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Wed July 15 2020

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Coronavirus and the JCT construction contract

5 May Claims consultant Arbicon offers some timely advice.

The Covid-19 pandemic has closed sites across the UK. Where does this leave contractors bound by JCT contracts?

The effects of coronavirus and the resulting construction project shutdowns have the potential to be devastating for the construction industry as margins are always tight and cashflow is paramount.  

If the money does not trickle down through the supply chain and none can be earned, contractors’ cashflow will grind to a halt and insolvencies will follow. The position will be more acute if a blanket ‘lock-down’ is imposed and contractors have numerous projects shut down. 

The various JCT contract suites make no mention of what happens in the event of a global pandemic shutting down projects around the world. So what commercial problems will construction contracts face and how can the contract deal with this unprecedented situation?

The kind of problems that can be predicted include lack of progress, supplies and labour shortages, site closures and ultimately cashflow difficulties that could lead to bankruptcy. The unpredictable problem is not knowing how long the crisis will last.

The most obvious impact of coronavirus is construction site closure or project delay. If the paying party with which the contractor is engaged will not accept delay, closure or suspension of all work by agreement – then what can the contractor do?

The JCT contract forms are similar throughout and contain ‘Extension of Time’ and suspension provisions.  Using the JCT Design & Build 2016 contract as an example, clause 2.24 demands that a delay notice be submitted and in that delay notice a ‘Relevant Event’ must be cited and ‘if practicable’, or soon afterwards, provide an estimate of any suspected delay.  

Clause 2.26 provides a definition of ‘relevant events’.  The applicable ones are likely to be:

2.26.12 – “the exercise after the Base Date by the UK government of any statutory power which directly affects the execution of the Works”.

2.26.14 – force majeure

In the first case, under a nationwide ‘lock down’, the government can force construction sites to close using statutory powers. In the absence 
of an agreement between the parties to suspend the works, this event is relevant and will entitle the contractor to an extension of time. 

In the second case, the concept of force majeure varies by civil jurisdiction. In English law, force majeure is not defined, either in statute or under case law and, notably, the JCT does not provide any contractual definition of force majeure either.

Typically, an event of force majeure is an event that is beyond either party’s control, not attributable to either party, and could not reasonably have been foreseen, avoided or overcome.

Will the coronavirus amount to force majeure? At the time of writing, there are no reported cases of the scope of the force majeure term being tested in respect of a JCT contract. As such without the JCT providing a contractual definition and without legal precedent, the full scope of the force majeure provisions and how this applies to the coronavirus crisis may require determination by future case law.

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However, guidance may be identified in the 1920 case of Lebeaupin v Crispin which suggests that an epidemic may constitute a force majeure event:

“Force majeure. This term is used with reference to all circumstances independent of the will of man, and which it is not in his power to control... epidemics are cases of force majeure…”

As such it certainly appears reasonable for contractors to turn to the force majeure relevant event in respect of the effect of the Covid-19 pandemic. 

If the works are suspended by agreement or otherwise, just be aware that JCT contracts contain rights to terminate by either party if the period of suspension is prolonged. 

In the JCT Design & Build 2016 contract, clause 8.11 allows termination on seven days’ notice after the expiry of the “relevant period of suspension” (found in the articles section under 8.11.1.1 to 8.11.1.6) which, if left blank, is two months by default.  

If this has been left blank, either party can terminate the contract on seven days’ notice after two months have expired for both instances of government intervention/shutdown and force majeure (should the coronavirus be accepted as such). 

Despite the world apparently closing down around us, contractors must be careful not to simply walk off site. Were a contractor to do so, the paying party could raise an argument that this constitutes a ‘repudiatory breach’ of the contract. Termination with damages could then be claimed. It is therefore strongly advised that the contractor negotiates any shutdown with the paying party or serves it with the appropriate notice.

Where an extension of time is granted after the coronavirus crisis is over, the contractor will not suffer any liquidated damages. However, any costs incurred due to the disruption and delay will not be recoverable by the contractor since a government lock-down or force majeure event is cost-neutral – in other words, it is nobody’s fault.  

In the case of termination of the contract, the contractor must vacate the site and submit a final account to include the value of works carried out, any relevant losses and expenses, costs of demobilisation and any materials and goods ordered and legally bound to be paid for.  

The employer makes an assessment and a payment, if applicable, within 28 days of receipt of the accounts from the contractor.  A formal settlement agreement is recommended here to avoid dispute. 

In the current climate, with businesses, schools, places of entertainment and many construction sites forced to close a significant number of construction projects are bound to be delayed, suspended or even cancelled. 

Such eventualities take us into uncharted territory and are likely to test provisions in construction contracts in a way they haven’t been tested before.

This article was first published in the April 2020 issue of The Construction Index Magazine 

UK readers can have their own copy of the magazine, in real paper, posted through their letterbox each month by taking out an annual subscription. Click for details.

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