With the World Health Organisation declaring COVID-19 a pandemic in March 2020 the world’s economies has stalled with economic output and the labour market feeling the worst effects.
The construction sector in particular is facing particular challenges posed by COVID-19, namely:
- Social distancing being impractical to implement on a live building site;
- Supply chain networks being disrupted due to labour shortages impacting not only the transportation of materials but also their manufacture;
- Contractors and suppliers operate on tight margins, therefore any disruption to the supply chain network will increase the financial strain on them;
- Contracts normally seek to allocate the risk between the parties, for certain events. With the scale and extent of COVID-19, this would have been unprecedented at the time the parties entered into a contract.
This article will look at the challenges faced within the construction industry, focusing on several of the most commonly used forms of construction contracts currently in use and what the potential is to recover additional time and cost as well as managing risk:
- FIDIC Red Book 1999 (FIDIC)
- JCT Design and Build Contract 2016 (JCT)
- NEC 4 Engineering and Construction Contract (NEC)
(Please note that much will depend on the specific terms of the relevant construction contract that one uses and how one should utilise the terms of these contracts during this pandemic):
What is the impact on Construction Contracts?
The impact we have witnessed so far of COVID-19 on construction contracts ranges from the following:
- Delay and disruption
- Cost overruns
- Changes being made to schedule of works and scope
- Prevention of performance – which may give rise to suspension or termination rights
Prior to discussing how time and cost are dealt with under these contracts, we shall look at performance risk, which is allocated through the two following ways:
- Force majeure; and
- Frustration
Force majeure in contract:
Under FIDIC contract (clause 19) details what force majeure is and in how to deal with it:
- Clause 19.1 defines force majeure as an exceptional event or circumstance:
- Which is beyond a Party’s control;
- Which such Party could not reasonably have provided against before entering into the contract;
- Which, having arisen, such Party could not reasonably have avoided or overcome; and
- Which is not substantially attributable to the other Party.
- One should note that diseases and pandemics are not included within the non-exhaustive list of exceptional events, but contractors could argue that COVID-19 meets the broad definition as stated under clause 19.1 (a) to (d).
- Clause 19.2 informs that the affected Party to force majeure must provide a fourteen day notice once the Party becomes aware or should have become aware of the event constituting force majeure.
- Clause 19.3 advises that each Party shall at all times use all reasonable endeavors to minimise any delay to the performance of the contract as a result of force majeure.
- Clause 19.4 normally gives rise to a right to an extension of time. Cost can only be recoverable if the event of force majeure falls into the category’s described under clause 19.1 (ii) to (iv) (war, terrorism, strike, etc.). COVID-19 would be unlikely to fall within these categories.
- Clause 19.5 provides that either Party may terminate the contract if an exceptional event causes a delay of 84 continuous days or multiple delays which total more than 140 days.
Under the JCT contract force majeure is referred to under clause 2.26.14, but is not defined. What it broadly refers to is an event that is not reasonably contemplated by the parties when the contract is signed, and which is beyond reasonable control of the party seeking to reply on the provision.
As there are specifically no reported cases on the meaning of force majeure in the JCT contract, how COVID-19 constitutes a force majeure event will be based upon the merits of each case. An additional factor to consider is whether the contractor has mitigated any delay, as per clause 2.25.6.1, which requires the contractor “to constantly use his best endeavors to prevent delay”.
Force majeure is not a “Relevant Event” under the JCT contract, and as such only additional time can be claimed, not loss and expense.
As per clause 8.11.1.1, either party may terminate the contract on notice if a suspension for force majeure continues for more than two months.
Under the NEC contract, there is no express force majeure clause, however the “compensation event” mechanism as per clause 60.19 may operate as a de-facto force majeure clause as it may entitle the contractor to additional time and cost if COVID-19 affects the works.
The client also has the option to terminate the contractor’s obligation to provide the works if the force majeure event will prevent completion of the works or is forecast to delay it by more than thirteen weeks (NEC clause 91.7).
