© Pattanaphong Khuankaew
As I write this article, the UK remains in the grip of a virus that has stalled most construction projects. Up and down employers, contractors, subcontractors and suppliers reach into their filing cabinets to look for the contracts they have made and see where they are. Our phones were busy calling from anxious customers all week
“Am I entitled to an extension of the deadline and exemption from flat-rate damage?” And “What about the reimbursement of my additional costs?” These are typical questions that my colleagues and I were asked about construction contracts this week. So what are the answers?
As is so often the case, the starting point must be to use the terms of the contract to check where the risk of a construction site shut down by coronavirus actually exists.
Has your construction contract been affected by a change in government legislation?
The Coronavirus Restrictions 2020 (England) Regulation (“Coronavirus Act”) is a Statutory Instrument (SI) released on March 26, 2020 at 1:00 p.m. in response to the Secretary of State’s 2020 COVID-19 pandemic was enacted for Health and Welfare, Matt Hancock. Legislation gives the government extensive powers to restrict movement of people, prevent gatherings or two or more people, and make trading in many companies an illegal activity.
Unfortunately, building is not currently classified as an illegal activity. Even if your contract eliminates a delay due to a change in government law, Coronavirus law doesn’t help you prove a right to an extension of the deadline, let alone recover from any additional costs that may arise.
Has your construction contract been affected by force majeure?
Force majeure is a French term that means “superior force” and is a contractual clause that exempts a party from doing something they promised in a contract for reasons beyond their control. Force majeure is often referred to as an unpredictable “act of God” event.
A claim to an extension of the deadline due to force majeure usually requires two additional requirements – that the event was not foreseeable and that there are no alternative means of performance. A right to additional time or costs due to an event of force majeure cannot only exist because the fulfillment of the contract has become financially more difficult. Commercial difficulties do not mean force majeure.
However, since the World Health Organization has declared COVID-19 a pandemic, it is very likely that the requirements have been met. Most standard forms of contract provide for an extension of the deadline due to a force majeure event. However, all of this assumes that your contract contains a provision on force majeure. However, what if the provision has been deleted?
No clause on force majeure in your construction contract?
If your contract does not include a force majeure clause, the doctrine of frustration may come to your rescue.
The doctrine of frustration enables the performance of a contract in circumstances where an unforeseen event occurs that makes performance of the contract impossible. The purpose of the doctrine is to avoid injustice when circumstances have changed significantly, which neither party could foresee or for which they are at fault. It is believed that the current coronavirus outbreak and subsequent government guidance and legislation could cause the doctrine to apply to certain contracts.
In order to determine frustration, it is important to consider that the unforeseen event must go to the root of the contract and render performance impossible (or a performance that is significantly different from what was originally intended) and that neither party is at fault. When a frustrating event occurs, the contract is automatically terminated without the parties having to take any action.
While a very high threshold is generally required to determine frustration, in the current circumstances with a lockdown being carried out across the UK, the doctrine of frustration may well apply to some works contracts.
Whether or not a contract becomes frustrated depends on all relevant factors, including the terms of the contract and the actual background. Whether the current outbreak of the coronavirus makes it impossible to fulfill the contract is fact-specific. It is clear that it is not enough for the current outbreak to merely delay the fulfillment of an obligation or result in increased costs for the executing party.
According to English law, both parties are automatically released from further performance. The Law Reform Act (Frustrated Contracts) of 1943 sets out how a party can get back monies paid and receive compensation for valuable services performed before the frustrating event occurred.
It doesn’t always make economic sense to assert the frustration of a contract; For example, if the contract is very long-term and includes provisions that the temporary effects of coronavirus will not make impossible.
You should also keep in mind that if you are wrongly frustrated, you may be entitled to a negative breach of contract, which could result in termination of the contract and exposure to a claim for damages. Careful thought and advice is required before frustration should be alleged.
Pragmatism and collaboration can win the day
Here’s another thought. There is little point in having a watertight contract case that secures you a claim that leads to a commercial self-interest. Insurance companies absolutely hate that we admit liability when we are at fault, so we never do. However, you can sit down with your customer and your own supply chain, put together the case for their guilt, and examine ways to weather this crisis without spending a lot of money on lawyers who can’t really solve your problems.
For many years I had a customer who was extremely economically aggressive. I always said to him, “If you had all the money in the world and the rest of us didn’t have any, you still wouldn’t be happy.” As he neared the end of his life, suffering from terminal cancer but surrounded by all his wealth, he realized that things could have been done differently. Maybe it’s time for an alternative approach and coronavirus certainly made me think differently. We have to get the good out of the bad when we can. Or maybe I’m just getting old and soft!
chief Executive Officer