COVID-19: Managing construction contracts

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Commercial Article

24 April, 2020

Contractors concerned that they could face delays or increased costs as a result of COVID-19 should consider whether they have any express entitlements to relief under their contract. This article will consider the possible entitlements under JCT and NEC standard form contracts.

JCT

Force majeure typically excuses one or both parties from performance of the contract following the occurrence of events that are outside the parties' control. The term force majeure has no recognised meaning in English law therefore it is usually defined in agreements, with express reference to a list of events which constitute force majeure.

The JCT suite of contracts provides a list of "relevant events" which, if encountered, entitle the contractor to claim an extension for the completion date. Force majeure is listed as a "relevant event", however is not defined in un-amended JCT contracts. Parties should therefore check for a contractual definition in any schedule of amendments.

If no definition is provided in a schedule of amendments, parties will have to rely on case law for guidance as to its meaning. There are no reported cases testing the scope of force majeure in the context of JCT contracts, however, a case dating back to 1920 suggests that an epidemic may constitute a force majeure event. Furthermore, given that an epidemic/pandemic is not covered by other "relevant events", it would seem reasonable for contractors to seek to rely on the force majeure relevant event to cover such circumstances.

Contractors seeking an extension of time must notify the other party (or Architect/Contract Administrator where applicable) immediately stating the applicable "relevant event". Failure to notify may result in the contractor losing the entitlement. Contractors must also ensure that they have sought to mitigate the effects of the event, such as seeking alternative supply sources and complying with the newly published Site Operational Procedures.

The JCT works on the basis that there are separate regimes for determining the entitlement to time and cost. The effect of this is that if a Contractor successfully establishes an entitlement to an extension of time for COVID-19 related delays, they will not have to pay damages for delay, but they must bear any cost resulting from the delay.

Parties may also wish to consider their termination rights. The un-amended JCT contracts provide for termination by either party by reason of force majeure. The right to terminate will arise if the whole (or substantially the whole) of the uncompleted works is suspended for the period set out in the contract (the default position being two months). The party seeking to rely on force majeure to terminate should act with caution because if the event is deemed not to be force majeure, it could leave itself open to a claim for repudiatory breach of contract.

NEC

Whilst NEC contracts do not expressly refer to force majeure, they do entitle a contractor to an extension of time and compensation on the occurrence of a "compensation event" which: stops the contractor completing the works or from meeting a key date; could not be prevented by either party; and would have been unreasonable to expect the contract to foresee at the formation of the contract.

Contractors must notify the Project Manager of a potential compensation event withing 8 weeks of becoming aware of the event. This requirement is a condition precedent, which means that a failure to notify will mean that a contractor loses its entitlement to an extension of time and compensation. In addition, contractors must give early warning notices when they become aware of any matter which may affect time or money such as price increases, delaying completion or a key day, or impairing performance of the works. Failure to do so may limit the relief a compensation event will give.

For advice and assistance with understanding your position under existing contractual arrangements in light of COVID-19, or reviewing and updating your contracts to ensure their suitability contact John Pickervance, our Head of our Commercial department via email or phone on 0333 207 1134. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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