COVID-19 and the Construction Industry
The outbreak of COVID-19 saw output in the UK’s construction industry plummet by 45.2% from March to April 2020. As an industry that contributed almost £117 billion to the UK economy in 2018 and provides 7% of all jobs, the disruption of the construction industry due to COVID-19 has far-reaching implications not only on the economy but also on the livelihood of millions of workers.
For construction companies and property developers, COVID-19 similarly presents challenges in the form of disrupted supply chains and timelines. As time is often of the essence in construction contracts, this increases the risk of contractors failing to meet their obligations to project owners, potentially leading to costly litigation proceedings. Thus, provisions that provide relief from contractual obligations in such extraordinary circumstances are of great importance. These include the contractual provision of material adverse change clauses (usually found in M&A), the contractual provision of force majeure clauses, as well as the residual common law doctrine of frustration. This article will examine the role of force majeure clauses in the construction industry, the interpretation of COVID-19 as a force majeure event, and the challenges surrounding reliance on force majeure clauses.
What is Force Majeure?
With its roots in the French Civil Code, force majeure (French for “superior or irresistible force”) is a term used to describe an event beyond the control of parties which prevents them from being able to fulfil their contractual obligations. While there is no exact legal definition of force majeure under common law, a force majeure clause will usually set out a list of events that qualify as force majeure events, explain the consequences of any of those events, and may set out what happens to payments made and services delivered before the force majeure event. Common force majeure events include the outbreak of war, natural disasters, acts of terrorism, and acts of God. Whether a pandemic like COVID-19 would constitute a force majeure event is tenuous and will be explored later in this article.
Notably, the general interpretative approach towards force majeure in the common law is one of strict contractual interpretation. The common law will not infer a force majeure clause where one does not exist, and neither will it allow events to trigger the force majeure provision unless it is expressly contracted for. This was made clear by Hamblen J (as he then was) in Tandrin Aviation Holdings v Aero Toy Store LLC and Insured Aircraft Service, Inc [2010] EWHC 40 (Comm) at [43], “Whether a force majeure clause in a contract is triggered depends on the proper construction of the wording of that clause; 'force majeure' is not a term of art.”
Standard Force Majeure Clauses in the Construction Industry
In the UK, several standard forms of contract exist for use in the construction industry. These include international standards provided by the International Chamber of Commerce (“ICC”) and the International Federation of Consulting Engineers, and domestic standards provided by the Joint Contracts Tribunal (“JCT”) and the New Engineering Contract. The following paragraphs set out how force majeure is defined by the ICC and JCT to compare their differing clarity in defining the concept.
ICC Force Majeure Clause
In March 2020, the ICC updated its force majeure clause to account for COVID-19. The Long Form clause defines force majeure as: an event or circumstances that prevents or impedes a party’s performance of contractual obligations and (a) the impediment is beyond reasonable control, (b) could not reasonably have been foreseen, and (c) could not reasonably have been avoided or overcome. While this definition is non-exhaustive, a list of presumed force majeure events is also provided, within which “plague, epidemic, natural disaster or extreme natural event” is found.
Hence, a COVID-19 situation would fall under its scope, allowing an affected party to rely on it for relief. However, the extent to which COVID-19 “could not reasonably have been foreseen at the time of the conclusion of the contract” may be disputed between parties given that this clause was updated in March 2020, when COVID-19 had already spread internationally.
JCT Design and Build 2016
The JCT standard form contracts are the most common standard form construction contract used in the UK, accounting for about 70% of UK projects. Specifically, the JCT Design and Build 2016 (“JCT DB16”) is the most commonly used building contract.
Under the JCT DB16, force majeure is a Relevant Event, but not a Relevant Matter. The former entitles the contractor to claim additional time, while the latter entitles a claim of additional costs. While it refers to it, JCT does not define force majeure and, interestingly, does not include the ‘foreseeability’ criteria.
Without a clear definition of force majeure provided, it may fall to case law such as Lebeaupin v Richard Crispin and Company [1920] 2 K.B. 714 to define it. In that case, McCardie J approved the application of the following meaning of force majeure, as originating from French law, to English law contracts: “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…thus war, inundations and epidemics are cases of force majeure; it has even been decided that a strike of workmen constitutes a case of force majeure.”
Does COVID-19 Constitute a Force Majeure Event?
It depends. If the force majeure clause in question expressly provides for “pandemic”, “epidemic” or “disease” as force majeure events, then COVID-19 may be more clearly within its scope. However, if no such express provision is included, there has been some confusion regarding whether COVID-19 would constitute an ‘act of God’.
Definition of ’act of God’
Based on Nugent v Smith [1976] 1 CPD 423 (“Smith”), an ‘act of God’ must be (a) exclusively of natural causes, (b) of an extraordinary nature, and (c) such that it would not be anticipated or provided against by the party seeking to rely on it. In Smith, for an act to be deemed of natural cause it had to involve “elementary forces of nature unconnected with the agency of man or other cause”.
By this definition, it may be tenuous to claim that COVID-19 is exclusively of natural cause given that the spread of the pandemic from person to person is heavily intertwined with the movement and agency of man. Hence, COVID-19 may not constitute an ‘act of God’.
Alternative Means of Relying on Force Majeure
Just because COVID-19 itself is not explicitly provisioned for in the construction of a force majeure clause may not preclude an affected party from seeking to rely on it. Several second-order effects of the pandemic, such as governmental lockdowns, movement restrictions, and transportation bans, may allow affected parties to claim relief under the force majeure clause or other provisions in the contract.
For instance, the JCT DB16 allows for termination of contract due to the occurrence of certain events causing the whole or substantially the whole of the uncompleted work to be suspended for a continuous period of two months. These events include the “exercise by the UK Government, a local or public authority of any statutory power that directly affects the Works”.
Opportunities for the Legal Industry
Within these issues of force majeure that present significant confusion to parties comes an opportunity for lawyers to provide clarity. Legal practices with strong dispute resolution teams have been experiencing and may continue to experience a rise in demand from clients for advice on issues such as force majeure and other means by which they may be released from contractual obligations. Conversely, parties seeking to prevent counterparties from eluding their obligations would seek the best litigators and dispute resolution teams to represent them in disputes, especially when the stakes are in the billions.
Furthermore, considering the often complex and cross-jurisdictional supply chains that construction companies and developers tend to have, therein lies an opportunity for experienced international arbitration teams to advise on and represent clients in cross-border disputes.
Conclusion
Ultimately, in the common law context, what constitutes a force majeure event will fall to the construction of the clause itself. As the construction of such clauses can differ widely, the construction industry faces disruptive threats and challenges to their projects with stakes not just of money, but also of jobs. Unfortunately, the most used standard form contract for construction in the UK, the JTC DB16, does not provide much-needed clarity as to the meaning of force majeure. Here lies another opportunity for dispute lawyers to represent both owners and contractors in the best construction of force majeure for each client's interests.
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