Covid-19 and Force Majeure under the JCT Contract and NEC 4.

January 5, 2021

Covid-19 and Force Majeure under the JCT Contract and NEC 4.

NEC4 CONTRACT.

Queries have been raised about how to deal with the impact on NEC contracts that may be caused by the prevention and containment measures being instigated to control the spread of the coronavirus. This note is aimed at explaining the ways in which the NEC4 contracts deal with this matter. The guidance is given in relation to the Engineering and Construction Contract (ECC), but similar actions apply under the other NEC contracts. This advice is given in relation to the standard wording in NEC4 contracts. If modifications have been made, the contract should be reviewed to check whether the guidance given here still applies.

The impact of the virus will vary between different countries, and affect contracts in different ways. The main problem is likely to be the unavailability of resources, primarily people but also Plant and Materials or Equipment. An early warning of the issue should have been given by either the Contractor or the Project Manager at the time, so that early discussion about the potential impacts could be held in advance, and mitigation measures identified. As the impact of the virus develops, and restrictions which affect the works, further early warning meetings should be held.

Governments in some countries have imposed specific restrictions on movement of people and goods. In this case, if the Site is located in that country and if Option X2 – changes in the law – has been incorporated into the contract, those restrictions would be a compensation event and the impact would be assessed in accordance with the contract.

In the most severe cases, where work has had to be stopped or suffers delay, because of the virus, clause 19 – prevention – may well apply. The situation could arise when people have been prevented from working on the contract or Plant and Materials or Equipment cannot be obtained due to restrictions on movement. These restrictions may have been applied in another country where essential Plant and Materials or Equipment were being sourced. It would be difficult to argue that, in such an extreme case, the Contractor could have anticipated the issue and have allowed for it. If the impact stops the whole of the works being completed by the date for planned Completion shown on the Accepted Programme, or being completed at all, then the provisions of this clause apply and the Project Manager should take control of dealing with the matter.

An event which passes this test will also be a compensation event under clause 60.1(19). Instructions issued by the Project Manager to deal with the matter are likely also to be compensation events, through a change to the Scope, stopping or not starting work or other events identified in clause 60.1.

It should be noted that the test in clause 19 is fairly strict. It is not sufficient that the works or a section of the works is delayed, the delay must impact the date of Completion of the whole of the works. A delay which does not impact the critical path of the programme or that can readily be overcome would not meet that test. It should also be recognised that clause 19 and the corresponding compensation event only applies in the case of delay, and do not apply where the only impact of the virus on the contract is an increase in cost.

Where the effect of the virus is having or is going to have a significant impact on the work in the contract, it would be sensible for the Project Manager to manage the effects of the virus on the works in the interests of the Client. That may mean the Project Manager instructing the Contractor to stop work or changing the Scope in some way to overcome the difficulties encountered. Clause 19 has been written specifically to make the Project Manager take control, but whether or not the effect of the virus meets the limitations in this clause, the Project Manager should consider whether or not it would be sensible to issue instructions dealing with the matter. This would allow the Project Manager to control the time and cost effect of the virus on the contract.

Under the NEC4 Term Service Contract, which does not contain clause 19 or the corresponding compensation event, the same approach for early warning and proactive management by the Service Manager should be followed. The Parties should work together in accordance with clause 10.2 to best address any impact on the delivery of the service due to the coronavirus.

Whilst the Short Contracts do not include clause 19, they do include the early warning procedure and (with the exception of the NEC4 Term Service Short Contract) provide for the event being a compensation event. This emphasises the point that the Client should be actively managing the effects of the virus to ensure that actions taken are in the best interest of the project.

JCT CONTRACT.

Introduction

Force Majeure is a French civil law concept which is undefined within English Law but was

introduced due to the narrow application of the Contract Law doctrine of Frustration.

Case Law

The principle of Force Majeure has been defined over the years through several cases.

Matsoukis v Priestman & Coi Justice Bailhache found that force majeure did apply to the

disturbance of business caused by a national coal strike along with accidents to machinery

but also decided that this did not cover delay caused by bad weather, football matches or

funerals as “these are the usual incidents interrupting work and the defendants, in making

their contract, no doubt took them into account”.

Lebeaupin v Crispin five years later expanded on this to include War and Epidemics “….

Thus was, inundations and epidemics are cases of force majeure; it has even been

decided that a strike of workmen constitutes a case of force majeure”. Justice McCardie

went on to state that the force majeure clauses should be constructed with close attention

to the words and the effect which could be different when considering different documents.

In relation to Strikes it was found that this could extend to where a strike is anticipated

along with embargoes and refusals to grant licenses in Coloniale Import-Export v Loumidis

Sonsiii.

The recent case of Seadrill Ghana Operations Ltd v Tullow Ghana Ltdiv noted that a party

who looks to rely on a force majeure clause must demonstrate that (on the balance of

probabilities):

o A Force Majeure Event has occurred and that it had the effect specified in the contract

(e.g. it prevented / hindered performance).

o The Claimants failure to perform was due to circumstances outside its control.

o There was nothing the Claimant could reasonably have done to avoid the Force

Majeure Event or mitigate its effects.

