Who carries the risk of the impact of Covid-19 on construction projects?
Unfortunately, it’s becoming clear that the Covid-19 outbreak will adversely affect the execution and completion of construction projects in Northern Ireland. Disruption is already being experienced in obtaining the delivery of goods and materials, as well as on the availability of the workforce currently engaged by contractors. The extent and duration of these impacts is unknown at the moment.
Therefore, on the presumption that the outbreak has a viable detrimental impact on the execution and completion of construction works, who carries the risk of that impact?
A contractor is typically bound to complete the execution of works under a building contract by a contractually binding completion date. If it fails to do so, then the contractor will be liable for any damages suffered by an employer as a result of that delay.
Under a building contract, save to the extent that the contract otherwise expressly provides, a contractor will generally carry the risk of completing the works, no matter what, save in respect of any breach of contract by the employer. Therefore, in respect of the impact of Covid 19 on a project, unless the contract expressly provides otherwise, the contractor will carry the full risk of that impact.
However, generally, the standard forms of building contract do provide some level of relief for a contractor in the event that a ‘neutral’ event occurs causing delay to a project, albeit precisely what those neutral events will cover will vary from contract to contract.
By way of example, the JCT standard form provides for an entitlement to an extension of time to the completion date if the completion of the works has been delayed by an event of ‘force majeure’. However, the JCT contracts do not define what force majeure means. Broadly, it means a major event which is outside the control of the parties, such as a natural disaster, that could not be avoided through the exercise of due care by the affected party. Therefore, if a contractor can properly show that the relevant works cannot be completed on time solely and directly due to the impact of Covid 19, that the causal link can be clearly proved by the contractor, and, that the impact of it cannot be avoided by the contractor then the contractor may be able to claim an extension of time because of it.
However, what if the contract in question does not provide any express contractual relief or, if it does, perhaps the contractor has failed to comply with a condition precedent which prevents such a relief becoming available? There is still a possible remedy available to the contractor which is that the contract could be discharged.
Such a remedy may become available via the doctrine of frustration. A contract may be discharged on the ground of frustration when something occurs after the formation of the contract, which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract. For example, it has been held that government prohibition of, or restrictions on, building operations during wartime caused the frustration of building contracts.
In Northern Ireland, if a contract has become impossible to perform or been otherwise frustrated then the provisions of the Frustrated Contracts Act (Northern Ireland) 1947 (the “FCA”) will apply. The FCA provides:
- Money paid before the frustrating event can be recovered and that money due before the frustrating event, but not in fact paid, ceases to be payable;
- A party who has incurred expenses is permitted, if the court thinks fit, to retain an amount up to the value of the expenses out of any money they have been paid by the other party before frustration; or where money was due and payable at the time of frustration, recover a sum not exceeding that amount for expenses;
- The court may require a party who has gained a valuable benefit under the contract before the frustrating event occurred, to pay a “just” sum for it. This is so whether or not anything was paid or payable before the frustrating event.
Whether the doctrine of frustration will apply in respect of the impact of Covid 19 will very much depend on the facts and in that respect it is still too early to make any proper assessment, particularly if, as is very much hoped for, the effects of Covid 19 will materially diminish over a relatively short period of time.
If you have any concerns or queries arising from the above, please contact Tim Kinney firstname.lastname@example.org or your usual Tughans contact, who will be able to refer you.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.