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Covid 19: An international construction perspective – England & Wales27 April 2020

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This is the first of our five-part series covering the issues facing the construction industry in five different jurisdictions across the world in the face of the COVID-19 pandemic.

"The term “force majeure” does not have a specific meaning under English law, and there is no general right to suspend or terminate a contract for a force majeure event."

Force Majeure and Frustration

Under English law, in rare circumstances parties may be relieved of their contractual obligations and the contract discharged on the grounds of the common law doctrine of frustration. However, a contract will only be frustrated if an intervening act occurs after the formation of the contract which causes it to become impossible or if performance is rendered radically different from the originally contemplated obligation; the intervening act is not the fault of either party; and if the contract did not deal with this potentially frustrating event. A party will remain bound to perform their existing obligations up to the time of the frustrating event.

Alternatively, parties may have recourse to a force majeure provision. The term “force majeure” does not have a specific meaning under English law, and there is no general right to suspend or terminate a contract for a force majeure event. However, many standard form construction contracts include force majeure clauses, which typically provide for the suspension or termination of obligations in the event of a specified event occurring after the contract was entered into which was beyond the parties’ control. For example:

  • The 1999 FIDIC contracts define force majeure as an “exceptional event or circumstance” beyond the control of the parties, and refer to a non-exclusive list which includes war, terrorism, riot, radiation and natural catastrophes but not, expressly, a pandemic. In such circumstances a contractor will be entitled to claim an extension of time and, in limited circumstances, payment of costs incurred;
  • Meanwhile the JCT Design and Build Contract 2016 form provides that force majeure is a relevant event which may entitle a contractor to an extension of time. However, no examples of force majeure events are given. Similarly, the exercise by the Government of any statutory power that directly affects the execution of the works may entitle the contractor to an extension of time; and
  • Finally, under the NEC4 Engineering and Construction Contract a contractor will be entitled to an extension of time and compensation on the occurrence of a “compensation event” – an event which stops the contractor from completing works on time, which neither party could have prevented, and which an experienced contractor would have considered so unlikely to happen that it was not reasonable for them to have allowed for. The NEC recently issued guidance listing a major outbreak of a virus as the type of event that could fall within the definition.

Force majeure clauses are generally construed restrictively, and their interpretation will always depend on the precise wording used. Although the English courts have commented that “epidemics are cases of force majeure”,¹ where a clause does not specifically mention disease, epidemics or pandemics, it may be unclear whether the COVID-19 pandemic qualifies as such an event.

"Where a clause does not specifically mention disease, epidemics or pandemics, it may be unclear whether the COVID-19 pandemic qualifies as such an event."

Suspension

Most construction contracts impose a limit on how long contracts may be suspended as a result of a force majeure event. The period will vary according to the asset being built, but two months is common. This may well be insufficient in the current circumstances. If suspension lasts for longer than the period specified in the contract, a right may arise that permits service of a notice requesting that suspension is lifted, and if works do not recommence, a right to terminate could then arise.

Termination

As indicated, there is no general right to terminate a contract for a force majeure event, but many contracts permit termination where an event continues for a defined period. The impact of the COVID-19 pandemic may also result in another termination event arising under the contract. For example:

  • The 1999 FIDIC contracts provide for either party to terminate if a force majeure event continues for longer than the specified period;
  • The JCT Design and Build Contract 2016 form entitles a party to terminate if the works are suspended for longer than the specified period as a result of a force majeure event, and also as the result of the exercise by the government or other public or local authority of a statutory power that did not follow from the contractor’s default; and
  • The NEC Engineering and Construction Contract provides for parties to terminate in the event of the occurrence of a compensation event. In addition, the insolvency of the counterparty will entitle a party to terminate. Parties may also seek to argue that a contractor’s failure to comply with its obligations or an instruction by the project manager to stop works entitles them to terminate, but they should exercise care since such actions would be excused by any intervening compensation event.

"It is vital to consider whether any policies may lapse in the event of a prolonged suspension of works."

Practical advice

If parties are looking to seek an extension of time or (eventually) terminate for a force majeure event, caution should be exercised when serving requisite notices. Ensure that the appropriate formalities are complied with, and exercise particular care when it comes to service. It is also important to act promptly – contracts frequently include time bar provisions requiring notices to be served within a certain period of a party becoming aware of the relevant event.

Parties should also review the terms of their insurance polices to assess the extent of available cover for force majeure events. Some policies may provide relief for physical and economic damage suffered, as well as the effect of delayed trading. It is also vital 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 otherwise agreed.

Finally, the terms of funding arrangements should also 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 developments, and understands the likely duration of any suspension of the works.

 

Click HERE to see our articles focusing on the challenges faced by the construction industry in other jurisdictions

 

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

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