This is a short advice note to assist both Contractor and Employer clients on the potential impacts COVID-19 may have on their businesses relating specifically to its construction works and on-going projects.
This advice note discusses generally how the mechanisms of the UK's most popular construction contracts (un-amended) treat pandemics, such as COVID-19. There is specific focus on how these such events are dealt with in relation to claims for delay (disruption and prolongation) and loss and expense.
This advice note is drafted on the basis of the current situation in the UK as of 26 March 2020.
It is likely that government action is to be taken soon. It is projected that works will be suspended on what are considered "non-essential construction sites". Such announcement or government action is likely to be made within the next 10 – 14 days.
Introduction
COVID 19 has been classified as a worldwide pandemic.
The construction, infrastructure and energy industries in the UK are going to feel the effects of this harder than most. The UK's property and construction markets are the litmus test for the stability of the UK and world economies; generally speaking, when the construction industry starts feeling unwell, it is a good indicator that all other industries will soon catch the bug.
Bearing in mind that the global impacts on the world markets caused by COVID-19 are sending us head first into a global recession, the construction and energy markets are going to be hit doubly hard.
This brief summary highlights what Contractors and Employers must be mindful of in these uncertain times in relation to ongoing and upcoming constriction projects.
I keep hear people talking about "force majeure" and "frustration" – what do these concepts mean to me?
There seems to be a misconception in the industry that COVID-19 is, or will be, classified as a "force majeure" event, and as a result of this, there is nothing to worry about. Unfortunately, for a lot of companies, this is not the case.
The concept of "force majeure" (being a "greater force"), being an unforeseeable or uncontrollable event or circumstance does not exist as a rule under UK common law. It is borne out of civil law jurisdictions where such rights exist, but in the UK, can only be relied upon as an express contractual right. Put simply, if your contract does not expressly contain a "force majeure" provision – you cannot rely upon the concept to protect you from the impacts of COVID-19.
Frustration is a little different. Frustration is a doctrine of English law, existing generally in the UK, that relates to an event occurring after contract formation (which is outside the control of the parties) and causes performance of the contract to be impossible, illegal or radically different (and not just more difficult) than that originally contracted.
Sounds like COVID-19 then? So this will help us?
Not quite.
The principle behind the doctrine of frustration is to excuse the parties (whether they want to or not!) from their obligations to continue with contractual performance. It is not designed to benefit one party from getting itself out of a bad bargain, just because an event has occurred that causes its performance to be more difficult (or cost more money). This was just the case as argued in Davis Contractors Ltd v Fareham UDC (1).
The doctrine has a very high threshold, and is not one that will be readily available to most. Although on the face of it, the doctrine of frustration may seem attractive, from a policy point of view, to allow this to apply to the masses due to COVID-19 may open the floodgates, and it is unlikely the Courts will be willing to be so lenient. The Courts approach to this approach was shown recently in the case of Canary Wharf v European Medicines Agency (2). This case dealt with a party wishing to absolve itself from a performance under a contract due to Brexit. Here the Courts demonstrated how reluctant it was to allow the doctrine of frustration to be abused as a "get out of jail (contract) card".
Always remember, even as the world moves around us, and every day brings different challenges relating to COVID-19, our contracts remain motionless and indifferent. What you may be able to rely upon all depends on what your contract says.
1 [1956] UKHL3
2 [2019] EWHC 335(Ch)
But my construction contract does have a force majeure provision, what now?
If your contract contains a force majeure provision, it is likely one of the standard form contracts that contain such express right (like a JCT or FIDIC form), an amended standard form including force majeure, or an entirely bespoke contract, that has this right.
If your contract has a force majeure provision, you will need to understand what the implications of this provision are, and ensure you can benefit from this.
If there are notice requirements, make sure you get these right!
Yes, I'm using a JCT Form of Contract (SBC and DB 2016) – so talk me through it
The JCT suite of contracts is still one of the most popular in the industry, although limited public use due to government's favouring of the NEC has seen its popularity dip in the last decade.
