COVID-19 – Suspending construction works, time and money
Unsurprisingly COVID-19 and its impact on construction contracts has been a key concern for our clients recently. Unlike some other areas, the position under building contracts is not necessarily straight forward.
Suspension of the works?
The immediate concern for most clients, whether employers or contractors, has been whether works can or should continue on site. While there has been much uncertainty throughout the industry following the government’s lockdown announcement on 23 March, it is important to keep in mind that it has never been an absolute requirement for all construction operations to cease.
The current position in England is that construction can continue provided it can be carried out in accordance with the Site Operating Procedures published by the Construction Leadership Council. These set out guidance on how to protect construction workers and minimise the risk of infection. They address travel, site access and egress, hand washing, site facilities, cleaning and arrangements for close working. It is the latter of these which has caused most confusion, with version 2 of the Site Operating Procedures advising that activities, where it is not possible for workers to maintain a two metre distance, should be not be carried out. Version 2 was retracted less than 24 hours after it was published. Version 3, published on 14 April, sets out a “hierarchy of controls” aimed at reducing the risk where maintaining a two metre distance is not possible.
Although it is permissible for certain construction activities to continue, we are seeing projects where contractors have nonetheless chosen to suspend works. The strict contractual position is often that, unless the contractor can demonstrate that it is not possible to follow the Site Operating Procedures, suspension of the works would amount to a serious breach of contract entitling the employer to terminate. For obvious reasons, many employers do not wish to go down this route and we are generally seeing employers and contractors reach commercial agreement.
A note of caution for parties is the mutual termination provision. The unamended JCT form entitles the parties to terminate where the works, or substantially the whole of them, are suspended for a continuous period of two months due to a force majeure event or the exercise of a statutory power, among others. Whether or not the suspension was instructed by the employer is irrelevant. If contractors suspend the works in circumstances where the works could reasonably continue, the employer should not inadvertently ‘affirm the breach’ as it could entitle the contractor to terminate after two month’s suspension. An agreement in which the contractor waives its right to terminate or agrees to extend the period before the right to terminate is triggered, perhaps in exchange for clarity over an extension of time, is preferable. Failing that, employers should write to the contractor to reserve their position.
Time and money
Even where works are continuing, the impact of Covid-19 is still likely to be felt. The key issues include delays caused by shortages in goods and materials or delays in importing them as well as potentially a lack of labour. Under JCT forms of contract, two ’Relevant Events’ are, well, relevant: the exercise by the government of a statutory power and force majeure.
Taking the first, the Relevant Event requires both the exercise of a statutory power and a power which directly affects the execution of the works. As we have said, there is no outright prohibition on the continuation of all construction works. Further, the Site Operating Procedures are guidelines and not statutory requirements. Although the Coronavirus Act 2020 was passed on 25 March, this is largely an enabling Act in terms of, among other things, giving the Secretary of State power to make “declarations”. Will parties accept that the Act was the exercise of a statutory power?
As for force majeure, there is no settled definition under English law and the unamended JCT contracts do not define it or give examples. Perhaps the next edition of JCT contracts will do. That said, force majeure is generally understood to cover circumstances which are not within a contracting party’s control and authority suggests it would cover epidemics. On that basis it is difficult to see how the outbreak would not constitute a force majeure event. However, it is common for contracts to exclude a shortage of goods or materials from force majeure and under those contracts the contractor has assumed the risk.
In terms of loss and expense, in the unamended JCT contract the contractor takes the entire risk of loss and expense due to the impact of Covid-19 on the progress of its works.
Under NEC forms of contract the position is potentially more favourable for the contractor. Under the NEC 3/ NEC 4 contracts a contractor is entitled to both an extension of time and compensation if an event occurs which stops the whole of the works being completed by the date for planned Completion shown on the Accepted Programme, or being completed at all. The contractor will need to demonstrate that an experienced contractor would have judged the Covid-19 outbreak at the Contract Date to have such a small chance of occurring that it would have been unreasonable for the contractor to have allowed for it. This is probably straightforward for earlier contracts, but is more problematic for contracts entered into more recently.
In contracts under negotiation, both employers and contractors must address the issue directly and allocate the risk between the parties. Most typically, we are seeing parties agree a risk share where the employer assumes the time risk, but the contractor assumes the cost risk of Covid-19 related delay. That said, parties do not necessarily have a free hand here and interestingly we are seeing funders refuse to lend unless the contractor assumes the risk. Whether most contractors can accept this risk remains to be seen.
It is not just that there are obvious benefits in setting out the position clearly; remaining silent could have unintended consequences. The more foreseeable the consequences of an event are, the more difficult it is to demonstrate that the event constitutes force majeure – the rationale being that it would be ‘reasonable’ to expect a contractor to be able take steps to avoid or mitigate the consequences of that event. Now that we have experience of a pandemic, isn’t it foreseeable we might have one again, or at least a resurgence of Covid-19?
There are also other considerations. For instance, how do you define Covid-19? What about mutations of it? Including a widely defined event is not always best, even from a contractor’s perspective. The looser the definition the more difficult it may be for a contractor to evidence that the delay is caused by that event.
Parties may consider being specific about how the impact of Covid-19 will affect the project. For instance, where there is a shortage of labour, parties may want to distinguish between a shortage caused by the number of workers being ill or self-isolating and pre-emptive measures that a contractor might choose to bring in to avoid the spread of the disease, particularly if there is a second outbreak once government restrictions begin to ease. Is it reasonable though for contractors to be penalised for taking sensible precautionary steps?
Mitigation is also relevant. Parties should keep in mind that under an unamended JCT contract, contractors are under an obligation to “constantly use best endeavours to prevent” delay and further delay. Employers will want their contractors to be proactive in managing delay where specified materials are sourced or manufactured abroad. Contractors could be obliged to make design proposals to mitigate the impact of delay, something which could be added to the value engineering provisions or design submission procedure.
This article was written by Fiona Edmond and Chris Busialeh. For more information, please contact Fiona on +44 (0)20 7427 4463 or at email@example.com or Chris on +44 (0)20 7427 4546 or at firstname.lastname@example.org.