Such measures, to stop the spread of coronavirus, as well as problems posed by the failure of supply chains and the furloughing of labourers have had a significant impact on many contractors’ ability to fulfil their contractual obligations.
Where a delay has been caused as a result of Covid-19 there may, in limited circumstances, be relief granted to those contractors who have been unable to carry out their work.
- Standard JCT contracts include a provision for force majeure. While the JCT does not define force majeure, it is commonly understood to be an event or circumstances beyond the control of either party that render the contract impossible to fulfil, such as war, crime, or a global pandemic.
- Contractors can seek an extension of time under the force majeure clause provided there is a relevant event that was unforeseen and that directly affects the execution of the contract.
- Whether Covid-19 qualifies as a relevant event will depend on what awareness the parties had of it at the time of contracting, as the force majeure in question must be entirely unexpected and unforeseen.
- As such, contracts that have been affected by Covid-19 that were signed a long time prior to the pandemic are likely to be subject to the principle of force majeure, whereas contracts signed as recently as February 2020 when there was much greater awareness of the virus and its ramifications, may not.
- The contractor must prove that a delay has been caused by the unforeseen event and must have done everything reasonably possible to prevent the delay.
- Contractors are unlikely to be able to recover any losses they have incurred as a result of the delay from the instructing party.
- Under standard JCT terms, either party is entitled to terminate the contract if the works are delayed for 2 months by providing written notice to the other, though it is worth checking to see if this term has been varied in the initial drafting of the contract.
- Where performance of a contract becomes impossible due to no fault of either party, it is considered to be frustrated and the parties will be either be granted an extension of time to comply with the contract, or be released from their contractual obligations.
- Frustration differs from force majeure in that it is a common law principle that does not need to be expressly incorporated into a contract. There does not need to be a single relevant event but the issue effecting the contract must go to the root of the agreement and fundamentally change each party’s obligations from those that were intended when the contract was initially agreed.
- Frustration is difficult to prove and the courts will not entertain arguments from parties who have simply found the contract to have become a ‘bad bargain’. The unforeseen escalation of cost in completing a contractual obligation does not amount to frustration.
- Where the fault lies with either a supplier or a sub-contractor, the main contractor will not be able to make a case for frustration.
- Contractors should also note that if there is a way of completing their contractual obligations, even if it is not the means by which they had intended when finalising the agreement, then there will be no case for frustration.
- Therefore, absent of the imposition of stringent governmental restrictions on the construction industry, it is unlikely that many building and engineering contracts will be frustrated by Covid-19.
The effects of Covid-19 are now well known and so can no longer be considered unforeseeable.
Therefore it is very unlikely that arguments for force majeure or frustration will be successful in JCT contracts not yet signed, or those that were signed after the initial outbreak of Covid-19.
In order for parties to seek relief for Covid-19 related delays in any future contracts, express terms will need to be incorporated specifying the measures that should be taken. This may require precise legal drafting.
Considerations for drafting
The standard terms of JCT contracts can be adapted and it is in the both the contractor’s and the contractee’s interests to consider the possible difficulties they may face as a result of Covid-19 and ensure that these considerations are accounted for in any future contract.
Before entering into an agreement, both parties should consider the effect that Covid-19 may have on:
- Supply Chains – Will you be able to source all of the materials required to fulfil your contractual obligations and what contractual terms would need to be included should the necessary materials not be available?
- Labour shortages – Given regulations relating to social distancing, essential work and possibly the furloughing of staff by sub-contractors, will it be possible to hire the necessary labour?
- Governmental restrictions – What governmental restrictions are currently in place for your industry and how will this affect your ability to comply with your contractual obligations?
For contractors, to not include such provisions in the construction contract would leave them open to the risk of failing to carry out their contractual obligations with no avenue for relief.
As for the contractee, it will save them considerable time and expense in the long run to have pre-agreed mechanisms for dealing with these possible difficulties, rather than litigating over them after the fact.
How can we help?
Lupton Fawcett has a highly regarded Dispute Resolution department with considerable experience in the construction industry. If you have recently become entangled in a construction dispute as a result of Covid-19, we will be able to advise you and guide you through this complex and contentious area of the law, whether you are a contractee or a contractor.
If you are concerned your business has made errors in the uptake and administration of the coronavirus job retention scheme (CJRS) or are facing the prospect of a Furlough Fraud investigation by HMRC, our team of Furlough Fraud Investigation Solicitors can offer you tailored legal advice and specialist representation.