Is coronavirus a Force Majeure event?
The COVID-19 pandemic has serious and long-lasting implications for current and future construction projects. Many practices will be scrutinizing their contracts in order to clarify their own liabilities and those of contractors and clients.
Whether or not COVID-19 constitutes a Force Majeure event is a key consideration. A Force Majeure clause sets out the rules that apply when an external event – outside the control of the parties to the contract – gets in the way of performance of the contract.
There is no standard definition of Force Majeure in English Law, so the rules that will apply are, quite simply, those set out in the contract. The ability to invoke Force Majeure will always depend on the drafting of the clause and the individual circumstance.
“A Force Majeure clause makes clear where the risk of the ‘unexpected event’ sits,” explains RIBA Specialist Practice Consultant Kai von Pahlen, a construction lawyer at VWV.
“If the contractor/supplier is excused from liability for failing to perform its obligations, the recipient of the goods/services is taking the risk of those obligations going unperformed”.
Most construction contracts contain express provision for adjustments to the completion date to be made in certain circumstances, including a Force Majeure event. Typically, these provisions allow the contractor to claim an extension of time to complete the works. An example of this is clause 2.29.15 in JCT form SBC 2016: this makes reference to Force Majeure but leaves it undefined.
If a Force Majeure event is prolonged beyond a specified length of time, one or both of the parties may be entitled to terminate the contract, but possibly with conditions attached.
For example, JCT forms SBC 2016 and DB 2016 both provide that if an event of Force Majeure causes work to be suspended for longer than the period stated in the Contract Particulars (the JCT default is two months), either party may choose to terminate the contractor’s employment.
Some Force Majeure clauses list the types of event to which they apply. If an epidemic or pandemic is not on the list, the clause may still be activated where the coronavirus outbreak is the cause of events that are on the list, such as travel bans or other government restrictions that prevent people from carrying out work. The party looking to be excused would normally have to show that such events have impacted on its ability to fulfil obligations.
Von Pahlen stresses that this is where a detailed look at the drafting of the Force Majeure clause is essential.
“For example, if the clause requires a party to be ‘prevented’ from carrying out their obligations, rather than merely ‘hindered’, then a management decision to not provide a contracted service in order to reduce the spread of coronavirus may not be sufficient to satisfy that test."
However, if the decision is effectively taken out of the contractor’s hands, such as a government mandate to slow the spread of the virus, the Force Majeure clause will very probably apply.
“There might be a whole range of circumstances in between, which will require careful interpretation of your contract. These could include a contractor who is unable to carry on with the works because employees or sub-contractors are ill, or self-isolating because they have symptoms. It will always depend on the exact drafting of the clause and the specific situation.”
Von Pahlen advises several practical steps that practices should immediately consider:
Make sure you understand your position
Where you think that you, your contractors, consultants or your suppliers may be unable to perform contractual obligations as a result of the coronavirus situation, those contracts should be reviewed. This will allow you to identify your risks and put in place appropriate mitigation.
Consider what insurance cover you have
Some insurance policies may cover losses associated with the impact of coronavirus. You should consider whether your insurance covers those circumstances. If it does, you must ensure you comply with any notice provisions and other requirements.
Engage pragmatically with contract counterparties
In many cases, the application of a Force Majeure clause to the particular circumstances facing your organisation may not be clear cut. Practices are strongly advised to engage pragmatically with contract counterparties about how the situation can be managed most effectively.
Review your contractual dispute resolution process
If you are concerned that you might end up in dispute with a counterparty, review your contract to see what steps you may be required to take to seek resolution. You should ensure that you are familiar with these steps and follow them where necessary.
The coronavirus situation is developing rapidly and there could come a point where more and more Force Majeure clauses are invoked by contractors and suppliers, even though neither party may have given those clauses much thought when the contract was drafted just a couple of months or even weeks ago.
Thanks to Kai von Pahlen, Associate, VWV.
Text by Neal Morris. This is a Professional Feature edited by the RIBA Practice team. Send us your feedback and ideas.
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