For the construction industry, the impact on a project due to a depleted work force and the subsequent delays onsite cannot be overstated. Lockdowns and delays in the supply chain could have serious financial implications for parties to a construction contract. As we step into this uncharted territory, our clients are now increasingly asking the question: what if we cannot perform our contractual obligations due to the coronavirus?
There are a number of important (but not exhaustive) points to consider:
1. The contract
Where you are unable to progress a project as a result of the coronavirus pandemic, you should discuss with your legal adviser as to whether your construction contract provides you with any relief from performance of your contractual obligations, and/or entitlement to recover loss and expense. In the first instance, you may wish to check whether your contract has a force majeure clause.
Is the coronavirus pandemic a force majeure event?
It is important to note that in Scots law, there is no legal definition of force majeure, although the term is commonly seen in construction contracts. A force majeure event is often considered to be an event which has occurred out with the control of the parties to the contract. The event must have prevented or delayed performance of the contract, and the parties must have sought to mitigate the event and their loss and expense.
If your contract contains a force majeure clause, your lawyer can advise you as to whether the coronavirus may be considered a force majeure event.These clauses are interpreted strictly by the courts, and therefore it is necessary to consider the precise interpretation of any clause with your lawyer before relying upon its terms.Force majeure clauses can provide comfort to parties that on the occurrence of a specified event, neither party will be liable for a resulting failure to perform their contractual obligations.
No force majeure clause?
If your contract does not contain a force majeure clause, you may wish to consider whether parties can seek relief through the common law doctrine of frustration. Frustration operates when a supervening event - that was not caused by the default of either party - significantly alters the nature of parties contractual obligations, to the extent that would be unjust to force the parties to perform the contract. A frustrating event will automatically relieve both parties of the duty to perform under the contract, and for this reason the courts will only consider that frustration has occurred in narrow circumstances. Arguing a contract has been frustrated should generally be the last port of call for parties, given the serious consequences of doing so.
Construction contracts may entitle contractors to an extension of time where a project is delayed due to a "Relevant Event", as defined under the contract. Contracts based on the JCT suite may make reference to Relevant Events such as civil commotion. Whilst the Covid-19 pandemic would most likely fall under force majeure, you may wish to discuss potential Relevant Events with your lawyer should you run into workforce difficulties due to Covid-19.
It would be prudent to contact your insurer in the first instance to put them on notice that you may suffer loss as a result of the Covid-19 pandemic. It is important to have these discussions with your insurer in early course, as the decisions of your insurer may impact upon your action plan. Given the often prescriptive nature of insurance cover, it is important to understand what your insurance policy will cover in these unprecedented times.
3. Commercial discussions
Whilst it is important to carefully review your contract and insurance policy, commercial discussions with the other contractual party may allow you to negotiate an agreed approach to the construction project, in light of the pandemic. Coming to a commercial agreement at this early stage can reduce the risk of a dispute arising further down the project.
Given the current uncertain climate, proper contract interpretation is crucial to protect your business. If you have any questions, please get in touch with our construction team.