Force majeure and your NEC3 construction contract
Times are challenging for the construction industry with the recent outbreak creating cash flow strain and anxiety for both clients and contractors. Government measures without clear direction for the sector have caused additional tension between the parties, leading to claims / disputes for a matter which most of the times is (or should be) provided for within the construction contracts.
If you are in an NEC3 construction contract, you would be wondering what is the correct approach to deal with the outbreak, which is clearly an event that neither party could prevent and that an experienced contractor could not foresee at the Contract Date. It is generally accepted that such an event could be categorised as a "force majeure" event in other forms of contract (such as JCT where it is included in the list of "relevant events" for delay).
Indeed, the NEC3 ECC standard conditions, seem to provide for such an event (albeit we find the relevant term only in the guidance notes) in clause 19.1 (Prevention), where it is stated that:
"If an event occurs which
stops the Contractor completing the works or
stops the Contractor completing the works by the date shown on the Accepted Programme
neither Party could prevent
an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it,
the Project Manager gives an instruction to the Contractor stating how he is to deal with the event."
Does the above make things straight forward? No. Why?
Because acknowledging the outbreak as an event which falls within the above description is only the starting point. The Contractor would then have to notify this event as a compensation event under clause 60.1(19) (unless a compensation event arises from the Project Manager giving an instruction on how to deal with the event as required by clause 19.1) but also justify how this event have either stopped the Contractor from completing the works or stopped him completing the works by the date shown in the Accepted Programme, i.e. the planned Completion.
We have just encountered two possible contention points. First, the Contractor must demonstrate the delay (which means that he needs to show that the works on the critical path were delayed after absorbing any available float) and second, this has to be based on the Accepted Programme; what if the last Accepted Programme was "accepted" a few months ago and all subsequent submissions are under review or not agreed (not the way NEC3 is supposed to operate but a very realistic scenario)?
A third issue that arises, is whether the outbreak itself qualifies as a compensation event or the imposed restrictions (e.g. government measures to deal with the outbreak) constitute the compensation event. A natural disaster would be a compensation event as it would prevent the Contractor from completing the works, but the consequences of the outbreak are indirect (related mostly to the restrictions), unless the Contractor was being deprived of its human resources by means of them getting sick and unable to work (which would also extend to its supply chain). But so far, the problems are mostly related to the imposed restrictions / social distancing and self-isolating measures. Even when the works resume, it is possible that many of these restrictions will remain for a certain period until everything gradually gets back to normal.
In the last scenario, the Contractor would have to move away for the outbreak event itself and rather seek refuge in Secondary Option clause X2 (X2.1 - Changes in the law) provided that this is included in Contract Data Part 1 of its contract. As set out in this clause, a change in the law of the country in which the Site is located is a compensation event if it occurs after the Contract Date. Recent / new legislation regarding the measures / restrictions to tackle the outbreak would qualify as a compensation event as they are affecting the construction operations directly.
Even if the above hurdles were overcome, a compensation event was justified and the Project Manager had accepted it, when it comes to the assessment stage the Contractor would have to provide within its quotation details of how the Prices, the Completion Date and / or the Key Dates were changed or will be changed as a result of the event. However, for the changes that would have to be assessed on a forecast basis (clause 63.1 provides for the dividing date to be the date of notification of the compensation event or the date of the instruction) another big problem arises in the assumptions that would have to be stated, as the duration of the outbreak or of the restrictions are still unknown. To make things more difficult, the contract requires the Contractor to provide its quotation(s) within three weeks. A realistic approach from both the Project Manager and the Contractor with regards to these assumptions would be of major importance.
A lot of unknowns and moving parts in dealing with the consequences of a major unfortunate event. Perhaps clause 10.1 "in a spirit of mutual trust and co-operation" could be of assistance, although it also states that the parties "shall act as stated in this contract".
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The above article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice and the law may have changed since the date of this article.