of an event that it could increase its total costs.
  • Covid-19 might be a ‘Compensation Event’ under clause 60.1(19) as an event that:
    • stops the contractor completing the works at all or by the planned date;
    • neither party could prevent;
    • at the date of the contract an experienced contractor would have judged its likely occurrence so small that it would not have been reasonable for the contract to consider it.
  • Unless the contractor notifies the project manager about its claim for an extension of time or additional costs within short period of time of becoming aware of the event, under clause 61.3 it might lose its right to make a claim at all.

 Practical tips:

  • The terms of the existing contracts should be reviewed, including force majeure clauses. For certainty, a Covid-19 epidemic should be included into the definition of force majeure.
  • Wording referring to unknown viruses, biological contamination or epidemics should be inserted into new contracts (and existing contracts should be amended if possible).
  • If your contract has been amended by a bespoke set of amendments, check them carefully to see if the position in relation to relevant events or compensation events has changed.
  • Early warnings and notifications of a compensation event should be given promptly, without any delay.

To find out more about anything covered in the article, or to discuss the terms of your construction and engineering contract, please get in touch with a member of Thrings’ Construction team.

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