Disruption due to coronavirus - where do you stand contractually?

Corona Virus
The outbreak of novel coronavirus (or COVID-19) that began late last year in China has since been declared a global health emergency by the World Health Organization. The Chinese government’s decisive response in shutting off or shutting down centres of population and industry may have helped slow the virus’ spread, but the knock-on effects are sending shockwaves through the global economy. 

As stock markets falter, supply chains for some types of parts and materials are looking significantly less secure. With a growing number of cases now being reported outside China, the risk of disruption to UK construction sites appears to be growing. So what are the contractual implications?

We are entering uncharted waters. There are no obvious precedents for determining where the risk of disruption from an outbreak like COVID-19 should fall but, as things stand, there are a few points worth considering. 

In order for a Contractor to trigger an extension of time and/or receive compensation for resultant loss or expense incurred, the onus would be on them to successfully argue that any COVID-19 related disruption constitutes a force majeure event. 

Under an unamended NEC3 contract, disruption brought on as a direct consequence of COVID-19 could be considered a Compensation Event in line with Clause 60.1(19), force majeure, entitling the contractor to additional payment and/or additional time.
    
Under a standard JCT D&B contract, force majeure is considered to be a Relevant Event (Clause 2.26.14) however not a Relevant Matter (Clause 4.21). Essentially this means that the contractor would be entitled to an extension of time (or to terminate the contract) but they would not be entitled to claim for loss/expense.

The complication with this being there is no clear-cut legal definition of force majeure and it is not defined within the standard NEC or JCT contracts. COVID-19 outbreak certainly seems to fit the general understanding of an unforeseeable event or circumstance beyond the control of either party, however whether or not it would be possible for contractors to claim for compensation and/or an extension of time on this basis remains uncertain. 

One potential option for contractors seeking to strengthen their argument could be to apply for a Special Certificate attesting to the existence of force majeure circumstances. While this would not provide any definitive confirmation that force majeure applies in the particular circumstance, it might at least lend some additional weight to the contractor’s argument. Unfortunately, again, this is an untested area.

Whatever the case, the potential scale and influence of the current coronavirus outbreak has certainly helped focus minds. There is a clear argument for establishing a greater degree of contractual certainty over disruption due to viral outbreaks in future. 

 

If you would like to know more about how COVID-19 could affect the risk profile of your business, and how you may be able to better protect your position, please get in touch.


Sam Baker | Account Executive
Lockton Global Real Estate & Construction

T:   +44 (0)20 7933 2543
M:  +44 (0)7880 012 923
E:   sam.baker@uk.lockton.com

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