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17 Apr 2020

COVID-19: Force majeure in UK construction contracts

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In our alert COVID-19: Force majeure, frustration and next steps, we looked at two areas that are set to be explored in greater detail in the construction industry in response to COVID-19, namely force majeure events and frustration.

This alert provides a quick guide on the operation of force majeure in two widely used standard form UK construction contracts – the JCT 2016 Design and Build and NEC 3 and 4.

As the standard forms are capable of being amended by agreement, it is essential that parties review their contracts carefully to determine the extent of their rights and liabilities.

JCT 2016 Design and Build contract

Relevant Events

Force majeure is a defined category of ‘Relevant Event’ meaning, the contractor may be able to claim an extension of time for the period in which completion of the works was delayed as a result of that event. 

Unfortunately, the term ‘force majeure’ is not defined elsewhere in the contract but it would be expected to cover events that are outside of the parties’ reasonable control, that are not foreseeable and do not arise due to the default or negligence of the party relying on the event. 

In practice, it is common for parties to agree to amend the contract to define the events that will give rise to a force majeure situation, with epidemics or pandemics often included within that list.  COVID-19 is likely to be covered under the terminology ‘pandemic’ given that the WHO has declared the outbreak of the virus as “a public health emergency of international concern”. 

Alternatively, should the Government exercise its statutory powers to close construction sites nation-wide to prevent the spread of COVID-19, the contractor may also be able to fall back on that exercise as a Relevant Event.

Notices

Where it is reasonably apparent to the contractor that the event is likely to delay the progress of the works, it is required to provide the employer with a notice setting out the details of the material circumstances of that event, including the cause, or causes, of delay which in the contractor’s opinion, constitutes a Relevant Event.

Given the Government appears to consider most large scale construction as ‘essential’ work, there is going to be some confusion over when it is ‘reasonably apparent’ that the works are likely to be delayed due to a COVID-19 related event.  From an employer perspective, there is no legal impediment to the contractor attending site and completing the works in accordance with the existing programme, provided they undertake safe working practices.

Alternatively, if the imposition of any Government-mandated safety measures means that the contractor is unable to comply with their health and safety obligations under the Health and Safety at Work Act 1974 and the Construction (Design and Management) Regulations 2015, that could well give rise to a reasonable apprehension that the works will be delayed in the foreseeable future.

The correct time to serve a contractor’s notice will therefore vary from project to project but this will ultimately change if the Government compels the closing of sites nation-wide.  In those circumstances, contractors should serve their notice as soon as possible.

The contract allows for most notices to be sent by electronic means although some notices such as default and termination notices may need to be served by registered post.  In the event that the parties’ listed addresses are currently inactive, or running on very limited skeleton staff, they may wish to consider agreeing to serve all notices by email for the near future.

Claims for additional costs

Neither an epidemic or pandemic, nor the exercise of a statutory power, constitutes a ‘Relevant Matter’ under the JCT contract.  It is therefore unlikely that the contractor will be able to make a claim for the additional costs incurred as a result of delay arising from COVID-19 related events.

The exception to this is where the employer issues an express instruction to suspend the works which is covered as a Relevant Matter.  Accordingly, it may not be in the employer’s financial interests to suspend the works unless compelled to do so by the Government, or where it is unsafe to continue works on site.

Termination

If the whole of the works, or substantially the whole of the uncompleted works, are suspended for a continuous period of 2 months as a result of the force majeure event, the contract gives either party the right to terminate provided that:

  • they serve a notice at the end of that 2 month period stating that if the works do not commence within 7 days after the date of receipt, they may terminate the contract; and
  • Subsequently send a notice of termination at the end of that 7 day period in the event that the works do not recommence.

NEC 3 and NEC 4

Compensation events

The NEC contracts do not contain a force majeure clause; however, they do provide a compensation event under clause 60.1(19) for an event which occurs that:

  • Stops the contractor completing the whole of the works, or from completing the whole of the works by the date for planned completion shown on the accepted programme; and which:
  • 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 to have allowed for it; and
  • Is not one of the other compensation events stated in the contract.

