The impact of the COVID-19 coronavirus continues to escalate and will likely significantly affect projects in the construction and infrastructure sectors. Essentially, delay and disruption to projects due to material shortages, restrictions on movement of workforce, shutdown of sites or illness of workforce on site (for example the recent temporary suspension of works to construct the new Google UK HQ after a worker tested positively for the coronavirus).
In such circumstances, we consider below the potential remedies under (unamended) JCT 2016 standard forms of building contract for a contractor to seek relief from performance and claim additional time and/or monies.
This commentary follows our recent article entitled ‘NEC3 – Have You Contractually vaccinated Against COVID-19?’
Before the onset of the coronavirus there was already a shortage of resource across the construction and infrastructure sectors in the UK. Now, as global supply chains dry-up and restrictions are imposed on the movement of workforce due to the coronavirus, there is an increased likelihood of contractors defaulting their contracts.
The JCT 2016 standard forms of building contract do not expressly refer to disease, epidemics or pandemics as Relevant Events (for an extension of time), or Relevant Matters (for loss and expense). As such, contractors may now seek to rely on other contractual provisions in their contracts, including the following Relevant Events:
- Changes or instructions (e.g. to contend with the coronavirus) – clause 2.26.1
- Postponement of works or part thereof by the Employer (under clause 3.10) – clause 2.26.2
- Employer’s deferment of possession or restriction on access to the site – clause 2.26.3
- Employer’s impediment, prevention or default (e.g. failure to provide goods or materials that it is required to provide under the contract) – clause 2.26.6
- Lock out of workmen – clause 2.26.11
- Exercise of any statutory power by the UK government or any local or public authority – clause 2.26.12
- Force majeure – clause 2.26.14
Exercise of any statutory power by the UK government or any local or public authority
The wording of clause 2.26.12 limits its application. That is, delay caused directly by the COVID-19 outbreak would not entitle a contractor to an extension of time but would in the event of a delay caused by the exercise of any statutory power in response.
For example, if a workforce was required by the UK government to stay at home in self-isolation (as under The Health Protection (Coronavirus) Regulations 2020) to help combat the spread of the coronavirus, then on the face of it there is a good argument that restrictions on movement of workers or activity that impacts the works falls within this ground.
At the time of drafting this article, contractors are seeking clarity on whether it is acceptable for construction and infrastructure sites to remain open after the Prime Minister’s announcement on 23rd March that the UK was on a strict three-week lockdown to help tackle the coronavirus outbreak. On the face of it, the prevailing UK government’s advice to follow public health guidance on social distancing and gatherings does seem infeasible on construction and infrastructure sites. However, some contractors believe that on many sites it is possible to carry out operations safely with the right planning, supervision and processes in place (e.g. the Site Operating Procedures now published by the Construction Leadership Council).
Force majeure is a contractual term that provides for the award of an extension of time if works are delayed due to the occurrence of circumstances beyond the control of the parties.
The trouble in seeking to rely on clause 2.26.14 in relation to COVID-19 is that the standard forms of contract do not provide a definition of force majeure. Interpretation will turn much on what was, or could have been, anticipated at the time the contract was entered in to.
Force majeure may well be relied upon for existing contracts, although this will depend on what impact the coronavirus actually has on the works on each project. However, in respect of contracts not yet in place, parties should be aware that force majeure may not apply to them in respect of the coronavirus, as it is no longer an event which is not foreseeable.
Postponement and Termination
In a worst-case scenario, as alternative to claiming for additional time, parties may wish to consider their termination rights.
Clause 8.11 provides for termination by either party, including by reason of force majeure or Employer’s instructions under clause 3.10. The right to terminate under this clause will arise if the carrying out of the whole or substantially the whole of the uncompleted works is suspended for the period set out in the contract particulars (the default position being two months).
In the event of suspension for the specified period due to a force majeure event, either party may give notice to the other that, unless the suspension ceases within seven days of receipt of the notice, the contractor’s employment may be terminated on the service of a second notice (which is given upon the expiry of the first notice period).
However, parties should be conscious of the risk of terminating for reason of force majeure. If the event is deemed not to be force majeure, the party seeking to rely on it could leave itself open to a claim for repudiatory breach of contract.
Loss and expense
It is important to bear in mind that while Relevant Events that cause delay to the works may give rise to an extension of time (and thus relief from liquidated damages), a contractor is only entitled to loss and expense if such matters are also Relevant Matters under clause 4.21, or as otherwise provided under the contract.
However, it seems likely that only Employer’s instructions, impediment, postponement of works and termination would give rise to a claim for additional monies in connection with the COVID-19 outbreak. For other matters, the financial risk is split between the contractor and employer (i.e. the contractor does not have to pay liquidated damages for delay, but bears the cost resulting from the delay).
What should you do?
Review the relevant terms of your contracts, particularly any amendments to the standard forms, and seek expert legal advice if you are unsure of your rights and obligations.
Check how risks are allocated under your contracts, and when any notices should be given. Under clause 2.24.1, the contractor must give notice “if and whenever it becomes reasonably apparent that the progress of the Works or any Section is being or is likely to be delayed”. Failure so to notify is likely to result in the contractor losing any entitlement to an extension of time, so it’s imperative to stay on top of notices.
Consider appropriate steps to mitigate delay, disruption and associated costs. A contractor is required under clause 22.214.171.124 to constantly use its best endeavours to mitigate the effects of any delay, even if the delay event is not its fault. This obligation should not be overlooked because, again, a failure to do so could result in a loss of entitlement to an extension of time. Contractors will likely take certain steps as a matter of course, such as seeking alternative supply sources, but should also consider taking steps to minimise the impact of the virus itself.
Keep good records of decision making and the effects of any delay and disruption to the works. These should include but not be limited to:
- Progress reports
- Plant and labour records
- Updated procurement schedules
- Correspondence with the supply chain (in relation to procurement, manufacturing and shipping of goods and materials)
- Updated programmes
- Cost records (to establish direct and indirect costs as a result of any delay or disruption, and any mitigation measures taken)
Think practically. For example:
- Supply chain: maintain dialogue with your key suppliers – establish up to date lead-in times and delivery schedules for goods and materials
- Labour and plant: monitor productivity – if this falls, manage such resource to meet the outputs likely to be achieved – any plant that is on standby or not being utilised should be off-hired
- Subcontractors: if Works are likely to be delayed, consider standing-down subcontractors to minimise costs
For contracts not yet in place, parties currently in negotiations should consider including amendments expressly allocating the risks arising as a result of COVID-19, and indeed diseases, epidemics and pandemics more widely. Alternatively, contractors will need to consider their entitlements under the Relevant Events/Matters cited above or contemplate postponing start on site until there is more clarity on the coronavirus situation.
If you have any questions or concerns about project delivery and the commercial impact arising from the coronavirus outbreak, please get in touch with us.