Posted 30 March, 2020 OBI BLOG
The outbreak of COVID-19 has caused many of us to examine contracts we are party to and ask the all-important question: What exactly is force majeure? What is covered by force majeure may well be vague and will be subject to interpretation. It would not be unreasonable to assume contractors and employers alike are concerned the effects of the pandemic could leave them high and dry. In a literal sense, force majeure means ‘superior force’. Yet in English law, force majeure is not a legal principle that can be implemented irrespective of what has been previously agreed by parties.
In construction we must look to the contract to establish liability. Fortunately, force majeure is widely included in standard forms of contracts, such as JCT (The Joint Contracts Tribunal). It is critical however to determine 3 factors;
1. If there is a force majeure clause,
2. What it lists as triggers of the clause, and
3. If these triggers are exhaustive.
One crucial factor to bear in mind is that a contractor must be able to prove they wouldn’t have been able to complete the job solely due to the circumstances that brought about the force majeure. They must have done all that was to be reasonably expected of someone in their position, had they not been affected. The impact could affect works, including supply chain difficulties, lack of workforce, inability to access site, or an inadequate cash flow. However, it is important to recognise that work on some sites can continue. If the site lends itself to allowing the workforce to work at a distance from one another, then they may still meet their contractual obligations. If a contractor did not make every effort to investigate reworking site labour allocation, then they would be at fault for the delay.
Limitations such as social distancing and working from home would not be regarded as a reasonable excuse to not complete a job to the expected standard. The work must be physically or legally impossible to complete, not just difficult or unprofitable.
So, contractual obligations cannot be executed due to Government instructions such as the lockdown Boris Johnson imposed on Monday, however if you are still covered by force majeure, what happens next? Well, the contractor will be able to apply for an extension of time, under a ‘relevant event’ jeopardising the delivery of the works. This would ensure the contractor is able to fulfil their obligations but under a revised period of time, whilst protecting them from the liability of paying out for liquidated damages.
But why does a relevant event fail to attract cost if the cost of overheads still needs to
met? The relevant matter mechanism allows for a contractor to claim back cost for a
situation that has come about from the client’s responsibility. Situations include but are not
limited to: failure to give the contractor possession of the site, failure by the client to provide
goods and materials, and discrepancies in contract documents. The differentiation
between these two mechanisms ensures the contractor can benefit from being afforded
time and cost if they face challenges through no fault of their own.
The impact of COVID-19 must be the only breach – it will not be sufficient for the relevant events claim if the contractor was not able to complete the obligations anyway.
But how will you as a client benefit from the contractor’s revised timescale? Put simply, if the circumstances occurred which were not the contractor’s fault, triggering force majeure, and there was no mechanism to extend completion date, then the contractor would only be committed to complete the works in a ‘reasonable’ time. The client would lose any right to liquidated damages, and lose all control over the timescale for delivering the project, which can incur costs that would have been covered under liquidated damages. It would ultimately be a lose-lose situation.
Extension of Time may be difficult to determine in a pandemic as the extent of the impact can be unpredictable. For instance, supply chains are recovering in China, but there are reports of a second wave. The client and the contractor should communicate some eventuality sequence ‘rules’ in the instance of relapse to save the effort of re-doing Extension of Time in instances of uncertainty.
What if I don’t want to invoke force majeure to protect the contractor from complications due to COVID-19? Frustration may still protect the contractor’s position, such as where completing a contract becomes illegal or the obligations are rendered impossible to what was previously agreed. Instead, accepting an Extension of Time would have benefitted the employer more.
Should you have any further questions or if you would like to discuss your particular situation, please contact a member of the OBI Building Consultancy Team.