As the UK awaits to see the full impact of the Coronavirus, we are seeing an increase in enquiries from our clients in relation to what they can do to prepare from a contractual perspective. One area that is worth reviewing is whether there is a Force Majeure clause in your contract. We have set out a full discussion on Force majeure in our article Coronavirus: Contractual Considerations, which can be found here: https://www.prettys.co.uk/coronavirus-contractual-considerations
This article cover contractual considerations in Construction contracts.
What is Force Majeure?
The literal translation of force majeure is ‘superior force’.
It comes from the French Code Civil. Broadly, under French law, if an event interrupts the performance of a contract, such as to make it impossible for the contract to be performed, either wholly or in part, then the contract, or the relevant part of it, is extinguished or may be treated as suspended. English law has no equivalent, save perhaps the doctrine of frustration, which is touched on later.
Therefore, force majeure can only be introduced if it can be expressly agreed by the parties and set out as a term of the contract.
Construction contracts
NEC3, JCT and FIDIC contracts have force majeure clauses. ICE does not. Taking each in turn:
NEC3
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.
JCT Design and Build Contract
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.
However, it is not a Relevant Matter and therefore gives no entitlement to loss and expense.
Legal considerations regarding Force majeure clauses generally
Read the Clause carefully
It is important to read the clause carefully and take all appropriate and required steps. Most force majeure clauses require the party that is affected by the ‘event’ to give the other party notice. Notice normally must be given in a specific form. Ensure that you take the appropriate action.
Burden of proof
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 start to consider and gather your evidence to show that you qualify under the clause. Similarly, it is important if you are the party that is not relying on the clause that you test the evidence regarding any reliance on force majeure. The burden is likely to be significant.
Duty to mitigate
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. The case of Channel Island Ferries Limited v Sealink UK Ltd [1988] arguably implies mitigation into all force majeure clauses.
Not just for economic considerations
Force majeure will not operate to deal with simple economic or market changes. These are not regarded as force majeure events: see Thames Valley Power Limited v Total Gas and Power Ltd [2005].
Specific events
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. However, otherwise a party may be looking to rely on a catchall such as ‘matters beyond the party’s control’.
It is better to have it covered by an express clause. Broader clauses may suffice, however, the party seeking to rely on the clause may need to justify their position to the judge and this may add another element of uncertainty.
FIDIC
Clause 18 of the FIDIC Rainbow Suite 2017, refers to ‘exceptional events’ rather than ‘force majeure’.
In order to qualify the event must:
- be beyond the parties control;
- be an unforeseen event and could not have been provided against before the contract or avoided after it has arisen;
- not be the fault of the other party.
The Contractor must give notice in the proper form to the other party within 14 days of becoming aware of the event. The Contractor may be entitled to an extension of time and/or recovery of costs. If the prevent is prolonged, the option to terminate may arise.
Must be unforeseeable
Usually the force majeure event must be unforeseeable, otherwise it is taken as something that the contract should have covered and will not offer protection. One would anticipate that an event caused by Coronavirus would meet this requirement if entered into before its impact was fully understood. Going forward this may not be so clear-cut. It is therefore important to consider the implications of the Coronavirus at the drafting/negotiation stage going forward.
Only effective cause of default
Following the case of Intertradex v Lesieur [1978], it is an established proposition that a 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.
Prevent v Hinder and Delay
If a force majeure clause provides that the relevant trigger event must ‘prevent’ performance then the party seeking to rely on the clause must demonstrate that performance is legally or physically impossible, not just difficult or unprofitable (Tennants (Lancashire) Ltd v G.S. Wilson & Co Limited [1917]. However, this must be contrast with clauses that use the words ‘hinder and delay’. In these situations the clause is given 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.
Court takes a strict and narrow view
As force majeure is a French invention. The English Court takes the view that business is paramount and therefore it is reluctant to extend force majeure over and above the extent of the contractual term agreed. It therefore has traditionally a narrow and quite limited application under English law. It should therefore be used sparingly.
The Doctrine of Frustration
What happens if you do not have a force majeure clause? There is the English doctrine of frustration. It can be broadly summarised as:
‘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 and has been allowed incredibly sparingly by the English Courts.
For a Coronavirus event the bar may be set too high. A qualifying scenario, however, might be state intervention by way of quarantine or lockdown.
If you do have an event that would qualify under the doctrine of frustration, then your ability to recover 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.
Reliance on the doctrine of frustration is incredibly rare and should only be considered for the most serious of circumstances.
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.
If you have a NEC3 or JCT Design and Build contract in mind, you need to consider whether to make the Coronavirus or force majeure clause a ‘Compensation Event’ or a ‘Relevant Event’ or a ‘Relevant Matter’.
General points to consider are:
- an overview of the type of events that will trigger force majeure;
- whether the event must be in existence for a specific period before it can be triggered;
- how the force majeure event is to communicated i.e. notice and in what form;
- the obligations of both parties if a force majeure event occurs e.g. is the contract suspended, can either party claim from the other, whether the contract can be terminated (then or later).
Conclusion
In conclusion, reliance on force majeure is uncertain and even if it is mentioned in a contract, there is still a heavy burden of proof that must be met. It can in certain circumstances lead to termination of a contract and this may not be not be ideal if the contract is potentially lucrative or long term.
If you do not have a force majeure clause and are entering into a new contract, it is worth properly drafting and incorporating an express clause. The clause could seek to make the Coronavirus a Compensation Event under NEC3 or under JCT a Relevant Event or Matter.
Finally, it is worth keeping abreast of developments. If the government does bring in quarantine provisions, regulations or border closures, this may lead to it being easier to succeed in this area.
If you have any queries in relation to contractual obligations caused by the Coronavirus, please do not hesitate to contact Peter Blake, Graham Mead or Michael Booth on 01473 232121.
