With a focus on JCT and NEC standard form Construction Contracts
On 5 March 2020, the UK's chief medical adviser announced that the UK was ramping up its "delay" phase measures to slow down the spread of the COVID-19 virus. The government is still considering the measures that would be taken in the "delay" phase but has previously indicated that these could include closing schools, encouraging working from home, and discouraging the use of public transport.
Despite a relatively limited number of cases having been reported in the UK to date (at the time of writing), the recent jump in the number of daily confirmed cases internationally has raised fears that the outbreak could become a pandemic (when an infectious disease spreads easily from person to person in many parts of the world). The effects of the virus in the UK and internationally both in terms of the rising number affected as well as the preventative measures taken mean that it is now well within the realms of possibility that COVID-19 will impact on construction and infrastructure projects in the UK, with labour and material shortages being expected.
This article provides an overview of some of the key contractual provisions and takes a brief look at the common law doctrine of frustration, which parties involved in construction projects in the UK should consider in order to protect their commercial position as a result of the additional risks and issues caused by the COVID-19 outbreak. It considers the approach of two of the most widely used domestic standard forms - JCT and NEC - to the situation, and provides practical tips for those who might be affected and how they might mitigate the risks that may arise.
Entitlement to Extensions of Time / Loss and Expense
Contractors concerned that they could face delays or increased costs as a result of the COVID-19 outbreak would be well advised to consider whether they have any express entitlements to relief under their contract.
For example, a contractor may seek an entitlement to extensions of time and/or additional payment in the event that:
- shortages of labour arise as a result of preventative measures to alleviate the outbreak spreading and/or due to infection, or potential infection, and the resulting quarantine, or self-isolation, required;
- shortages of plant and materials arise due to delays in their importation or transportation;
- the site is closed or access is restricted as a result of measures to contain the COVID-19 outbreak; and/or
- the contractor is not able to carry out the works as a result of action by governments to prevent the spread of the outbreak.
We consider below the possible entitlements under JCT and NEC standard form contracts.
Force majeure is a foreign law concept, originating from French civil law, which has been introduced into English law contracts where it remains a creature of contract and not a common law doctrine. It is usually used to refer to circumstances that are outside of the parties' control. The JCT suite of contracts makes express reference to force majeure being a "relevant event" (see, for example, Clause 2.29.15 of the JCT Standard Building Contract 2016) and a potential termination trigger (at Clause 8.11 of the same form).
Force Majeure as a Relevant Event
As epidemic or pandemic events are not listed as separate relevant events, entitling a contractor to an extension of time, contractors seeking entitlements resulting from the COVID-19 outbreak would most likely seek to do so under the "force majeure" relevant event.
Notably, in an un-amended JCT there is no contractual definition of force majeure. Parties should, in the first instance, check for a contractual definition of the term in any schedule of amendments. Such definition may set out an exhaustive or non-exhaustive list of events or circumstances that may amount to force majeure.
Typically, an event of force majeure is one that is beyond a party's control, could not reasonably have been provided against, could not have reasonably been avoided or overcome and is not attributable to the other party.
A statement of the meaning of force majeure by Goirand was approved by McCardie J in Lebeaupin v Crispin  2 KB 714 as applying to many English contracts, and suggests that an epidemic may constitute a force majeure event:
"Force majeure. This term is used with reference to all circumstances independent of the will of man, and which it is not in his power to control... this, war, inundations and epidemics are cases of force majeure; it has even been decided that a strike of workmen constitutes a case of force majeure."
However, there are no reported cases testing the scope of the term "force majeure" in the context of JCT contracts. Without a specific definition provided in the JCT, and without common law precedent, the meaning of force majeure may have to be determined by case law in the courts. Some commentators have indicated that interpretation of force majeure under JCT is likely to be restrictive because similar matters, which would typically constitute force majeure, are already expressly dealt with as relevant events. As an epidemic/ pandemic is not covered by other relevant events, it would seem to be reasonable, however, for contractors to seek to rely on the force majeure relevant event to cover such circumstances.
Importantly, and as to be expected, the contractor must notify the Architect/ Contract Administrator forthwith, stating the applicable Relevant Event(s), "if and whenever it becomes reasonably apparent that the progress of the Works or any Section is being or is likely to be delayed". Failure so to notify is likely to result in the contractor losing this entitlement, so it's imperative to stay on top of notices and also give some consideration to when such a notice might need to be served, bearing in mind that that time may now not be far off.
Contracts often provide that a party seeking to rely on force majeure will need to be able to show that they have sought to mitigate the effects of the event and JCT contracts are no exception. There is a requirement on the contractor, albeit not expressly related or limited to force majeure, for example at Clause 18.104.22.168 of the JCT Standard Building Contract 2016, to "constantly use his best endeavours to prevent delay in the progress of the Works or any Section .. and to prevent the completion of the Works or Section being delayed or further delayed beyond the relevant Completion Date". This obligation should not be overlooked because, again, a failure to do so could result in a loss of entitlement to an extension of time under the JCT contracts. Contractors will likely take certain steps as a matter of course, such as seeking alternative supply sources, but should also be taking steps to minimise the impact of the virus itself, for example by adapting site attendance protocols.
It is worth noting that 'force majeure' is not included in standard form JCTs as a "relevant matter", so whilst the contractor may be entitled to an extension of time for a force majeure event, they would not be entitled to loss and expense. The effect of this is that a contractor does not have to pay damages for delay, but he must bear any cost resulting from the delay (effectively meaning that a 'force majeure' event is treated as a neutral event, where the financial risk is split between the contractor and employer).
