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Business and Corporate Law, Construction Law

Can you Use Coronavirus to Get Out of your Construction Contract?

Whether you believe that the coronavirus situation is a media beat-up or a genuine pandemic of apocalyptic proportions, there’s a decent chance that if you’re in the construction industry it’s going to affect you in some way.

The reason is clear: lots of stuff you need for your project is made in China (specifically), and Asia (generally).

So what happens if you, your subcontractor, your supplier or your manufacturer get the notification that what the contract requires simply can’t be done anymore (or at least, not in the way that was initially planned) because of a coronavirus-related disruption?

Let’s find out.

The State of Coronavirus

Before we dive into looking at whether or not you need to abide by the terms of your contract should your ability to do so be impacted by the spread of coronavirus, let’s take a look at the state of play in a recent update from the World Health Organisation.

Coronavirus Spread

There are certainly a lot of places where COVID-19 is yet to have any substantial impact. But there are also many areas where there are enough confirmed cases that governments are starting to take steps which could impact international trade and business.

Most notably, as has been widely reported, there is significant spread of the virus in mainland China. In the construction industry in particular (although really in any industry that relies upon Chinese manufacturing) this could cause major disruption to your supply chain, your ability to secure manufacturing services, and your ability to utilise goods that would have originally been supplied out of China or affected countries.

So the question we need to ask is:

What happens if your obligations under a binding contract assumed that you would be able to source from a country that is experiencing a significant coronavirus outbreak and, as a consequence of the outbreak, you are no longer able to get those goods or services?

A Contract is a Contract, and your Principal Doesn’t Care

The obvious starting point is that the contract you agreed to is binding on you, absent a lawful reason to the contrary.

There are some circumstances in which you might be able to avoid complying with the terms of your contract. But otherwise you should have clear agreement from the other party or compelling advice to the contrary if you’re going to go off-script.

The safest bet is to assume that you need to deliver under the contract terms. If you proceed on the basis that your principal or customer will compassionately relax the requirements, you’re running a significant risk.

Naturally, part of that risk is a legal one – there’s a good chance that you have breached the terms the contract and are exposing your company to liability.

There is also a significant commercial risk that you would be taking by assuming that your principal doesn’t simply expect you to deliver on what you promised irrespective of what unanticipated difficulties may have arisen.

Rather than focusing on negative, you could also view this as a commercial opportunity. If you can find a way to deliver on your contractual promises, surmounting the difficulties that you’re facing, there is a good chance that you will solidify your client relationship. After all, overcoming difficulties can earn you greater respect from your client about your ability to come through at important times.

What Does Your Contract Say?

So then, the first and most obvious place to start is to look at the contract. Many contracts, though not all, contain clauses to deal with situations like epidemic or pandemic illness.

Taken further, some contracts are even prepared for things like a zombie apocalypse as Amazon AWS appears to be in theirs:

So even though your contract might not be quite so broad as the AWS terms and conditions, there is a good chance it contains clauses that could impact on the situation. Checking your contract is good place to start.

With that done, what legal avenues might there be?

Frustration

While many people have heard of the doctrine of frustration, and would dearly love it to apply to situations like this, it is quite unlikely. Even if it did apply, you might not like the consequences.

The doctrine of frustration requires a supervening event, in which no party is in default, which changes the nature of the contractual rights and obligations that were contemplated the time of the contract so radically that it would be unfair to continue holding parties to the contract.

That doesn’t happen very often.

And while intuitively them might seem like a great thing, the consequence if the doctrine does apply is that both parties are released from the contract. So the question is this: is that the outcome you want? A temporary challenge doesn’t always mean you want to toss the entire contract out.

More relevantly, there are decisions around viral outbreaks and the application of the doctrine of frustration, and the success rate is low. For our part, we would not be betting the house on the doctrine applying in the case of a coronavirus interruption to your contract.

