Coronavirus and Force Majeure Clauses: Points for Employers and Contractors to Consider

24th Mar 2020

As the World Health Organisation declares the Coronavirus, or ‘COVID-19’, now to be a pandemic, many involved in the construction industry are fearing that its effects on projects and businesses may be catastrophic.

The areas where it is currently predicted the pandemic may have the most adverse effects are materials and equipment supply chains, leading to suppliers, sub-contractors and contractors defaulting on their respective contractual obligations, and projects falling into delay. Government or local authority restrictions, whether under existing Public Health legislation (such as the Public Health (Control of Disease) Act 1984) or under emergency legislation, such as the new Coronavirus Bill expected to become law in the UK imminently, could lead to project sites being shut down.

Where then does this leave the commercial parties, and in particular at what point can extreme circumstances justify a person from suspending performance or withdrawing completely from further honouring their contractual commitments?

The unhelpful answer is that it depends: it depends on the terms of the relevant contract; on the governing law of the contract; and on any material legislation which already exists or which may be enacted as the current situation develops.

If one takes England, Wales and Northern Ireland first (Scotland has its own construction-related laws) the point to take on board immediately, and which may surprise some, is that, absent express contractual provision, force majeure is not a recognised legal doctrine which excuses or dilutes performance obligations. Indeed, the term is not even recognised as a legal term of art in English law.

That said, some contracts in use in England do expressly legislate for force majeure. So the JCT SBC 2016 form, which is in common use on large Employer-designed projects, does provide that force majeure is a Relevant Event for the purposes of extension of time. However, the contract does not define the term.

So would the effects of the pandemic qualify as a force majeure event in the first place? English law authority on the question is scant, although it was said obiter in Clifford Gardner v. Clydesdale Bank Limited [2013] EWHC 4356 (Ch) that a “flu pandemic” was an event of force majeure. A downturn in the financial markets is not, however, an event of force majeure: Tandrin Aviation Holdings Limited v. Aero Toy Store LLC [2010] EWHC 40 (Comm) and nor is the fact that the contract has become more expensive to perform: Thames Valley Power Ltd v. Total Gas & Power Ltd [2006] 1 Lloyd’s Rep. 441. Where there is contractual provision allowing extension of time for force majeure , the contractor must prove a causal link between the force majeure and the delay to the works: this may be straightforward where its workforce is required to self-isolate, but less straightforward where its supply chain is interrupted.

If the contractor can prove an event of force majeure, the consequences under the standard forms typically provide for an extension of time rather than a right to cancel the contract altogether, as set out for example under clause 2.29.15 of the JCT SBC 2016. The contractor will need to show that it has taken reasonable steps to avoid or mitigate the event or its consequences: clause 2.28.6.

The NEC forms of contract do not use the term force majeure, though the Guidance Notes describe Clause 60.1(19) (which lists Compensation Events) as being such a provision. A pandemic may fall within Clause 60.1(19) if it stops the contractor from completing the works by the agreed completion date, if neither party could prevent it, and an experienced contractor at the contract date would have judged the event to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it. A contractor is entitled to both an extension of time and loss and expense in the event of a Compensation Event.

If force majeure is not provided for in the contract, and there is no other provision which would govern, a possible resort is to the doctrine of frustration. However, the doctrine is of narrow application and essentially requires such a change of circumstances that performance of the contract would be physically or legally impossible, or would be rendered radically different from that which was promised.

By way of example, an indefinite delay ordered by the Minister of Munitions under the Defence of the Realm Act 1914 was held to have frustrated a contract between a statutory authority and Contractors: Metropolitan Water Board v. Dick Kerr & Co [1918] AC 119 (HL). In effect, the contract in Dick Kerr became legally impossible to perform, though it is possible that “abnormal” delay could also be sufficient to frustrate the contract, if that delay “were so differing in degree and magnitude from anything which could have been contemplated” (Sir Lindsay Parkinson & Co Ltd v. Commissioners of Works [1949] 2 KB 632).

