Preserving your supply chains in the wake of COVID-19: the construction industry and builders merchants.
On the evening of Monday 23 March, the Government announced the latest raft of restrictions that would apply to businesses and individuals to reduce the spread of COVID-19. The restrictions specify that people should, where possible, work from home, but, where this is not an option and the work is essential, people can continue to work as normal, albeit only in accordance with Public Health England guidelines.
Construction and manufacturing operations have given as examples of workplaces where people cannot work from home. The guidance also states that retailers can continue to operate where this is essential, for example providing food and other essential items, and that online and delivery operations involving limited contact can also continue.
For the construction industry, builders merchants are a vital part of the supply chain. Supporting the industry, especially where essential maintenance work is being undertaken, is imperative to keeping it alive in these trying times. With that in mind, up to now, builders merchants have generally continued to operate within the restrictions placed on them by Public Health England.
Should the government continue on its current trajectory however, and further restrictions be placed on businesses, builders merchants may well be forced to close. Without builders merchants operating, a number of construction projects run the risk of being delayed or left incomplete, and as a result, have the contracts under which they are operating breached. This will inevitably leave a number of contractors potentially liable and at risk of being sued for breach of contract. Certain legal concepts and contractual rights may, however, be available to those in the construction industry that are open to these risks.
Force Majeure clauses are designed to excuse one party (or both) from performing affected obligations in a contract following the occurrence of certain events or circumstances. It is a contractual concept and as such, the circumstances in which and how it will apply are open to interpretation. As such, whether or not force majeure is triggered will be contract specific. With reference to standard Force Majeure clauses however, there is a high chance such clauses are engaged in light of COVID-19 and the disruption caused to supply chains globally, particularly in the wake up of previous global health issues.
The effect of a Force Majeure clause will also depend on the clause wording, however, generally, its effect includes one or more of the following:
- Non-liability; and
- A right to terminate.
Under English law, a contract may be discharged on the ground of frustration where, after a contract has been formed, an event occurs which renders the performance of that contract impossible, illegal, or radically different from what was contemplated at the outset of the contract.
Unlike force majeure, the concept of frustration is not informed by the contract. Instead, the principle has developed in the English courts over the years. It is therefore generally accepted that a frustration event:
- occurs after a contract has been formed;
- is not due to the fault of either party;
- is so fundamental as to be regarded as striking at the root of the contract and is beyond what was contemplated by the parties at the commencement of the contract; and
- renders further performance of the contract impossible, illegal or makes it radically different from that contemplated originally by the parties.
Should supply chains be so disrupted that performance of the contract or project be rendered impossible, contractors may well be able to rely on frustration to avoid liability.
In the event that builders merchants and indeed contractors, are forced by law to cease trading, parties may rely on illegality or public policy to terminate the contract. This concept provides that contracts involving transactions prohibited by law are generally void and cannot be enforced by either party. Under the current restrictions, this concept will not assist those looking to avoid liability for not performing their obligations under a contract, however, with the situation rapidly evolving, this may well come into play in the near future.
Some standard form contracts allow limited recourse where governments change statutory requirements, such as forcing closures. Some contracts also include wording such as “so far as procurable” which could mean that a contractor is entitled to switch products or possibly suspend its activities whilst it has no access to certain materials.
The circumstances we are currently living are unprecedented. It is a time to come together and find reasonable solutions to the issues that arise out of COVID-19, not conflate issues and cause detriment to others. With that in mind, it is worth considering contacting those that you have a contractual relationship with should you not be able to perform your obligations, and attempting to vary your contracts to ensure your actions, or lack thereof, do not result in breach of contract.
For further guidance on the effect of COVID-19 on the construction industry, and the enforcement of contracts more generally, contact one of our specialist advisors below.