Force Majeure

Many contracts, most likely including yours, include a clause known as a “force majeure” clause. Generally this clause applies to help parties impacted by large-scale events outside their control. That might be war, earthquakes, hurricanes and the like. Sometimes these clauses include provision for plagues or epidemics, so as we mentioned earlier this is going to be a case of checking the contract carefully to see whether there is any provision for a coronavirus-like outbreak.

The difficulty with the practical application of these clauses is the degree to which the event prevents, hinders or delays your ability to deliver what you promised. Depending on the wording of the specific clause, the degree of difficulty you must face could be anything from “it has become impossible” to “it has made delivery under the contract extremely difficult”.

There will also be an immediate practical question whether, in fact, a coronavirus outbreak has truthfully had an impact on your project delivery. So while it may be tempting to blame coronavirus for a factory shutdown in China, if the factory shutdown is really a consequence of something else the clause is unlikely to apply.

If a force majeure clause applies you are, provided you have complied with the contract, generally excused from performing the obligations under the contract that have been impacted upon by the event. This relaxing applies only as long as the event prevents you from performing.

Whether or not your clause applies to a coronavirus outbreak is going to depend on the terminology used in your contract. Force majeure has been subject to many decades of litigation and the subtleties of language and the different clauses can have a large impact on their application.

This is an area where you would really need to get conclusive legal advice before acting.

Can you Mitigate?

Both the general law that’s going to apply to your situation and, probably, the contract itself are likely to impose requirements on you to minimise both the delay and the loss that might be caused by any coronavirus disruption. That will be the case whether or not you might be able to utilise something like a force majeure clause.

In many cases, you will have a positive obligation to take reasonable steps to avoid the loss or delay that you might be concerned about. That might include ensuring that you have accurate information, open lines of communication with both your customer and your supplier, and actively seeking alternative suppliers or an alternative methodology to deliver under the contract.

It is going to be important to document your efforts here. That should include keeping a running series of file notes about telephone conversations, discussions had on-site, meetings with your client and any other relevant material that demonstrates you are taking reasonable steps.

Practical Measures

While the law will have many things to say about a situation like this, often the best practical thing you can do is to be proactive about your contract management and your relationship both with suppliers and clients.

What is your supplier saying about the situation and its impact on their ability to deliver? Do you believe them? Can they offer some sort of tangible evidence to support their assertions if you are sceptical in some way? Get clear and unambiguous confirmation from your supplier, but if you have realistic concerns about their ability to deliver new and contractually bound to them already, then you need to have other options up your sleeve.

If the supplier cannot deliver on time or they are experiencing low capacity or some other form of disruption, can they arrange for alternative sub-suppliers to pick up some of the slack or deliver a portion of the contract? If not, can you de-scope some of your arrangements with them and move them partially to alternative suppliers? This might be a good way of mitigating your risk by not having all your eggs in one basket.

If you have any concerns at all then you need to ensure that you have alternative suppliers lined up and ready to go to take over the entire burden. Accepting continuous promises to deliver in the absence of any evidence of capacity to do so is unlikely to do you any favours, particularly with your significant exposure to your own client. So be prepared to bite the bullet for a shift, and know in advance when you need to make the move to protect your own project timetable.

And, of course, be cautious about communications with your own principal.

While on the one hand open and frank communication can be beneficial for a relationship, it is important you do not do anything which might foreshadow a breach of contract and put your client on edge (ie – don’t freak out your principal by over-sharing).

Many contracts allow the principal to take work out of your hands. The way you communicate with them, in particular at a time of heightened concern, is going to impact their confidence in you.

Similarly, however, if you have tangible assurance from your overseas suppliers that they are able to deliver on-time, then passing on that information and the steps you have taken to ensure adequate supply under the contract could be well received and offer increased trust in your company for the project.

Impacted?

Are you concerned about a potential supplier being impacted upon by coronavirus outbreak?

Do you have concerns about a third party’s ability to deliver something they have promised that you need for a larger contract?

Don’t hesitate to reach out and we will help you work through both the process and the options for next steps.

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