5. März 2020
Construction projects are likely to be affected by the novel coronavirus outbreak. The nature and scale of any impact cannot be predicted accurately at this point, but labour and supply chain issues are increasingly foreseeable. What happens if it impacts your project?
If a construction contract lacks an express term allocating the risk of infectious disease outbreaks, such as COVID-19, parties will need to rely on other provisions, such as extension of time and loss and expense clauses, to understand who bears the risk. To illustrate, we have looked at how these clauses might operate under the commonly used JCT DB 2016 standard form. Other forms, including NEC, FIDIC and PFI contracts, will take different approaches.
A contractor may be entitled to an extension of time, and to avoid paying liquidated damages, if an excusable delay event occurs causing critical delay to the project. The list of excusable delay events (referred to as "Relevant Events") is set out at clause 2.26 and includes two which may apply during an infectious disease outbreak:
Under clause 8.11 of the standard form, either of these Relevant Events may also ultimately entitle the employer or contractor to terminate the contract if the whole or substantially the whole of the uncompleted works are suspended for more than two months (unless otherwise amended). Termination is a high risk option and the commercial implications must be considered very carefully.
The government has broad statutory powers under public health legislation and the Civil Contingencies Act 2004 which it can activate when an event or situation threatens serious damage to human welfare. It may prohibit travel at specified times or to/from specified places, requisition property or prohibit specified activities. Any such measures could have significant impact on a construction project and qualify as a Relevant Event, but a mere government recommendation may not.
This Relevant Event is useful if a delay event cannot be linked to the exercise of a statutory power. Conceptually, force majeure refers to exceptional and uncontrollable events outside of the parties' control, but the term is not defined either in the JCT or under English law.
There is a 1920 case that is likely to be useful, citing: "this term is used with reference to all circumstances independent of the will of man, and which it is not in his power to control … thus, … epidemics are cases of force majeure" (Lebeaupin v Crispin).
This case also suggests that force majeure covers more than just instances of uncontrollable natural forces in operation. Administrative interference, such as an embargo, may also be covered. Given the World Health Organisation says we are in "uncharted territory", delays caused by disease related waves of absences or supply chain issues caused by a foreign government could trigger this clause.
We would expect an adjudicator, arbitrator or judge to focus carefully on causation in the event of an extension of time claim in these circumstances. A claimant would need to prove that the Relevant Event actually caused the delay alleged. A contractor would face difficulties if the employer establishes the contractor was already causing delay, or the delay was only indirectly caused by the Relevant Event.
Under the standard form, a contractor is not entitled to recover loss and expense, such as prolongation compensation, simply because it obtains an extension of time. Instead, a contractor must separately establish a "Relevant Matter". The list of Relevant Matters is at clause 4.21 of the standard form, but an infectious disease outbreak does not fit in to any of these categories. This means that an employer is unlikely to be required to pay compensation under the unamended JCT contract, but a contractor should carefully check other provisions (such as fluctuations) or insurances (such as business interruption) in case recovery is possible through other routes. There is a clear risk of knock-on insolvency caused by disease related business disruption.
The UK government is keen to reduce the spread of the novel coronavirus whilst ensuring the country continues to run as normally as possible. We hope this allows parties to complete projects as planned whilst protecting vulnerable individuals.
If you think your project is exposed to risks arising from the outbreak of an infectious disease, check the contract and consider:
Every contract is different and much will depend on the specific wording used. Contact Jonathan Hutt or your usual Taylor Wessing contact to discuss this further.