Force Majeure in Construction contracts

A Force Majeure clause allows a party to suspend or terminate performance of their obligations under a contract where there has been an “act of God”, ie. an event outside of a party’s control. The law recognises that where an event arises outside of a party’s control, the party seeking to rely on the Force Majeure clause, who cannot now fulfil their contractual obligations, will not be liable for failure to perform.

Construction contracts

NEC3, JCT and FIDIC contracts have force majeure clauses. ICE does not.

Clause 2.26.14 of the JCT Design and Build Contract identifies ‘force majeure’ as a Relevant Event which would entitle the contractor to an extension of time and an event which would entitle either party to terminate the contract under clause 8.11.1. If an EOT is not agreed, you can adjudicate on this. Similarly, any issues in termination can be adjudicated.

It is not a Relevant Matter and therefore gives no entitlement to loss and expense.

NEC3 states The Coronavirus may be a Compensation Event pursuant to Clause 60.1(19). This Clause covers an event that:

• Stops the contractor completing the works at all or by an agreed date: and
• The event is one which neither party could prevent; and
• The contractor would have adjudged the event as having such a small chance of occurring that it would have been unreasonable for the contractor to consider it when they entered into the contract.

Most force majeure clauses require the party that is affected by the ‘event’ to give the other party notice and in the correct form.

It falls to the party seeking to invoke the force majeure clause to prove that the ‘event’ is sufficiently serious to be relied upon. It is therefore important that you gather your evidence to support your position, which currently should not be difficult.

The party seeking to rely on the force majeure clause is under a duty to mitigate or minimise their loss and to have taken all appropriate and reasonable steps.

Force majeure clauses usually outline the specific events which will be covered by their operation. Regarding the Coronavirus, if pandemic or epidemic is mentioned then a party is likely to qualify. If not, and the government brings in additional guidance and/or restrictions then you may also qualify.

It is likely that the force majeure event must be unforeseeable, otherwise it is taken as something that the contract should have covered and will not offer protection. An event caused by Coronavirus would meet this requirement if entered into before its impact was fully understood. For future contracts, the drafting needs to be considered very carefully.

The force majeure event must be the sole cause of the failure to perform an obligation. In the case of Seadrill Ghana v Tullow Ghana [2018] there was more than one cause of the default and therefore the force majeure clause did not operate. The party seeking to rely on the clause must demonstrate that performance is legally or physically impossible, not just difficult. Clauses that use the words ‘hinder and delay’ give a wider scope and will generally be satisfied if performance is substantially more onerous. However, a mere increase in the cost of performing the contract is unlikely to be sufficient trigger.

The Doctrine of Frustration

What happens if you do not have a force majeure clause? The doctrine may apply:-

‘A party is discharged from its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract or would render performance radically different.’

It can only be used in very narrow circumstances, If you do have an event that would qualify under the doctrine of frustration, recovery of any monies is governed by the Law Reform (Frustrated Contracts) Act 1954. Here, broadly, the party that suffers as a result of the frustration is entitled to have any monies that they have paid returned to them less any allowance which is to be deducted and assessed by the court.

Drafting

As set out above, if you are entering into a new contract, you need to properly consider incorporating a force majeure clause or even a specific Coronavirus clause.

You need to consider whether to make the Coronavirus or force majeure clause a ‘Compensation Event’ or a ‘Relevant Event’ or a ‘Relevant Matter’.

We can assist and advise on all issues that relate to Covid 19 affecting your construction contracts, projects and disputes.

Contact me on 01603 675639 or email ph@rogers-norton.co.uk.