In the current situation, it might be that an order to close site premises under the Public Health (Control of Disease) Act 1984 would lead to a similar result, assuming, of course, that the relevant contract did not itself provide for the event, in which case the contractual provision would prevail. In fact, clause 2.29.13 of the JCT SBC 2016 form would appear to cover this under the “exercise of a statutory power” provision. Similarly, under the government’s proposed Coronavirus Bill, Schedule 21 confers powers on the Secretary of State to close premises or impose restrictions on persons entering or remaining inside them, for the purpose of preventing, protecting against, delaying or otherwise controlling the incidence or transmission of coronavirus.

It should be noted that from the contractor’s point of view, vis-å-vis the Employer, the contractual ‘protection’ may be less advantageous than being able to claim frustration.

Looking at projects and contracts with an international dimension, either because of their location or governing law clause, the situation may be more complicated, and also more unpredictable.

In Hong Kong, projects subject to the HKSAR General Conditions of Contract for Building Works (and similarly the GCC for Engineering Works) contain a ‘Special Risks’ provision covering matters such as war and terrorism, but nothing which would appear to cover a pandemic, and no force majeure clause.

For projects proceeding under the FIDIC Red Book, the first thing to note is that force majeure is indeed a recognised term of art. The Red Book (2017) defines “Exceptional Events” in Clause 18.1 as an event or circumstance which is beyond a Party’s control; which the Party could not reasonably have provided against before entering into the Contract; which having arisen, could not reasonably have been avoided or overcome; and which is not substantially attributable to the other Party (this is Clause 19 under Red Book 2005). There follows a list of examples in Clause 18.1(a) to (f), including war, terrorism, riots, strikes and natural catastrophes, but nothing which would appear to capture a flu pandemic. If an Exceptional Event occurs, the contractor is entitled to an extension of time and, in certain of the cases listed in Clause 18.1(a) to (f), to payment of its costs. Further, under Clause 18.5, a delay of more than 84 continuous days, or multiple periods which total more than 140 days, gives either party the right to terminate the Contract.

Clause 8.5 of the Red Book also provides for an extension of time in the event of “Unforeseeable shortages in the availability of personnel or Goods … caused by epidemic or governmental actions”. It is not clear what ‘epidemic’ means in this context, but the dictionary definition, “a temporary but widespread outbreak of a particular disease” is a sensible starting point.

In many civil law jurisdictions, contractors and employers will also need to be mindful of any mandatory provisions of the Civil Code governing unforeseen circumstances. For example, in the UAE, Article 249 of the Civil Code may entitle the contractor to relief in the event of “exceptional circumstances of a public nature”. In such a case, the judge “may reduce the oppressive obligation to a reasonable level if justice so requires”, provided the party seeking relief is not at fault. Whether a pandemic would qualify as such an exceptional circumstance, and quite what the level of relief might be, are open questions. In South Korea, a contractor may not be held liable for a claim if performance has become impossible, so long as this was not caused by his own negligence: Article 390 of the Korean Civil Code.

Of course, not all civil law jurisdictions have the same laws or approaches to legal issues. Thus in the People’s Republic of China there is little or no distinction between drawn between frustration and force majeure, and because the PRC Courts have the power to vary a contract if they consider it fair to do so, there is considerable scope for uncertainty.

What can and should a party adversely affected by COVID-19 be doing now?

Governments and public authorities across the globe are saying that “we are all in this together”, a mantra last heard in the aftermath of the 2008 financial crash, and which some think turned out to be a somewhat hollow catchphrase. But although comradely words do not have the force of law, there is much to be said for those commercial parties who are being or expect to be adversely affected by the pandemic to start a dialogue now with their opposite contracting parties as to how the risks being posed by the situation can be managed. This may lead to compromise, creative thinking or at least the taking of ameliorating steps (on both sides) at an earlier stage, leading to better outcomes. It should in any event be accompanied by maintaining a religiously detailed paper trail – often invaluable if disputes arise at a later date.

It should also be remembered that onerous notice provisions may be applicable to events upon which reliance is to be placed and NOM clauses should not be disregarded. Indeed, parties need to be clear when making concessions in a spirit of cooperation quite what is being offered and on what terms, lest at a later stage issues of waiver or estoppel are raised against them.

Andrew Goddard QC and Mischa Balen.

Subscribe Now

Sign up now to receive our latest news, legal insights and information on upcoming events.



Related Juristictions