As I sit and write this article the UK remains in the grip of a virus that has brought the majority of construction projects to a standstill. Up and down the land employers, contractors, subcontractors and suppliers are reaching into their filing cabinets to search for the contracts they entered into in order to see where they stand. Our telephones have been busy all week with calls from anxious clients
“Am I entitled to an extension of time and relief from liquidated damages” and “What about the recovery of my additional costs” are typical questions that my colleagues and I have been asked this week regarding construction contracts. So, what are the answers?
As so often is the case, the place to start has to be by looking at the terms of the contract you have entered into to establish where the risk of a construction site shut down by Coronavirus truly lies.
Has your construction contract been affected by a change in government legislation?
The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 (“Coronavirus Act”) is a statutory instrument (SI) which was enacted at 1pm on 26 March 2020, in response to the 2020 COVID-19 pandemic by the Secretary of State for Health and Social Care, Matt Hancock. The legislation gives wide-ranging power to the government to restrict the movement of people, prevent gatherings or two or more people and makes the trading of many businesses an illegal activity.
Unfortunately, construction is not currently stated to be an illegal activity so even if your contract provides relief from a delay caused by a change in government legislation, the Coronavirus Act will not assist you in demonstrating an entitlement to an extension of time, let alone recover additional costs that will be incurred.
Has your construction contract been affected by Force Majeure?
Force Majeure is a French term which means ‘superior force’ and is a contractual clause which absolves a party from something it promised in a contract because of reasons beyond its control. Force majeure is often referred to as a major unforeseeable ‘Act of God’ event.
An entitlement to an extension of time due to force majeure usually requires two additional requirements to be met – that the event was not foreseeable and that there is no alternative means of performance. A claim for additional time or cost due to a force majeure event cannot be just because the contract has become financially more difficult to perform. Commercial difficulty does not amount to force majeure.
However, with the World Health Organisation declaring COVID-19 as a pandemic, it is very arguable that the requirements have been met. Most standard forms of contract provide for an extension of time due to a force majeure event. But this all presupposes that your contract includes a force majeure provision, but what if the provision has been deleted?
No force majeure clause in your construction contract?
If no force majeure clause exists in your contract then it is possible that the doctrine of frustration may come to your rescue.
The doctrine of frustration allows a contract to be discharged in circumstances where an unforeseen event arises that renders the performance of the contract impossible. The purpose of the doctrine is to avoid unfairness where there has been a significant change in circumstances that neither party was able to foresee or is at fault for. It is arguable that the present coronavirus outbreak and subsequent government guidance and legislation could mean that the doctrine applies to certain contracts.
To establish frustration, it is important to bear in mind that the unforeseen event must go to the very root of the contract and render performance impossible (or performance that is essentially different from that originally envisaged) and that neither party is at fault. Where a frustrating event occurs, the contract is automatically terminated without requiring any action of the parties.
While generally a very high threshold is required to establish frustration, in current circumstances, where a lockdown across the UK is implemented, the doctrine of frustration may well apply to some construction contracts.
Whether a contract will be frustrated, depends upon all relevant factors being looked at, including the contractual terms and the factual background. Whether the current coronavirus outbreak has the effect of making the performance of a contract impossible is fact-specific. What is clear is that if the effect of the current outbreak is to simply delay performance of an obligation or to result in increased costs for the performing party, it will not be enough.
Under English law both parties are automatically discharged from further performance. The Law Reform (Frustrated Contracts) Act 1943 sets out how a party can recover monies paid out and receive compensation for any valuable benefit provided before the frustrating event occurred.
It is not always commercially sensible to claim frustration of a contract; for example, where the contract is for a very long term and contains provisions that are not rendered impossible by the temporary effects of Coronavirus.
You should also bear in mind that where frustration is called incorrectly, you may face a claim for a repudiatory breach of contract that could lead to the termination of the contract and exposure to a claim for damages. Careful consideration and advice are required before frustration should be alleged.
Pragmatism and collaboration may win the day
Now here is another thought. There is little point in having a watertight contractual case that secures you an entitlement that results in a commercial own goal. Insurance companies absolutely hate us to admit liability when we are at fault so we never do so. But you could consider sitting down with your client and your own supply chain, park up the arguments about whose fault this is and explore options to get through this crisis without spending large amounts of money on lawyers that can’t really solve your problems.
I had a client for many years who was extremely commercially aggressive. I used to say to him “If you had all the money in the world and the rest of us had none, you still wouldn’t be happy”. When he was nearing the end of his life, suffering with terminal cancer but surrounded by all his wealth, I think he realised that things could have been done differently. Perhaps it is time for an alternative approach and Coronavirus has certainly made me think differently. We have to take the good out of the bad when we can. Or perhaps I am just getting old and soft!