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COVID-19 and Construction Contract Penalties

• 2nd Apr 2020
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Construction contracts contain time pledges stating the time period by which a site should be completed by. Since the outbreak of the COVID-19 pandemic and in particular the government’s announcement on 23 March 2020, contractors are understandably concerned about the ability to meet the time pledge in contracts. This is due to various factors such as, workers self-isolating and the closure of various businesses due to measure put in place to fight the virus which means that the supply chain is disrupted.

If the time pledge is not going to be met, a breach of contract will occur. Therefore, contractors may be liable to pay liquidated damages for the delay or face claims for damages for the delay.

However, subject to what the contract states, the contractor may be able to apply for an extension of time or even step away from their obligations in certain (although limited) circumstances.

1. Most contracts will contain what is widely referred to as a force majeure clause. This allows the parties to step away from their contractual obligations where a party is unable to complete them due to an event that is outside of their control, for example a flood or a global pandemic. However, some force majeure clauses in contract lists specific events which will trigger the clause rather than having a broad definition. Therefore, the clause should be reviewed carefully to assess if it will apply to the events arising as a result of COVID-19.
2. If the government introduces changes in the law to fight the virus which ultimately effects the execution of the contract, this can be used as grounds for an extension of time. There are various matters that will be taken into consideration here. For example, the timeline of the introduction of the legislation and the contract, whether the events were or should have been in the reasonable contemplation of the parties at the time the contract was entered into.

In these unprecedented circumstances, parties should endeavour to agree an extension of time in good faith. Advice should be sought be entering into an agreement to extend.

The government is introducing new legislation almost on a daily basis in the fight to contain the spread of COVID-19. Therefore, advice should also always be sought before a party takes step in fear a time pledge will not be met.