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Coronavirus: What protection is afforded to contractors?

As cases of COVID-19 increase throughout Europe and the UK, the adverse impacts on the construction industry are becoming a probable reality. What protection is afforded to contractors against the impacts of coronavirus?

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As cases of COVID-19 increase throughout Europe and the UK, the adverse impacts on the construction industry are becoming a probable reality. For contractors and subcontractors who will usually be bound by time sensitive dates for completion of the contracted works this presents real risks that 1) ongoing projects will be affected by critical delays and disruption and 2) any costs of any delay will be borne by the contractor.

Although it is difficult to identify the form of the delay, the UK government has recently indicated they may invoke urgent measures such as imposed quarantine steps and mandatory lockdown of schools and businesses in attempts to stop the spread of the virus. Similarly, local restrictions imposed by overseas jurisdictions and stricter border controls could delay the movement of equipment and materials necessary to progress an ongoing project

The question is what protection is afforded to contractors against the impacts of coronavirus?

A contractor’s entitlement to relief from its obligations under the contract including an entitlement to claim for extensions of time and any flowing disruption costs will in every case turn on the precise wording of the agreed terms of the contract.

The starting point is to look to see if there are any provisions relating to government intervention and force majeure.

Government intervention

Most standard form contracts include clauses relating to the exercise of statutory power: see for example cl. 2.26.13 of the unamended JCT 2016 Design and Build Contract Conditions or cl. 2.19.12 of the unamended Intermediate Building Contact 2016 Conditions. These clauses provide that a Relevant Event (as defined) which may give rise to an extension of time will include:

the exercise after the Base Date by the United Kingdom Government or any Local or Public Authority of any statutory power that is not occasioned by a default of the Contractor or any Contractor’s Person but which directly affects the execution of the Works.”

Importantly, this clause stipulates that the government intervention must have occurred after the Base Date for it to be construed as a Relevant Event under the contract. For future projects currently at tender stage this gives the parties an opportunity to include a bespoke amendment which expressly refers to the coronavirus.

For current projects this means that parties’ knowledge of the possible intervention prior to entering into the Contract will need to be examined to determine whether a contractor is entitled to rely on this clause. Subject to the facts and circumstances of each case, it is unlikely that parties could have expected the severity of the coronavirus and the consequential government intervention measures prior to the contract’s Base Date.

Force majeure

Alternatively, a contractor may seek recourse pursuant to force majeure clauses. A party’s entitlement to rely on a force majeure event is a contractual right only meaning it must be expressly referred to in the contract.

As is the case above, most standard form contracts include force majeure clauses: see for example cl. 2.26.14 of the unamended JCT 2016 Design and Build Contract Conditions or cl. 2.20.13 of the unamended Intermediate Building Contract 2016.

Although force majeure events are undefined in these standard form contracts, courts have in the past, defined a force majeure event as “situations where circumstances beyond the control of the parties render performance impossible by one of the contracting parties”: Lebeaupin v Crispin [1920] 2 K.B. 714, 718.

In the absence of an express provision referring to the coronavirus (or other pandemics) as a force majeure event, it is open to interpretation whether the coronavirus would be a Relevant Event in a construction contract which falls under the general force majeure wording and entitle the contractor to seek relief from its obligations under the contract .It remains to be seen whether courts will construe whether coronavirus falls under the definition of a force majeure event.

If it is found that coronavirus is a force majeure event, contractors must be mindful to establish that the Relevant Event is causing the delay which will inevitably vary from case to case depending on the facts. Without establishing the chain of causation there is no entitlement to claim for an extension of time.

Other factors such as compliance with notification provisions and mitigation to the impact upon the critical path are further factors which the contractor must assess during its extension claim.

Whilst any government intervention or force majeure clauses may give rise to a contractor’s entitlement to an extension of time which will relieve it from liability for liquidated damages, contractors should also look at the wording of the contract to determine who will bear the costs of the delay. The current unamended conditions will not entitle a contractor to loss and expense caused by the delay and the costs will be borne by each party affected by the delay.

Frustration

Finally, a further possible means of relief for parties affected by the coronavirus is the common law doctrine of frustration of the contract. Frustration is an extreme remedy in the sense that invoking the general law of frustration will bring the contract to an end forthwith with the flow-on consequences to be guided by the Law Reform (Frustrated Contracts) Act 1943. Given the severity of the outcome, the Courts impose a high threshold within narrow limits when determining whether a Contract has been frustrated such that its performance is not possible.

In cases where frustration may apply, the courts will construe the contract and see whether the parties have themselves provided for the situation which has arisen. If the situation was contemplated and provided for, then contract must govern”: The Eugenia [1964] 2 Q.B. 226, 239.

For ongoing projects frustration is unlikely to be a feasible option.

Conclusion

Contractors should check their current contracts to determine whether they include clauses relating to government intervention and force majeure. If there are no such provisions, a contractor should open dialogue with the employer to determine whether the contract can be varied to include a mechanism to deal with any events and delays associated with the coronavirus.

In addition, contractors should be vigilant in respect of their supply chain management and subcontractor relations to ensure they are not assuming all the risk in the event the coronavirus adversely affects the progress of ongoing projects.

You are contacting

Alexander Jullienne

Associate

alexander.jullienne@collyerbristow.com