Force Majeure as a Termination Trigger
In a worst case scenario, as alternative to claiming for additional time, parties may wish to consider their termination rights. Clause 8.11 of the un-amended JCT Standard Building Contract 2016 provides for termination by either party by reason of force majeure. In a scenario such as a major COVID-19 outbreak in the UK, which the government has said has the potential to affect up to 20% of the workforce at any given time, the economic benefit of preserving the contract may be eroded given the degree of uncertainty and the real risk of accumulating costs from delay.
The right to terminate under Clause 8.11 will arise if the carrying out of the whole or substantially the whole of the uncompleted works is suspended for the period set out in the contract particulars (the default position being two months). In the event of suspension for the specified period due to a force majeure event, either party may give notice to the other that, unless the suspension ceases within seven days of receipt of the notice, the contractor's employment may be terminated on the service of a second notice (which is given upon the expiry of the first notice period).
Parties should be conscious of the risk of terminating for reason of force majeure - if the event is deemed not to be "force majeure", the party seeking to rely on it could leave itself open to a claim for repudiatory breach of contract. That is not a good position to be in, as it entitles the innocent party to compensation putting it in the same position as if the contract had been properly performed – potentially a significant sum. In addition, parties should consider carefully the other potential effects of triggering a termination event, such as reputational risks, and the potential damage to long-term supply chain relationships.
Contracts Not Yet in Force
Those parties not yet under contract should be aware that force majeure may not apply to them in respect of COVID-19, as it is no longer an event which is not foreseeable. 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 and indeed perhaps epidemics and pandemics more widely. Failing that, contractors will need to consider their entitlements under other relevant events, such as statutory powers directly affecting the works (see our analysis of other relevant events below) or the parties may want to consider postponing start on site until there is more clarity on the situation.
Other Relevant Events
In addition to force majeure, the JCT 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"
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.
Clause 60.1(19) of the NEC 3/ NEC 4 Engineering and Construction Contract entitles a contractor to an extension of time as well as compensation if an event occurs which:
- "Stops the Contractor completing the whole of the works; or
- Stops the Contractor completing the whole of the works by the date for planned Completion shown on the Accepted Programme.
- neither party could prevent;
- an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it."
The final limb of the test may prove troublesome at this stage, particularly for a contractor looking for an extension of time / compensation under a contract signed now, given media coverage of the scale of the outbreak, and its likely economic impact, and effect on international trade is so widespread. As such, it would be difficult for a contractor, entering into an NEC contract now, to argue that the effects of COVID – 19 had such a small chance of occurring that it would have been unreasonable to have allowed for it.
Those contractors that had already entered into an un-amended NEC standard form by the time the COVID-19 outbreak was widely reported are more likely to succeed in arguing that such an outbreak had such a small chance of occurring that they could not reasonably have allowed for it. The increasing prevalence of epidemics (including, for example, recent outbreaks of swine flu, Ebola, and SARs), however, does raise questions as to whether parties might increasingly be expected to make allowances for such outbreaks.
NEC is rooted in the principle of mutual trust and cooperation, which applies equally to the process for notifying compensation events. Whilst the notification process is designed to give early warning to encourage collaboration and to mitigate risks contractors should be mindful of the somewhat proscriptive procedure for notifying compensation events. Contractors must notify the project manager of a potential compensation event under 61.3, within 8 weeks of becoming aware of the event or risk losing their entitlement to additional time or money. This is on top of the obligation at clause 15.1 which requires a contractor to give early warning when they become aware of any matter which could increase the price, delay completion or a key date, or impair performance of the works.
Parties may also consider whether the doctrine of frustration applies. The doctrine was developed to deal with situations 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 or transforming the obligation to perform into an entirely different obligation from what the parties contemplated at the time of entering into the contract
Unlike force majeure, where frustration does apply, the contract is automatically terminated upon occurrence of the frustrating event. As neither party is at fault and therefore no party is able to claim for damages, the common law provides that losses are dealt with where they lie. This used to lead to inequitable results, as, for example, a party might not be able to recover a pre-payment made under the contract. To address this, the Law Reform (Frustrated Contracts) Act 1943 was introduced to allow pre-payments to be recovered or, conversely, where a party has derived considerable benefit from a contract prior to the frustrating event equity can intervene to require that the party receiving the benefit makes payment for it.
Some of the consequences of COVID-19 may render some contractual obligations impossible (if, for example, the outbreak resulted in whole cities being locked-down). Parties should, however, be aware that, perhaps due to the finality of the remedy, the courts are usually reluctant to find that a contract has been frustrated. As a result, the threshold for proving frustration is likely to be higher than for force majeure.
As frustration is a permanent remedy, it should only be considered as a last resort. As the burden of proving frustration is a heavy one, where parties are not yet in contract, it would be sensible to consider how COVID-19 could impact the contract and specifically provide for this in express terms.
Parties to construction contracts will naturally be concerned about the commercial effect of the Coronavirus outbreak on their operations.
We urge parties to 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. In this regard, parties should also consider the wider reaching effects of the outbreak, including changes in legislation or regulations and the knock on effect this might have on site access, supply of materials and availability of labour.
Going forwards it may well be worth - in light of the coronavirus outbreak and the others that have gone before it, such as SARS and swine flu - giving more thought to epidemics than previously, especially in this increasingly global economy of ours. Parties should consider expressly providing for such events in their contractual arrangements with a view to dealing at the outset with the risks associated with them.
Please do not hesitate to contact us if you would like our assistance in considering your contractual rights and obligations, and so that we can help better protect your business in light of COVID-19 and its potential consequences.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.