COVID-19: Force Majeure under the JCT Design & Build 2016
The disruption caused by the coronavirus has accelerated over the past few days and the future impact of the outbreak remains uncertain.
There are already significant ramifications for construction firms continuing to deliver on contractually agreed commitments, but uncertainty remains over what will happen if contractors – many of which have continued their onsite work – participate in the wider lockdown by suspending operations, as some have already done.
Delays on a construction site are not an unusual occurrence, but the impact of COVID-19 is new. Where construction companies face delays due to staff or labour shortages, or difficulties with the supply of materials and plant, the client and contractor will need to consider the precise terms of their contracts to determine what relief is available.
Ambiguity of ‘force majeure’ definition
Under the commonly used JCT Design and Build contract 2016, two overarching principles apply. Firstly, the contractor carries the risk of time and cost for all matters within its control, and this includes how labour and materials are sourced; and secondly, the cost risk in relation to delay events is usually neutral, meaning the contractor will be granted an extension of time and released from delay damages, but will have no entitlement to recover losses or expenses.
The JCT identifies a number of events that allow the contractor to claim an extension of time. There are two provisions likely to be relevant:
- Clause 2.26.12: “the exercise after the Base Date by the United Kingdom Government […] of any statutory power […] which directly affects the execution of the Works”; and
- Clause 2.26.14: “force majeure”.
It is interesting to note that the JCT does not define what amounts to force majeure and the question on everyone’s lips is: “Does COVID-19 amount to a force-majeure event?”
In the absence of a contractual definition, the parties may eventually find themselves before an adjudicator or the courts to answer that question. The only steer given by the courts is that force majeure is commonly found to be an event beyond the control of the party seeking to rely on it, must not have been foreseeable at the date of the contract and must be the sole cause of non-performance.
Regardless of whether the country is on lockdown, it is arguable that COVID-19 fits the requirements of force majeure, but the contractor will need to address two questions: have they mitigated, and is force majeure the sole cause?
Entitlement to extra time is conditional on mitigation. The contractor must “constantly use his best endeavours to prevent delay […] however caused”. This is a key proviso and failure to mitigate may result in the contractor losing entitlement to an extension. If the delay claim rests on a lack of labour due to infected employees, for example, questions may be asked about the contractor’s business-continuity plan. Were adequate health and safety measures implemented on site to prevent the spread of infection? What alternative labour sources were considered?
The English courts in recent years have also reinforced the position that a force-majeure event must be the sole cause for a party’s non-performance. How this position sits within the context of concurrent events of delay has yet to be determined. The parties may find themselves entrenched in highly complex discussions.
The unamended JCT also gives the parties a nuclear option: termination. Clause 8.11 allows either party to terminate the contract for force majeure if “the whole or substantially the whole of the uncompleted Works is suspended for […] the continuous period” set out in the contract particulars, usually two months.
In the event of termination, the contractor will be required to vacate the site and issue a final account, to include the value of works carried out, any relevant losses and expenses, the costs of demobilisation, and cost of materials and goods ordered and legally bound to pay.
Any party seeking to terminate on this basis should do so with extreme caution. If the cause is not found to be force majeure (perhaps because the virus is not the sole cause preventing the fulfilment of contractual obligations), that party may be exposed to claims of repudiatory breach and liable for compensation.
Review contingency plans
As the situation develops, it is becoming more and more likely that emergency regulations will be enforced under the Civil Contingencies Act 2004, and construction sites could be shut down. In such circumstances there is the possibility of claiming an extension of time under the provision mentioned earlier, covering statutory powers. The contractor will still need to make efforts to mitigate, but it may be a lower burden to achieve.
As before, the JCT provision addresses only the issue of “delay”, not resulting costs and losses.
These are challenging times for every business. Parties should take time to review contingency plans, consider carefully the terms of their contract, and resist issuing premature notices.
The constructive way forward is to open up an early dialogue to find solutions to problems. This may be problematic where parties are already entrenched in disputes or delays.
This article appeared in Construction News on 27 March 2020.