September 26, 2020

Shutdown: Are you prepared if your project has to close because of coronavirus?

The coronavirus and Covid-19, the disease it causes, are spreading faster than can be tracked or tested and the construction industry is starting to be hit from the fall-out. On 11th March 2020 construction work on Google’s new £1bn headquarters in London’s King’s Cross closed to allow checks to be carried out by health authorities after a coronavirus outbreak. Many other projects are at risk of being disrupted. Here are some key points raised by Barry Hembling, Construction Partner at Watson Farley & Williams LLP, that projects must consider to ensure they are best placed for the coming period of uncertainty.


Contract Terms

Contract terms should be checked to understand the costs and/or time impact of disruption from coronavirus related issues. The starting point is to check for a force majeure clause, which is a clause that excuses non-performance from unforeseen events occurring after the contract was entered into. The event must be one beyond the parties’ control which makes contractual performance impossible. Although well drafted contracts include examples of force majeure events, not all contracts do so and this can lead to difficulties in interpretation. The recent reclassification of coronavirus by the World Health Organisation from an epidemic to a pandemic makes it difficult to argue that coronavirus is not the type of unforeseen event intended to be covered. Caselaw supports that view and it has been held that “epidemics are cases of force majeure”.[1]

Consequences of Force Majeure

Where a contract refers to force majeure, it usually sets out the consequences of such an event occurring, which usually involves excusing the obligation to perform. Some contracts permit relief from time but not payment of money, it all depends on the contract drafting. Time or costs will not necessarily follow just because a force majeure event has occurred. Any application must be judged on its merits and claims must comply with contract requirements. The party reviewing the claim must be satisfied that the event is likely to cause a delay to the completion date. An apportionment exercise could be carried out to identify the effect of the event with other causes of delay. It might also be relevant to consider whether all reasonable steps have been taken to avoid disruption or to reduce or minimise its impact. Parties should familiarise themselves now with what they need to do when making or reviewing a force majeure claim so they are prepared should a claim have to be made.

Suspension

In some cases there may be no alternative but for projects to suspend works. Unlike the practice being adopted in many service industries, it may simply not be possible to carry out physical works on site using split teams and health and safety may make suspension a necessity. To avoid works being suspended indefinitely, most contracts impose a limit on how long the works may be suspended. The period agreed usually varies according to the asset being built but two months is common. That may seem insufficient in the event of a prolonged period of uncertainty and so it may be necessary for the parties to agree to agree a longer extension. This is because if a suspension lasts for longer than the period specified in the contract, a right may arise that permits service of a notice requesting that the suspension is lifted. If the works do not recommence, a right to terminate could then arise.

Termination and Frustration

There is no general right to terminate a contract for a force majeure event but many clauses permit termination where an event continues for a defined period. Accordingly, termination clauses should be reviewed to understand the circumstances in which the contract may be terminated for force majeure events.

Parties may also be relieved of their obligation to perform on grounds of frustration. This is the principle where an event occurs after contract formation which makes the contract physically or commercially impossible to fulfil. If a contract has been frustrated then it is automatically discharged and the parties are excused from their future obligations. However, a party will bound to perform their existing obligations up to time of the frustrating event. If a party incurred obligations before the time of frustration, it remains bound to perform them and because no one party is at fault, neither party may claim damages for the other’s non-performance.

Insurance

Terms of relevant insurance policies should also be reviewed to assess the extent of available cover from force majeure events. Some policies may provide relief for physical and economic damage suffered as a result of a force majeure event. Project delays from the impact of coronavirus may also lead to delayed trading and the terms of any applicable policies ought to be reviewed. It is important to consider whether any policies may lapse in the event of a prolonged suspension of works. Some policies contain relatively short time limits which means coverage lapses after a set period unless agreed otherwise.

Funding arrangements

The terms of funding arrangements should be checked to clarify how they respond to force majeure events and project delays. It is important to ensure that any project monitor is kept up to date with development and understands the likely duration of any suspension of the works.

Conclusion

Even the best designed, planned, and constructed projects experience unexpected events which cause unexpected costs that no one party could reasonably be expected to bear. Force majeure clauses are a key means by which contracts adapt to events that the parties could not have foreseen when the contract as entered into. The drafting of clauses varies and the consequences of force majeure events may vary between contracts. It can be difficult to conclude what such clauses are intended to cover, especially where matters such as war, strikes, fire and weather have been expressly dealt with in the contract. Many projects will be impacted by coronavirus issues over the next few weeks. Parties can make sure they are best placed by understanding now how the contract will respond to unexpected events.

Barry Hembling, Construction Partner at Watson Farley & Williams LLP

[1] Lebaupin v Crispin [1920] 2 KB 714