The outbreak of the COVID-19 virus poses a number of significant challenges for the construction industry and will undoubtedly raise issues across diverse areas of law. Those involved in any construction project must be braced to encounter possible delays and increased costs as a result of COVID-19, which may arise from labour shortages, delay in delivery of plant and materials and site closure.
The purpose of this note is to provide general guidance on the doctrine of frustration, the concept of force majeure as it may apply to common forms of construction contract, and drafting challenges that we can expect to arise for projects that are yet to commence.
Doctrine of Frustration
Under English law where the doctrine of frustration applies to any contract, that contract will be terminated automatically and the parties discharged from their obligations.
Frustration of a contract will occur when an unforeseen event renders the performance of the contract commercially or physically impossible. It may also apply when the frustrating event has the effect of transforming the obligation to perform originally contemplated by the parties into something completely different.
Importantly, the event must not arise owing to the fault of one of the parties. For that reason, neither party can claim damages and the losses are often said to remain as they lie (although this is not always strictly true, because where this produces an obviously inequitable result one party can be required to compensate the other – this commonly arises in cases where up-front deposits have been paid).
Will the outbreak of COVID-19 lead to the frustration of construction contracts? As of the date of this note, it is extremely likely that the UK Government's preventative measures will be liable to change as the pandemic unravels. It is not inconceivable that, for example, the city within which a building site is located may be locked down, in which case contractual obligations could be rendered impossible to perform. In this regard, it is important to note that if the performance of the contract is merely rendered difficult, but not impossible, then the doctrine of frustration will not apply.
The bar for frustration is therefore rather high, and the burden for a party alleging frustration of a contract is heavy. Crucially, a mistaken allegation may amount to an anticipatory or repudiatory breach of the contract, which may result in termination and a subsequent claim for damages brought by the other party. The specific factual circumstances will be important and tailored legal advice should always be sought. To see our detailed guidance on the doctrine of frustration, please click here.
Force majeure is a legal term used to refer to circumstances that are outside of the parties' control. Under English law, it is a contractual concept only and cannot be introduced via common law. Accordingly, contracting parties are responsible for defining force majeure events (although this is not always done) and for determining the contractual consequences when such an event occurs.
The most popular standard form contracts in the construction industry contain reference to force majeure. There follows some guidance on the JCT form, which is the most commonly used in England and Wales.
The JCT Standard Building Contract 2016 expressly refers to force majeure being a "Relevant Event", which is the list of events that may entitle a contractor to an extension of time, provided the event in question actually caused delay. However, force majeure is not a defined term in JCT contracts, unless this is dealt with by way of a bespoke amendment agreed between the parties at the time of formation of the contract.
In the case of an unamended JCT, force majeure is to be given its usual meaning, which is broadly an event beyond the control of a party, which could not reasonably have been avoided and cannot be attributed to the counterparty. Well-known examples would include war or widespread strike action.
Would the outbreak of COVID-19 allow a party to claim force majeure? The precise definition of force majeure as it is used in an unamended JCT contract is not something which has been tested in court (at least, not in the reported cases).
It is therefore difficult to predict how the courts would interpret COVID-19, however it has been suggested that since other relevant events which are considered force majeure are specified in the JCT contract and a pandemic is not mentioned, the court's interpretation could be strict. Expert opinion may be required to support a claim that COVID-19 falls within the terms of a particular contract.
It should also be noted that a contractor under a JCT contract is almost always required to mitigate any delay being suffered (for example Clause 22.214.171.124 of the JCT Standard Building Contract 2016) and there may be strict notification requirements that govern how and when delay shall be notified.
In the event that a contractor cannot establish a Relevant Event has occurred, there will be no entitlement to an extension of time (and therefore no entitlement to the costs that may arise resulting from the delay).
Once again, it is important to bear in mind that the Government's guidance is fast-moving and this may affect how the law is applied in these situations. For example, the JCT forms also entitle a contractor to obtain an extension of time in the event that the Government exercises "any statutory power which directly affects the execution of the Works".
The UK Government has already asked the British public to work from home where possible, but should this be taken a step further with offices, operations and projects being forced to shut down or if freedom of movement is restricted, we may well begin to see arguments arising from that particular wording.
Furthermore, it may be that we see contractors arguing that there exists a state of "civil commotion", which is also included as a Relevant Event in unamended JCT forms. Such an argument will have to be judged against the current circumstances that exist in society, but previous case law suggests that civil commotion is in fact judged as more severe than a riot, and is in fact indicative of a state between riot and civil war. As things stand, therefore, an argument that civil commotion is causing delay is not considered likely to succeed in establishing an entitlement to additional time.
Aside from the right to extra time, force majeure events may also be used as grounds for terminating a JCT contract.
Clause 8.11 of the un-amended JCT Standard Building Contract 2016 provides for termination by either party by reason of force majeure.
Under the JCT, the right to terminate 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. If the period is suspended due to a force majeure event, either party is entitled to notify 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).
As referred to above, there is always a risk whenever terminating building contracts that the grounds specified will be found by the courts to be inadequate grounds for termination. Given the lack of clarity from the courts regarding the status of a pandemic as a force majeure event, parties should be mindful of the risk that if a contract is terminated for this reason and it is later determined by the courts that there was in fact no force majeure event, the party seeking to rely on the termination could be on the receiving end of a claim for repudiatory breach of contract, which may result in a liability to pay the counterparty damages.
To see our detailed guidance on force majeure, click here.
The landscape surrounding COVID-19 is changing at considerable speed, and the appropriate legal advice will also evolve accordingly.
For existing construction projects, careful consideration will need to be given to the contract in question and how its provisions may be interpreted in light of the current situation.
Furthermore, those parties who are in the early stages of a project and are currently in the throes of negotiating a contract will need to consider whether bespoke contractual amendments are appropriate to deal with issues concerning, for example, delay and loss and expense as a result of the outbreak of COVID-19.
The Construction team at Mishcon de Reya are fully equipped to deal with issues that will arise in the coming weeks, months and beyond.
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