Exceptional events clauses: negotiating infrastructure contracts

The coronavirus crisis has shown that relevant clauses in standard form contracts do not always provide solutions that parties to project contracts want.

Businesses active in the infrastructure sector should consider now whether the contracts commonly used are fit to address these exceptional events, from new pandemics, to the impact of the Brexit trade deal on projects with a UK-EU nexus, and increased political risk in certain jurisdictions.

For employers and contractors alike, the starting place when considering if and how to amend your standard form to cope better with exceptional events is to consider how your performance, and that of your counterparty, might be impacted, what relief should be granted and subject to what conditions. This involves educated guesswork and prediction given that exceptional events are generally unforeseeable, either in occurrence or impact, but lessons can be taken from the approach to Brexit and the Covid-19 pandemic and how these events impacted infrastructure projects.

Impact of Covid-19

The impact of the pandemic on infrastructure projects has been wide-reaching, and is far from over. From the contractor perspective it has caused transportation and logistics delays, staff resourcing difficulties, site closures or reduced working efficiencies, shortages and/or increases in the price of certain goods and materials, additional costs of procuring PPE and other protective items, as well as increased pressure on cashflow throughout the supply chain.

The two primary contractual protections in standard forms that are relevant to the impact of the pandemic on construction projects are provisions on force majeure; and clauses on change in law. Other relevant clauses include those dealing with employer defaults, which are relevant to contractors; and those addressing failures by, and advice or recommendations from, governmental agencies.

Change in law and governmental action/inaction clauses

The biggest perceived shortcoming of these clauses in the standard forms in the context of Covid-19 is that they did not clearly cover advice, guidance or recommendations from government or industry bodies which were not legally binding, but were expected to be followed – for example the social distancing recommendations in the UK. This is the case with clause 2.15 in the JCT Design and Build Contract 2016, for example, and with option X2 of the NEC Engineering and Construction Contract too. Sub-clause 8.5 in the 1999 edition of the FIDIC Red, Yellow and Silver Books could apply but is often removed or weakened in the drafting process.

As a consequence, many contractors are looking to the force majeure clauses in these contracts which could potentially cover advice, guidance or recommendations from government or industry bodies, but many will have discovered that the requirements to be met for a successful force majeure claim are quite stringent and generally do not cover both extension of time and additional cost rights.

Therefore contractors should review change in law clauses and government action or inaction clauses in contracts carefully to determine whether they are sufficient to provide time and cost relief for the full range of government actions or inactions that could occur during a future, or continuing, exceptional event from full changes in law to non-legally binding advice, guidance or recommendations. This includes those of non-governmental but influential industry bodies such as the Construction Leadership Council. If the relief provided for is insufficient, and the hurdles to bringing a claim under the force majeure clause are high, amendments should be considered to provide coverage.

Force majeure clauses

Force majeure clauses differ quite dramatically across the major standard forms in use in the construction industry. JCT adopts the loosest approach, with no definition of the term 'force majeure' provided, leaving it open to the parties to determine whether to rely on the case law or insert specific types of events which should be caught by the term.

Perhaps given the experience of the Covid-19 pandemic so far, more contractors will want to put some flesh on the bones and provide a non-exhaustive list of events that will be considered 'force majeure' events provided they comply with certain overarching criteria, as is found in the FIDIC clauses. This would provide a greater degree of certainty than the current approach.

The other issue with the JCT approach is that only extension of time is made available as a remedy for force majeure events. There is no right to claim compensation for additional costs, unlike under the NEC and FIDIC forms. This is something we think that contractors will be even more alive to when negotiating JCT contracts in the future.

The NEC approach does not use the term force majeure and does not contain a list of indicative events. Instead, it sets out the criteria that any such event must meet in order to be considered a compensation event under clause 60.1(19), giving rise to both extension of time and additional cost compensation rights.

Contractors in particular may now want to make clear in the drafting that certain events such as pandemics will be covered by the compensation event, provided they satisfy the general criteria.

The FIDIC contracts adopt a twin approach to force majeure, containing both a list of general criteria and an indicative list of force majeure events. The contractor is entitled to extensions to the time for completion to the extent delayed by a force majeure event, subject to providing the requisite notices, but additional cost compensation rights will only apply in some cases. Epidemic and pandemic are not amongst the listed force majeure events, but in the Red and Yellow Books reference to "unforeseeable shortages in the availability of personnel or goods caused by epidemic or governmental actions" provides a stand-alone right to extension of time.

It is common to negotiate the force majeure events which allow additional cost compensation, and contractors would be well advised to consider whether they will now require the opportunity to claim such compensation for certain force majeure events that do not bring this right under the standard drafting.

Bespoke drafting

One of the key elements of both the NEC and FIDIC approaches to force majeure is that the clauses will not provide protection to a contractor who should have foreseen and provided for or prevented the potential impact of an event.

Whether this is a requirement for an event to be considered as a force majeure event in the JCT contracts is a matter of interpretation, but, on the basis of case law, an English court would likely be reluctant to find that an event that a party could and should have foreseen and prevented would count as a force majeure event entitling contractual relief.

This is particularly relevant when parties are considering whether force majeure clauses provide them with sufficient protection for specific exceptional events that are either ongoing, will happen imminently, or have a high likelihood of happening. Failures to take steps to identify the event or to prevent or mitigate its impact on contractual performance may well mean no relief is available.

These concerns often spur the insertion of specific clauses or additions to existing force majeure clauses dealing with ongoing, imminent or highly likely force majeure events. The party concerned about its performance being impacted is often worried that because the event and its impact is known, at least to some degree, it may not be able to claim force majeure protection, or that the counterparty will challenge its claim on the basis that it has not taken sufficient steps to foresee and prevent or mitigate its impact. The counterparty is of course concerned to ensure that the impacted party is obliged to do exactly that.

This has particularly been the case with Brexit and Covid-19, both of which have been known about for some time, but whose impacts have been very wide-ranging and challenging to predict. In the case of Brexit, whilst it became clear some time ago this was going to happen, it is only with the expiry of the Brexit transition period on 31 December 2020 that it took full effect, and its impact is still playing out. In respect of Covid-19, its impact is still changing on almost a daily basis.

The specific drafting will commonly identify specific aspects of performance which the parties consider could be impacted, and deal with the specific steps that the parties have agreed should be taken to prepare for and prevent or mitigate the impact of the exceptional event. This could include, for example in respect of Covid-19, obligations to implement measures to prevent the spread amongst workers, re-organising site works to minimise the risk of infection spreading, ensuring back-ups are available to deal with logistical problems and auditing key supply chains for resilience. The drafting may also make any contractual relief for impacts experienced despite these steps conditional on complying with the clause – often a key employer requirement. A further key issue for negotiation is the cost of taking these measures, which in our experience is usually either placed with the contractor or shared between employer and contractor.

The key benefit to the parties of the specific drafting approach is that it focusses minds on identifying and mitigating the likely impacts of exceptional events before entry into the contract. It will provide the employer comfort that the contractor is obliged to take steps to prevent and mitigate, while the contractor will have comfort that if it takes the required steps and is still impacted by the event, the appropriate contractual relief will be available.