Frustration of a contract:
Frustration of a contract occurs when circumstances beyond the control of the parties mean that the contract itself can no longer be performed. English courts have given the scope of frustration a narrow interpretation, meaning that the threshold for frustration at common law will be higher than the threshold for force majeure under a construction contract. The key point is that the obligations must become impossible to perform as it will not be sufficient that the obligations simply become more difficult, more costly and/or more time consuming to perform.
Where a contract contains a force majeure clause, frustration is less likely to be successful, as a force majeure clause addresses the scenarios that may arise as a result of COVID-19.
Extensions of time and additional costs
Contract professionals will be more familiar with the allocation of risk for time and cost under their contracts and the relevant mechanisms they operate under, than with force majeure or frustration. Where contracts can still be performed, despite COVID-19 impacting them, there may still be a time and cost impact which will need to be assessed.
Under the FIDIC contract, contractors are entitled to an extension of time for delays caused by “unforeseeable shortages in personnel or Goods … caused by epidemic or governmental actions”. Clause 8.4 (d), as well as “delays caused by Authorities”, Clause 8.5. It is likely that either or both of these clauses will provide entitlement for a contractor.
The contractor may be able to claim for both time and cost, through clause 13.1 “Variations” and 13.2 “Value Engineering” proposals which may be submitted by the respective parties to change the works due to unforeseen circumstances. In addition, the contractor may claim for an “adjustment for changes in legislation” under clause 13.7 which also gives rise to a claim of time and cost.
Under the JCT contract, the contractor is entitled to an extension of time where completion of the works or a section of the works shall likely be delayed beyond the relevant completion date by a “Relevant Event”. As discussed above, the list of Relevant Events does not expressly state a global virus outbreak such as COVID-19, but force majeure is listed as a Relevant Event so the contractor may be able to claim additional time in respect of delays caused by COVID-19, subject to substantiation and mitigation factors.
Under the NEC contract, additional time and money are not treated separately but treated together as a “compensation event” as per clause 60.1. COVID-19 could open a number of potential compensation events, including events for failure by the client to provide something in time. In particular clause 60.19 provides that there will be compensation when 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 showing 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.”
This provision may entitle the contractor to additional time and/or money as a result of the impact of COVID-19 on the works.
One should also check to see if a change in law (Option X2) has been selected. If so, a change in law of the country due to COVID-19 will be a compensation event.
It should be noted that in line with clause 61.3, the contractor is to notify the project manager within an 8 week time period to claim for a compensation event, otherwise the contractor will be time barred. This should be considered alongside the contractors obligations of providing “Early Warnings” of matters which could increase the pro=ices, delay completion or a key date of the works as per clause 15.1.
The below matrix summarises the contract risk as detailed above.
| COVID-19 CONSTRUCTION CONTRACT RISK MATRIX | ||||
| Force Majeure | Termination | Time | Costs | |
| JCT | Clause 2.26.14:
Force majeure is not defined although civil, commotion, strike etc. are listed separately as a Relevant Event. |
Clause 8.11.1.1:
Either party may terminate on notice if a suspension for force majeure continues for more than two months. |
Clause 2.25:
Extension of time where the works or a section are likely to be delayed beyond the relevant completion date by a Relevant Event. |
N/A as force majeure is not a Relevant Event. |
| NEC | Clause 60.19:
An unforeseeable event which neither party could prevent that stops the contractor completing the works. |
Clause 91.7:
The client may terminate if the force majeure is forecast to delay completion by more than thirteen weeks. |
Clause 60.1:
Both time and money can be awarded |
|
| FIDIC | Clauses 19.1 – 19.5 and 19.6:
An Exceptional Event gives rise to potential rights to extensions of time and termination and either party may terminate the contract if it is impossible or unlawful to perform their contractual obligations. |
Clause 19.6:
Either Party may terminate the contract if an Exceptional Event causes a delay of 84 continuous days or multiple delays which total more than 140 days. |
Clause 8.4 – 8.5:
Extension of Time for Completion are granted for delays caused by epidemics, governmental actions and authorities. |
Clause 13.8:
Adjustment for changes in Cost may be made in limited circumstances for increases in labour, goods, and other inputs into the works. |
| Clauses 13.1 – 13.2 and 13.7:
Variations, Value Engineering and Changes in Legislation may give rise to both time and cost entitlements. |
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