The force majeure claim failed in this case as it was found that the claimant would have

been unable to act in any event due to their own negligence/default.

Defined Force Majeure Clauses

Some contracts (by way of amendments) may seek to define the term “Force Majeure” with

a list of events with the final event to be a broader range of terminology such as “other

such events”. Great care needs to be taken in this regard as rather than applying a ‘catch

all’ principle it can lead to the Ejusdem Generis (of the same kind or class) principle

applying, in that within the preceding list there will be some common category developed

and anything which falls outside of this category will not be included.v This stance of the

courts remains as is highlighted in BOC Group plc v Centeon LLC and another & Burrows

Investments v Ward Homes.vi

Whilst the inclusion of a definitive list may help a party to bring a Force Majeure claim, this

does not automatically guarantee that a party will be successful in claiming Force Majeure.

This is evident in the recent case of Classic Maritime Inc v Limbungan Makmur Sdn Bhdvii

which introduced a ‘but for’ test for causation and found that Limbungan would have been

unable to perform even if the Force Majeure event had not occurred.

Force Majeure in relation to COVID-19

To enable a successful claim under the Force Majeure clause of the JCT, a party would

have to demonstrate that as a result of COVID-19 they have been prevented from

completing their works or that to continue would lead to the party breaking other

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contracts.

The fact that performance has taken longer to achieve than originally anticipated or was

more difficult/unprofitableix will not allow a party to be successful in a Force Majeure claim.

So, if you want to rely on the Force Majeure provisions of the Contract you must be able to

establish that you could not progress your works whatsoever.

CDM Regulations 2015

Under the CDM Regulations 2015x the client has overall responsibility, as defined within

section 4. This is clarified under the following sections below:

4.(1) –

4.-(1) A client must make suitable arrangements for managing a project,

including the

allocation of sufficient time and other resources.

4.(2) (a) & (b) –

(2) Arrangements are suitable if they ensure that –

(a) the construction work can be carried out, so far as is reasonably practicable, without

risks to the health or safety of any person affected by the project; and

(b) the facilities required by Schedule 2 are provided in respect of any person

carrying out construction work.

4.(3) –

(3) A client must ensure that these arrangements are maintained and reviewed

throughout the project.

4.(6) (a) & (b) –

(6) A client must take reasonable steps to ensure that –

(a) the principal designer complies with any other principal designer duties in

regulations 11 and 12; and

(b) the principal contractor complies with any other principal contractor duties in

regulations 12 to 14.

Due to the requirements to maintain social distancing as far as practicable and increase

the cleaning regime on site as a result of the Site Operating Procedures, this overall

responsibility for this arguably rests with the client. The Client must ensure that the

Principal Contractor complies with sections 12 – 14 of the Regulations, meaning that if the

Principal Contractor was to not implement any measure to comply with the Site Operating

Procedures then the Client would be ultimately responsible in this regard.

Under paragraph 4.1 onwards of the CDM Regulations 2015, the client is ultimately

responsible for ensuring the works are carried out safely.

The CDM regulations place obligations on both the Client and the Principal Contractor.

There may be an argument that compliance with the current site operating procedure

requires an instruction from the Client to the Principal Contractor.

It may be possible by following the respective Parties obligations under the CDM

regulations to demonstrate that the Client ensures compliance with the site operating

procedures which may arguably be possible to be a relevant event and relevant matter.

Recommendations

The approach to be taken may change depending on your position in the supply chain i.e.

Main Contractor or Subcontractor and the Terms and Conditions of the Contract you are

working under.

For Subcontractors the introduction of the Site Operating Procedures will lead to the

imposition of restrictions which may be included under variation 5.1.2 of the Sub-Contract

which could (depending on amendments) lead to a claim for both an Extension of Time and

Loss and Expense. Alternatively, this may be an ‘Act or Impediment’ by the contractor and

give rise to an Extension of Time and Loss and Expense.

For Main Contractors taking into consideration the clients obligations under the CDM

Regulations along with the restrictions placed upon construction activities by the Site

Operating Procedures Version 3 could fall under clause 5.1.2 of the Contract if established

would give rise to both an Extension of Time and Loss and Expense.

In each instance the exact wording of the Contract will need to be reviewed along with the

relevant notices that are in place, and most importantly a careful review of the specific facts

of each situation.

[1915] 1 KB 681 at 685-7

[1920] 2 KB 714 at 719

iii

[1978] 2 Lloyd’s Rep 560

[2018] EWHC 1640 (Comm)

Powell v. The Kempton Park Racecourse Co., [1899] A.C. 143

[1999] 1 All ER (Comm) 970, & [2015] EWHC 2287

vii

[2019] EWCA Civ 1102

viii

Reardon Smith Line v Ministry of Agriculture, Fisheries and Food [1961] 2 All ER 577

Tennants (Lancashire) Ltd v G.S. Wilson & Co. Ltd [1917]

The Construction (Design and Management) Regulations 2015