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16 Apr 2020

COVID-19: Force majeure, frustration and next steps

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The unprecedented impact of COVID-19 is having a wide-reaching effect on supply chains in the construction industry.  Parties to construction agreements have been faced with the unenviable decision whether to close sites or try to keep them open where possible.

While the Government’s current advice is that people employed on ‘essential construction work’ can, and should, continue to go to work - with the necessary alterations in place to take account of any guidance to safe working - the rapidly evolving nature of the situation means that this position is susceptible to change at any time.

The disruption brought on by COVID-19 will inevitably have serious financial implications to the construction industry on a global scale.  It is therefore important for industry stakeholders to review their contracts and understand their rights and liabilities in light of recent developments.  Two areas that are likely to receive great attention over the coming months, force majeure and frustration, are considered below.

Force majeure

A force majeure clause allows the parties to suspend, or forgo, an obligation to perform the contract if a certain event occurs that is beyond their reasonable control and renders the contract impossible to perform.

As force majeure in the UK is a creature of contract and, unless the parties allow for it in their agreement (as is the case in the standard form JCT Design and Build Contract 2016), it will not apply as a matter of law.  Accordingly, the categories of applicable force majeure events will be determined by the express words used by parties and if no events are listed, a Court will need to interpret the meaning of the words in light of the relevant facts.

In addition to showing that a force majeure event has arisen, the party relying on that event to suspend, or forgo, its contractual performance will also need to demonstrate that:

  • The event relied upon was an effective cause of the delay sufficient to prevent performance of the works.Where there are multiple potential causes of delay, if the event relied upon does not render performance impossible on its own, then that will be insufficient.
  • The party’s inability to perform its obligations was as a result of circumstances that were beyond the control of either party (i.e. neither party was at fault).
  • The event was not anticipated by the parties’ at the time they entered into the contract.
  • The party took all reasonable steps to avoid or mitigate its consequences.For example, the fact that there may be a shortage of labour, or materials, may not be sufficient in demonstrating a claim in force majeure if there were alternatives available to the contractor to complete the works, even if they came at a higher cost.

If a valid force majeure event is established, then the contract should set out the parties’ respective rights and liabilities in relation to that event, including which party bears the risk, which party may make claims for relief and compensation and how any suspension or termination rights may be exercised.

Frustration

Where the contract does not provide for the operation of force majeure, the parties may alternatively look to rely on the doctrine of frustration.

A contract is said to become frustrated when an unforeseen event outside the control of the parties renders it impossible to perform, or alters the obligations such that they are radically different to what was contemplated by the parties when they entered into the contract.  Where a contract does become frustrated, unlike force majeure, the agreement is automatically terminated with neither party being liable for breach. 

It needs to be borne in mind, however, that the common law has imposed a high evidential burden on a party seeking to prove that a frustrating event has occurred which was not the fault of either party.  Circumstances which cause the parties to incur increased costs, or general hardship in performing the contract, are usually insufficient to satisfy the test which is why frustration cases rarely succeed.

It is also important to note that frustration is unlikely to apply if the event relied upon has been foreseen by the parties to the contract.  A force majeure clause which covers the possibility of epidemics and pandemics, or Government directions or changes in law, for example, would fall into this type of situation.

What to do now?

There are important steps parties can take now to assess their ability to make a claim or their exposure to liability in respect of COVID-19 related events, and to manage any risks accordingly:
 

  • Review the relevant notice provisions of the contract to make sure that any notices that need to be sent now are done so in a timely manner, and in accordance with the formal requirements of the contract.
  • Consider whether a written agreement is needed to accept notices at an alternative address to what is stated in the contract, or via electronic means (such as email), while shut down measures are in place.
  • Keep up to date with any new Government directions concerning the ongoing management of construction sites, and any changes in health and safety procedures that need to be adhered to in carrying out works.Any anticipated issues surrounding the supply of goods, materials or labour should be communicated at the outset so that the parties can work together at an earlier stage to try and minimise disputes.
  • Ensure that record keeping is up to date and that adequate project records are maintained going forward.This will be important if disputes arise over COVID-19 as the contemporaneous records will be relied upon to demonstrate the events taking place on the project at any one point in time, and will provide evidence of any circumstances giving rise to delays that may be encountered.
  • Contractors should check their sub-contracts to determine whether any rights to claim an extension of time and/or recover costs for the occurrence of a particular event are passed down through the supply chain, and whether the right to recovery is expressed on the same or similar terms.This will help identify if there are any risks to recovery downstream, should the same event effect multiple levels of the supply chain.
  • Review any corporate and project insurance policies to see if they cover any claims in relation to adverse effects COVID-19 may have on the works.
  • If it comes to the point where there is no other option but to suspend the works, consider whether:
    • There are certain activities that do not need to be suspended and can continue to be progressed remotely off-site (for example, the development of designs or models); and
    • The site is adequately protected and secure from unauthorised access during the period that personnel are not present.
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