The JCT form of contract does not define "force majeure". However, given its ordinary meaning and precedence in cases where the contractual meaning is examined, it is likely that the outbreak of COVID-19, as a global pandemic, would be classified as a "force majeure" event.
The JCT form of contract deals with claims from Contractors for extensions of time (Relevant Events) and loss and expense (Relevant Matters) separately.
In relation to extensions of time, COVID-19 is likely to be triggered by three main events or actions;
1) an instruction from the Architect/Contract Administrator or Employer to suspend the works;
2) exercise by UK government of any statutory power which directly affects the execution of the works; or
3) force majeure.
These events, if notified in accordance with the contract, will allow the Contractor an extension of time, thus saving it from liquidated damages for delay; but may not cover its standing time or cover the costs of overheads and prelims, or any loss and expense.
This is the tricky bit when it comes to the JCT, and its dealing with "time" and "money" separately.
Parties must be careful and mindful always as to how works are suspended.
There is a distinction between Relevant Events for which the Employer is responsible for, and those which are neutral. Those events which the Employer is responsible for, may also be Relevant Matters, and allow the Contractor to claim both "time" and "money".
Force majeure (and likewise, such governmental action expressly prohibiting works) is a neutral, time only event. Meaning, if such event occurs, and is notified appropriately, the Contractor should be granted a "free" extension of time, saving it from liquidated damages, and the Employer should not have to cover costs associated with the delay to the works. Both sides have the pause button pressed on their obligations under the contract. Neither benefits, neither is unduly burdened.
What about those tricky ones that may be time and money?
The Employer may believe it is following UK guidelines, putting the interest of staff, employees and those working on Site first and foremost, or it is in fact concentrating on other concerns under the Health and Safety at Work Act and/or CDM Regulations. These are the traits of a conscientious employer, and is a trait during these times that should be applauded. However, if not careful, the Employer may in fact be placing itself at risk in paying the Contractor costs under contract, to which it does not believe it should be entitled.
If an instruction is given by a Contract Administrator/ Architect or Employer, this is not just a Relevant Event, but also a Relevant Matter, entitling the Contractor to recover loss and expense (which may include prelims, overheads, loss of opportunity).
Be aware of this.
Parties must also be careful if they give an instruction to suspend the works, and no force majeure or governmental action Relevant Event occurs thereafter. Any instruction given to suspend the works, should such period be prolonged, may allow the contractor to issue a Default Notice, giving the Employer 14 days to remedy the prolonged suspension (recognised as a potential breach). If the Employer does not (or cannot) give notice for works to continue, the Contractor may be allowed to terminate its employment under the Contract.
This will have significant implications in costs and the direction of travel of those costs. Generally speaking delays caused by government action or force majeure are those neutral events, and costs may be mitigated – but what happens if a Contractor can demonstrate it would have been able to work elsewhere, and had plant, equipment, materials and labour tied up during this open-ended delay period?
No two cases are ever the same, and circumstances on site, relationships between the parties, amendments to the contract and a whole myriad of changes may cause one situation to be interpreted differently by an adjudicator, arbitrator or a judge. There is no definitive right answer.
Be aware of this.
My contract doesn't have a force majeure provision. I'm using an NEC3 (or NEC4) – and it mentions "prevention" though – surely it’s the same thing?
The NEC3/4 deal with pandemics or governmental actions differently than other forms of construction or energy standard form (or bespoke) contracts.
The NEC does not have a force majeure provision as standard. Instead, this is replaced with a "prevention" provision, generally seen as dealing with contractual "impossibility".
The difficulties with prevention (clause 19) is that there exists a higher threshold to be satisfied for its application than that which would normally excuse performance of a party or parties under a force majeure provision.
