Edge Consult’s Review of potential contractual issues for consideration
The impact of the Coronavirus outbreak on the construction industry’s supply chains and the availability of labour is something the industry is now becoming only too aware of.
As well as investigating effective health and safety systems and strategies for workers, building sites and the wider community, construction companies also need to consider the contractual implications for existing and future projects.
We consider below some of the relevant contractual considerations and risk management strategies which may be considered in the wake of the crisis. The following analysis focuses on the position under English law.
For construction companies the first thing is to appreciate the differing situation in respect of future contracts and those contracts that are already in place.
Prior to agreeing any future construction contracts, companies should consider inserting provisions to deal with the Coronavirus outbreak. Specifically, the contract or agreement needs to consider where the risk lies as a result of any delays to the works resulting from the outbreak. Key points to consider include: –
- If a main contractor delays a sub-contractor due to the outbreak, is the sub-contractor entitled to an extension of time and any resulting loss and expense?
- If a sub-contractor delays a main contractor due to the outbreak, can the main contractor recover any damages from the sub-contractor resulting from the sub-contractor’s delay?
- How will cash flow be dealt with, e.g. how will payment for fabricated materials stored off site be dealt with were the client/contractor to defer delivery to site due to the outbreak?
- If the works on site are suspended as a result of the outbreak, which party bears which costs resulting from the suspension?
- Even if the proposed contract has force majeure provisions, can these be relied upon?
Force majeure events are, broadly speaking, unexpected circumstances or an exceptional event outside of a contracting party’s reasonable control that, having arisen, prevent it from performing its contractual obligations.
However, given that both parties to the contract are now only too aware of the outbreak, you may be unable to rely on this provision as the circumstances are no longer unexpected.
It is most unlikely that the contract will have any specific provisions in respect of a potential virus outbreak. Therefore, affected parties should investigate whether their existing contracts make provision for force majeure and whether the outbreak falls within the protection offered by the relevant clause.
However, many sub-contracts do not incorporate force majeure provisions. Release from performance as a result of force majeure is not recognised as a standalone principle of English common law. It is therefore a matter for parties to deal with based on their contracts and the protection afforded by the clause will depend on the drafting.
As mentioned above, force majeure may cover an exceptional unforeseen event such as the current outbreak. However, where the parties entered into the construction contract after the outbreak first became known, it may not be possible to use force majeure.
If the outbreak constitutes a force majeure event under the construction contract, employers could be faced with main contractors (and contractors with sub-contractors and suppliers) claiming they are entitled to invoke provisions in their contracts for extensions of time and/or to suspend their performance.
However, even this may only protect the parties from liability to pay damages to their client. Depending on the drafting on the contract, it is most likely that the costs will lie where they fall, i.e. neither party can recover their costs from the other party.
Depending on the terms of the contract, there may be also be an obligation to mitigate the effects of the outbreak, for example sourcing materials or labour from elsewhere.
Can Frustration Be Used?
Under English law, if a contract becomes impossible to perform as a consequence of the outbreak, it may be argued that it has been frustrated and the parties are discharged from further performance of their obligations. However, it is likely to be very difficult to establish frustration in the current circumstance. Frustration cannot be used: (a) where the parties have contractually agreed the consequences of the event, e.g. use of a force majeure clause; (b) an alternative method of performance is possible; (c) because performance has become more costly or (d) because a party has been let down by a third party.
The following covers the key risk mitigation measures which construction companies may wish to consider in relation to their contracts: –
- Prior to entering into new construction contracts, understand the financial risks, highlighted above, and consider contractual arrangements to address these risks. Remember, both parties will need to agree to the proposed arrangements before a contract is formed.
- Check the terms of existing contracts for protection against the outbreak, including force majeure clauses. That would include contracts with both your clients and suppliers. If possible, the parties may wish to consider renegotiating and amending the contract to cover the outbreak. However, if the other party to the contract does not wish to renegotiate, the original terms and conditions will stand.