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Following the Construction team’s recent article on force majeure and entitlement to relief in the context of the Coronavirus pandemic, in this article, Cleaver Fulton Rankin considers the common law principle of frustration specifically in relation to construction contracts, as well as the prevention principle and extensions of time.
The common law principle of frustration provides that where a ‘frustrating event’ occurs, a contract can be automatically discharged so that it is no longer binding on the parties. This principle applies to commercial contracts, including construction contracts.
A ‘frustrating event’ will be deemed to have occurred where it satisfies the following criteria (i) it has taken place after execution of the contract; (ii) it is so fundamental that it goes to the root of the contract and entirely beyond what was in the contemplation of the parties at the time it was executed; (iii) it is not the fault of either party to the contract (or a ‘no-fault event’); (iv) it is not contemplated or provided for in the contract; and (v) it renders further performance of the contract impossible, illegal or makes it radically different to what was in the contemplation of the parties at the time the contract was executed.
Events that may lead to a frustrated contract include, but are not limited to:
On the other hand, a contract would not be frustrated if:
If a contract is deemed to have been frustrated, it is automatically terminated and the parties are discharged from their further obligations. The courts will not intervene to amend the terms of the contract, and the parties will, if it is an option, need to negotiate a new contract between themselves. All sums paid in respect of the contract before it was discharged are recoverable, although the court has discretion to allow one contracting party to retain some or all of the payments from the other if expenses have been incurred or the other party has received a valuable benefit before the contract was terminated due to the frustrating event.
Prevention Principle & Extensions of Time
The case of Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd which helped establish the prevention principle in relation to construction contracts, and the inclusion of extension of time (‘EoT’) clauses within them, along with the ability for the employer to extend the date of completion even where no EoT has been applied for. In the above case, the contractor was delayed by the employer’s failure to give prompt instructions to proceed with certain works. As a result, the court found that it was ‘beyond all reason’ to find the contractor liable for the damages suffered by the employer as a result of their own delay to the works. Despite the Court of Appeal (including Coulson LJ ) recently confirming the first instance decision of the TCC in North Midland Building Limited v Cyden Homes Limited i.e. that parties can contract out of the prevention principle, it remains to be seen what the full effect of this case on this area of law will be, and whether a trend towards this thinking, or away from it, will be established by the courts.
The central purpose of an EoT clause is to allow the date for practical completion to be extended for acts and omissions of the employer, in order to avoid falling foul of the prevention principle and ensuring the liquidated damages regime can still operate. Such clauses will typically include the following as causes of delay entitling the contractor to claim an EoT (i) an act or omission of the employer; (ii) a delay caused by the employer; or (iii) an act of prevention by the employer.
It is however important for contractors (and sub-contractors, consultants, suppliers etc.) to note that where they intend to apply for an EoT as a result of the impact of Covid-19, they must do so in full compliance with the time periods, and notice requirements set out in the contract(s) they are party to. Often it is found by contractors that the time allowed is very limited, or that they have allowed the time to lapse, and ultimately lost their opportunity to claim for an EoT. In such circumstances however, the employer may waive this and still allow the contractor to submit an EoT application (obviously this would need to be recorded in writing accordingly). Alternatively, it will be open to the employer to unilaterally extend the date of completion, and this will be worth discussing this with them.
On the other hand, it is important for employers (and main contractors etc.) to be aware of the prevention principle and if they receive an extension of time application as a result of the Covid-19 pandemic, that they too comply with their own obligations under the relevant EoT provisions. Indeed, they may fall foul of the prevention principle where they fail to deal with such matters promptly and issue instructions as was the case in Peak.
If you are an employer, contractor, sub-contractor, consultant or supplier and are currently dealing with contractual issues arising from Covid-19, our team of top tier construction lawyers at Cleaver Fulton Rankin would be delighted to help you. Please do get in touch.
This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Construction team at Cleaver Fulton Rankin for further advice or information