Christopher Dickson: Coronavirus – is there a contractual cure?
CMS senior associate Christopher Dickson discusses the effects of the coronavirus outbreak on construction contracts.
While the worst effects of the coronavirus outbreak have so far largely been felt in China, the escalating number of confirmed cases reported in Italy over the past few days has continued to keep the outbreak in the headlines of the UK news. Despite there having been relatively few confirmed cases in the UK so far, the knock-on effects of the outbreak have been much wider spread. From a construction industry perspective, the impact of the outbreak on an ever-increasingly globalised supply chain is now starting to become prevalent.
We are already providing advice to clients concerned about the contractual implications of the outbreak. This typically involves giving consideration as to whether the coronavirus outbreak is a “force majeure” event under the relevant contract, which may give the parties relief from performance of their contractual obligations and ultimately a right to terminate such obligations.
In Scots law, there is no freestanding concept of force majeure. Although the term is frequently used and understood when describing an unforeseeable event outside the reasonable control of either party, whether an event properly constitutes force majeure ought to be defined by and dealt with in accordance with the relevant contract terms.
The SBCC standard building contract 2016 edition lists “force majeure” as being a Relevant Event (giving the Contractor a potential entitlement to an extension of time) under clause 2.29.15. The term is not however defined and force majeure is not a Relevant Matter which would give the Contractor a potential entitlement to recover its loss and expense.
The Contractor must formally notify the Architect or Contract Administrator pursuant to clause 2.27 where the Contractor considers it is entitled to an extension of time. The matter will then fall to be decided by the Architect or Contract Administrator under clause 2.28 (where in the event of a Relevant Event and the completion of the Works being likely to be delayed beyond the Completion Date, a fair and reasonable extension of time shall be given).
Force majeure is also a potential termination event. Under clause 8.11, if there has been an occurrence of force majeure which has prevented the carrying out of the whole or substantially the whole of the uncompleted works for the period of time set out in the Contract Particulars (2 months being the default position), then either party may give notice that unless the suspension of such works has ceased 7 days after such notice has been received by the counterparty, then the Contractor’s employment under the contract is to be terminated.
Although “force majeure” is not a defined term in the NEC4 suite, both NEC3 and NEC4 contracts provide defined criteria firstly to establish whether a force majeure type event has occurred and secondly the contractual implications which flow therefrom. The NEC contract guidance notes make clear that the relevant contractual provisions are to address the occurrence of force majeure events.
Taking the NEC4 engineering and construction contract (ECC) as an example (and with reference to clauses 19.1, 60.1(19) and 91.7 in particular), there are essentially 3 criteria which require to be satisfied for such a force majeure event to be deemed to have occurred. These are that the event must:
- either have stopped the Contractor completing the works, or stopped the Contractor completing the works by the date shown on the Accepted Programme;
- not have been capable of being prevented by either party; and
- an experienced Contractor would have judged at the Contract Date to have had such a small chance of occurring that it would have been unreasonable for the Contractor to have allowed for it.
Clause 19.1 requires the Project Manager to give an instruction as to how such force majeure event is to be dealt with. Such an instruction may result in either a change to the Scope, or stopping the work, both of which would be “compensation events” under the contract giving the Contractor a potential entitlement to additional time and/or money. In any case, the mere occurrence of the force majeure event is a compensation event under clause 60.1(19). It is essential that the Contractor notifies the Project Manager of a potential compensation event for the occurrence of a force majeure event as under clause 61.3, if the Contractor fails to do so within 8 weeks of becoming aware that the event has happened, the Contractor loses its entitlement to any additional time or money. In addition, the Contractor should also be issuing an early warning notice under clause 15.1.
Unlike the SBCC position where either party has the right to terminate on the occurrence of force majeure, clause 91.7 of the NEC4 ECC only allows the Client the right to terminate where a force majeure event is forecast to delay completion of the whole of the works by more than 13 weeks. That said, a bilateral termination right does exist in the event that the parties have been released under law from further performance of the whole of the contract. However, it may be difficult for either party to rely on this as an unchallengeable right to terminate where for example legislation has been implemented which would only affect performance of the contract on a temporary basis.
Conclusion and practical tips
Although both the SBCC and NEC forms contain provisions intended to deal with the occurrence of events such as the current coronavirus outbreak, they go about things in a different way. On balance, the NEC position appears more favourable from a contractor’s perspective (in that both time and money are potentially recoverable), although a bilateral right for termination as a result of the occurrence of the force majeure event alone only exists in the SBCC form.
Other construction contracts, whether bespoke or standard form, will take variable approaches to force majeure events. In any event, we would recommend always taking the following steps in dealing with a possible force majeure event:
- review the terms of the relevant contract – be aware of contract amendments! There will usually be specific processes to be followed under the contract, including the service of notices, when dealing with a potential force majeure event;
- consider whether there is anything you can do to mitigate against the effects of the force majeure event;
- keep detailed records of what has happened and how you have been affected from both a time and monetary perspective. These will help in substantiating any claim for additional time and/or money which may flow from the occurrence of a force majeure event; and
- consider a negotiated solution. Contract terms will not provide an appropriate answer to every possible event and where parties are prepared to act reasonably, it may be that a mutually acceptable way ahead which is not in the contract can be agreed.