Coronavirus’s impact on construction contracts

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The coronavirus outbreak in China is causing disruption to the supply chain and commercial construction contracts internationally, David Weare, partner at law firm Fladgate, argues that while it may be a force majeure event, this is by no means certain

The recent outbreak of Coronavirus has been classified as a public health emergency of international concern by the WHO. The virus has started to affect economies as well as health authorities worldwide. In attempts to control the outbreak, the Chinese government has imposed restrictions on travel and has shut down factories which are considered “non-essential”. Such closures have placed a strain on supply chains and commercial arrangements internationally.

In light of this disruption, Coronavirus could affect your construction site, but who holds the risk of a disruption caused by Coronavirus?

If you had entered into an un-amended NEC 3 contract Coronavirus may be a Compensation Event under 60.1 (19). This clause covers an event which:

  • Stops the contractor completing the works at all or by an agreed date; and
  • the event is one neither party could prevent; and
  • the contractor would have judged the event as having such a small chance of occurring it would have been unreasonable for the contractor to consider it when they entered into the contract.

But what is the position under an unamended JCT contract?

Clause 2.26.14 of the JCT Design and Build Contract identifies “force majeure” as a Relevant Event which entitles the contractor to an extension of time and an event which entitles either party to terminate the construction contract under clause 8.11.1, but it is not a Relevant Matter and gives no entitlement to losses and expenses.

Force majeure in its most literal sense means “superior force” and is generally understood to cover an event or circumstance beyond the control of either party. However “force majeure” has no recognised meaning in English law, and if used without a definition is likely to present risks. A clause stating that the “usual ‘force majeure’ clauses shall apply” has been held void for uncertainty.

A force majeure event?

On the face of it, Coronavirus may be a force majeure event but this is by no means certain. Similarly, the common law doctrine of frustration which concerns events which are not the fault of either party rendering the performance of a contract impossible and discharges the parties from further obligations is uncertain not least because the courts have interpreted the doctrine of frustration narrowly.

Given the global nature of commercial business, parties should always consider how unpredictable and uncontrollable problems such as Coronavirus, will be dealt with in their contracts. Good legal drafting should provide a resolution for any such issue and this should now include unknown viruses or put another way Biological Contamination.

 

David Weare

Partner

Fladgate LLP

www.fladgate.com

Twitter: @fladgatellp

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