COVID-19: Impact on Construction ContractsFriday, 20 March 2020
As the Coronavirus (Covid-19) continues to spread globally, many concerns are being raised about the direct impact of Covid-19 on the public health system and the economy. There is little or no indication at present as to what the precise impact Covid-19 will have on construction projects in Ireland.
Supply chains and consumer activity are likely to be disrupted with the spread of Covid-19; however, for the most part, construction sites are continuing to operate albeit subject to compliance with HSE, HSA guidelines and implementation of the Government’s advice to maintain social distancing in workplaces.
The spread of Covid-19 globally has raised significant questions, including what impact it will have on the employment of construction workers, the supply of goods and materials from other jurisdictions and entitlements for costs and/or extensions of time under construction contracts.
In the event that a construction project is impacted by Covid-19, there are number of options to consider including:
- Whether a force majeure event has occurred under the contract and the contractual implications of force majeure;
- Whether the contract has been frustrated and becomes impossible to discharge; and
- Whether the parties should meet to pre-agree terms in an attempt to reach a workable solution.
Circumstances which transpire as a result of Covid-19 do not automatically entitle a party to renege on its obligations under a contract. The contractual obligations remain enforceable against the parties even if performance of contractual obligations becomes more difficult to perform or even becomes too inconvenient. If a party is unable to perform or comply with a particular contractual obligation, they must identify the exact cause and circumstances giving rise to its inability to perform.
Force majeure is generally defined as an unavoidable or exceptional event which results in one or both parties being unable to perform its obligations in accordance with the contract.
The parties should consider whether Covid-19 is a force majeure event under the contract. If a construction site is forced to close due to Covid-19, such closure may be defined as a force majeure event under the relevant contract. A contractor may be entitled to an extension of time for the period of closure under the relevant clause of the contract. For example, under Clause 30 of the RIAI Building Contract, if a force majeure event arises, the contractor is entitled to claim for an extension of time but will not be entitled to costs.
Payment obligations may not automatically be suspended as a result of a force majeure event despite the other party being unable to perform its obligations under the contract. Terms of payment will depend on the contract and whether payments are calculated based on certain milestones being reached or whether payments are made on a fixed monthly basis.
If your contract does not expressly provide a force majeure clause, it may be implied where an event occurs which prevents a party or both parties from performing a particular obligation. If a force majeure clause does apply, the party relying on the clause may suspend works until the force majeure event ends or to a time otherwise agreed between the parties.
Where a delay to the project is being claimed under the contract as a result of COVID-19 events, parties must adhere to the normal contractual notification terms and make sure the required notices and details are submitted in line with the contract in order to ensure that they are awarded what they are entitled to. Employers should check that such terms have been complied with where claims are made.
A contractor has a duty to mitigate any losses or delays and that duty continues to apply even in the case of COVID-19. It will be important for the contractor to show that they have put reasonable measures in place to mitigate against any losses or delays from COVID-19 - they cannot simply rely on it as a delay event without showing that they tried to minimise the effect of it on the programme.
Proof required by party replying on force majeure
It is the responsibility of the relying party to prove the force majeure event and provide substantiation of the impact and effect of the event. If force majeure does not apply and a party suspends works, they may be in breach of contract which may have serious ramifications in terms of damages.
A contract may include a detailed definition of force majeure which includes the terms such as ‘epidemic’, ‘pandemic’ or another similar term and, if such terms are included, Covid-19 may come under such a definition and may entitle a party to rely on a force majeure clause. Legal advice should be taken in circumstances where it is not clear whether a force majeure event applies to the situation and contract.
If your contract does not provide for a force majeure event, the doctrine of frustration may apply. The doctrine of frustration is a legal principle which applies to contracts entered into in Ireland. It occurs when extenuating circumstances arise which are unforeseen; beyond the control of the parties; without fault of the party seeking to rely on the doctrine; and results in one or both parties being unable to perform its obligations under the contract.
The performance of the contract either becomes illegal, impossible or radically different from that which the parties intended. Frustration of a contract means that the contract comes to an end and can no longer be performed and the parties will be discharged from the contract. The party seeking to rely on the doctrine may be entitled to reasonable costs incurred up to the date of frustration which they will have to demonstrate and prove.
Site closures which are as a result of measures implemented due to Covid-19 may be considered as events of ‘frustration’. If a contractor intends to assert force majeure or frustration, they should be clear as to their rights in advance. Where a party incorrectly claims force majeure or frustration, this may amount to a breach of the contract and may entitle the aggrieved party to claim damages or terminate the contract.
Frustration can be difficult to prove in an Irish court as the threshold to prove frustration is extremely high. Practically speaking, contractually agreed force majeure clauses which define circumstances that are beyond the control of the parties is more preferable than seeking to rely on the remedies under the doctrine of frustration.
For either the contractor or the employer under a construction contract, the impact of COVID-19 may be covered by insurances and any cover will depend on the terms of the particular insurance policy. Parties should seek advices from their insurance advisors and make sure they are aware of any disclosure obligations under the policies.
Ancillary Agreements - Funding / Agreement for lease
Parties to any contract should consider the terms of any associated obligations under any connected agreements. Where there is a funder involved, the terms of the facility agreement should be checked for how it deals with force majeure. Equally, if there is an agreement for lease there may be relevant obligations to consider and the terms of that document should also be checked.
If a construction project is adversely impacted by Covid-19, a number of remedies and options are available which may include force majeure, frustration and liquidated damages. This will vary between contracts and the terms of the contract and circumstances must be reviewed on an individual basis.
Parties to a contract have a duty to mitigate their losses and should assess what steps should be taken to mitigate any losses. It is imperative that the parties maintain detailed records throughout the project and where the contract provides for notifications, progress reports and strict notice periods, the parties must adhere to these provisions including any time bar provisions in the contract.
The key point to note when handling any delay or disruption claims which arise as a result of Covid-19 is to understand and apply the terms of the contract. The best approach, as always, is for the parties to agree to a process in preparation for any anticipated closure, length of such closure and implications for the project in terms of costs and the delays to the programme.
This briefing is a general overview and guidance note only. It should not be regarded as a substitute for professional advice. Advice should always be taken before acting on any of the matters discussed.