24th March 2020
COVID-19 and construction contracts

As the coronavirus pandemic sweeps across the globe and the UK government announces increasingly stringent measures to combat its spread, businesses from all sectors across the UK are struggling to keep their heads above water. In particular, industries such as retail, travel and hospitality are suffering most from social distancing and lockdown measures – but the construction industry is also feeling the hit.

Industry bodies Build UK and the Civil Engineering Contractors Association (CECA) have released a joint statement warning that construction is to become “dramatically and severely affected” in the coming weeks and months, with site closures highly likely if more stringent measures are introduced. It’s hardly surprising, then, that legal and insurance professionals are seeing a flood of enquiries from companies seeking information on how to avoid liability or recover their losses if their business is impacted by the virus.

Contractual options for affected companies

If a company’s business is interrupted to the extent that it leads to the delay of contracted works, there are legal options that may help them:

  1. Force majeure clauses

Force majeure essentially means the occurrence of an event that is beyond either of the parties’ control, and which neither party could have foreseen at the time of signing the contract, that prevents one of them from fulfilling their contractual obligations. It is not obligatory for contracts to contain a force majeure clause, but many do. For example, JCT Design and Build Contracts refer explicitly to force majeure under clause 2.26.14; it is considered a ‘Relevant Event’ that may provide a contractor with a time extension, but not a ‘Relevant Matter’ entitling them to compensation for loss or expenses.

On the other hand, NEC 4 contracts do not refer to force majeure but contain other provisions within Clause 60.1(19), which refer to events that could not have been foreseen at the date of making the contract, and which prevent a contractor from completing the works to schedule.

It is likely that these provisions will have notice requirements, or obligations on the affected party to do everything possible to reduce the likelihood of delays, which must be fulfilled in order for the clause to be effective. It will also be down to the specific wording of each contract as to whether coronavirus can be claimed as a force majeure event.

  1. Frustration of contract

Where no force majeure clause exists in a contract, it may be possible to avoid liability through the legal concept of ‘frustration of contract’. It may be possible to claim this if an unexpected event takes place making it physically or commercially impossible to fulfil the contract.

Having said this, it is much more difficult to prove frustration of contract than it would be to avoid liability if a properly worded force majeure clause were in place, and it is much more likely that the latter would cover business interruption due to coronavirus.

  1. Business interruption insurance

While many may believe that their business interruption policy will reimburse them for losses incurred either from the effects of the disease itself or forced business closures, this is unfortunately unlikely to be the case. These policies are usually designed to cover damage to premises, and the Association of British Insurers (ABI) has stated that most standard policies will not cover forced closure by the authorities or interruption as a result of an infectious disease. Some larger companies may have purchased extensions to their policies, however, and may wish to check their policy wording to see whether they could be entitled to an insurance payout.

Working to help you and your clients

We are aware that many of our Brokers and their clients are concerned about the impact of the COVID-19 pandemic on their businesses. We are experiencing very difficult times, both economically and personally, which is why here at Focus we’re working hard to support you and provide solutions to any issues you may be experiencing. Just call us on 0345 345 0777 or email and we’ll be happy to talk.