This clause encompasses some of the essential elements of a force majeure clause, save for positively setting out a requirement on the contractor to take reasonable steps to mitigate the consequences of the delay (which it would be expected to do anyway through the use of the Early Warning Notice process). 

Whether an experienced contractor would have allowed for a COVID-19 type of pandemic event is likely to be the subject of dispute.  On the one hand, there have been threats of global pandemics in the past such that a competent contractor would be aware that they are capable of occurring and spreading quickly.  However, the size and nature of the current pandemic, along with the extensive lock down measures undertaken by countries around the world in response, are unprecedented and there is a good argument that it would be unreasonable to expect any contractor to have allowed for it.

Similar to the JCT, the NEC offers a potential alternative to a contractor to make a claim for a COVID-19 event which causes the Government to force the closure of construction sites through a change in the law.  As the compensation event is covered under the optional clause X2, it only applies if the parties have agreed to specifically incorporate it into the agreement.

It is important to remember however, that a Government announcement advising construction sites to close down nation-wide does not, in and of itself, amount to a change of law until it has been enacted by the passing of legislation in Parliament.  The optional clause X2 will therefore only be engaged from the time any such legislation takes operative effect.

Claims for additional costs

Perhaps the major point of difference between the NEC contracts and the JCT, is that a compensation event for a force majeure type event, if demonstrated, may entitle the contractor to both time, and also cost by way of a change to the contract prices.

Nevertheless, it is important for contractors to remember that the contract prescribes for project manager assessments to be based on assumptions that the contractor reacted competently and promptly to the event and any cost and time relating to the event was incurred reasonably. 

Where the contractor did not take reasonable steps to mitigate its losses, such as failing to give an Early Warning Notice when it became aware of the matter that would increase the contract prices or delay completion, the project manager may take that into account in its assessment.

Notices and instructions

NEC 3 and 4 prescribe an eight week time limit on the contractor to notify the project manager upon becoming aware that the compensation event has happened.  If the contractor fails to so notify, it is prevented from having the contract prices, completion date or a key date changed unless the event comes from the project manager or the supervisor giving an instruction or notification, issuing a certificate or changing an earlier decision.

Where an event arises that meets the criteria of clause 60.1(19), the project manager is required to provide an instruction to the contractor stating how the event is to be dealt with.  If that instruction involves a change to the scope of the works, directs the contractor to stop or not start any work or changes a key date, then the project manager is required to notify the contractor of the compensation event at the time the notification is made.  If no such notification is given, the contractor’s eight week deadline to provide its own notice will commence from the date of the project manager’s notification.

It is therefore important for contractors to issue their Early Warning Notices as soon as they become aware of any COVID-19 related matter that could delay the works, or increase the total prices under the contract, because it will give the project manager enough time to assess if the matter requires an instruction in order to mitigate the effects of the event.

Where there is an agreed communication system prescribed by the contract particulars, there is no need to change the formal address for the service of notices, provided the parties are able to have continuous access to that system.  If no system is specified, communications will be validly served when it is sent to the address prescribed for receipt under the contract or alternatively, by electronic means where the parties agree to that method of transmission.

Termination

The client has the power to terminate the contractor’s obligation to provide the works where an event that meets the same criteria as clause 60.1(19) is forecast to delay completion of the whole of the works by more than 13 weeks.

If the client has given an instruction to stop, or not start, any substantial work or all work, either party may terminate the contract if an instruction allowing the work to re-start, or start, or remove work from the contract scope, has not been given within 13 weeks (provided that the instruction was not due to a default by the party seeking to terminate).

At the current time, it is impossible to say with any certainty how long the Government’s lockdown measures will last but it seems likely that disruption from COVID-19 will continue for many months to come.

 

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KEY CONTACT

Ron Nobbs

Ron Nobbs
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Paul Thwaite

Paul Thwaite
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Harrison Wall

Harrison Wall
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