Whereas in other forms of contract where force majeure is included, the occurrence of a force majeure event would tend to afford relief to Parties performance, for something outside eithers control. The NEC3/4 prevention provision however adds in a number of hurdles to jump over, never with the intent of absolving either party. Clause 19 states:
If an event occurs which
• stops the Contractor completing the whole of the works or
• stops the Contractor completing the whole of the works by the date for planned Completion on the Accepted Programme
and which
• neither Party could prevent and
• an experienced contractor would have had judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable to have allowed for it,
the Project Manager gives an instruction to the Contractor stating how the event is to be dealt with.
For a prevention event to have been deemed to have occurred, then all three hurdles must be jumped. It is the latter of which that is already causing problems for contracts where the ink is not yet dry.
I think a prevention event has occurred – what do I do?
First, either the Contractor or Project Manager should notify. However, if no instruction is given by the Project Manager, to ensure a good record trail, it is wise for a Contractor to get communicate with the Project Manager, and ask the Project Manager what to do.
The Project Manager will then be tasked with instructing how such event is to be dealt with. The instruction will likely result in:
1) an instruction to stop or not start work, in accordance with clause 34.1 – this is in effect suspension of the works
2) an instruction changing the Scope (or Works Information for NEC3) – this will tend to be omissions of work, or a resequencing of the works
Such instruction is to be followed, whether a Contractor likes it or not, in accordance with clause 27.3.
I got the instruction, now what?
If such instruction is received, then immediately (if the Project Manager has not done so themselves – which it should have) notify a compensation event. Be careful, if required to specify which compensation event has arisen.
The most likely compensation events to have occurred are:
1) 60.1(1) – a change to the Scope / Works Information
2) 60.1(4) – the Project Manager gives an instruction to stop or not start any work or change a Key Date
3) 60.1(5) – the Client / Employer or Others don't work as stated in the Accepted Programme
4) 60.1(8) – the Project Manager changes a decision which he has previously communicated (likely to deal with COVID-19)
5) 60.1(19) – a prevention event
Keep in mind however, that a prevention event will only be a valid compensation event if there are no other compensation events. This further limits its applications under the NEC3/4.
After notifying a compensation event, the change management system under clause 6 kicks in; this involves the preparation of quotations (being both time and money), assessed in accordance with clause 63 and implemented as set out in clause 66 (65 – NEC3).
It is imperative that a Contractor stick to these strict timeframes, as it may forfeit rights in failing to notify (specifically the condition precedent / time bar in clause 61.3).
I didn't receive an instruction?
As above, it will always be best to notify the Project Manager of such event, and request an instruction be given. If the Project Manager believes that no instruction is necessary, the Contractor is left with two options:
1) issue an early warning notification, and instruct (it is not a request – they have to attend) a meeting with the Project Manager. Advise that the Client / Employer be in attendance; or
2) notify a compensation event under clause 60.1(19)
a. be aware of the limitations, that if this event is valid, it may restrict a Contractor's rights in claiming others for the same cause
The true gift of the NEC in these situations is the early warning mechanism. The mechanism is designed for situations where the Parties need to sit down and talk, and it goes without saying that this should be done at the earliest. Early warning meetings allow the Parties to discuss alternative ways of dealing with the pandemic, and may lead to negotiated settlements, or agreements to vary the Contract to add in an applicable force majeure provision – which we are assisting clients with already.
Generally speaking, such agreements accept the neutral nature of COVID-19, and allow for the Parties to "pause" obligations. Essentially, on the face of these, neither party benefits from its occurrence, and the EoT will only deal with delays from the immediate date of agreement, and end at a particular date (say 12 weeks in the future). That said, there can be some commercial benefit to agreeing a prolonged period of delay to allow time to be "made up" elsewhere – in terms of design works, which should not be delayed.
What are the consequences under the NEC3/4 of suspension to the works caused by COVID 19?
A lot depends on whether or not a compensation event is notified (on time) and is valid. If it is, generally speaking, a Contractor should be entitled to the time and money associated with the delay. It is a shortcoming of the NEC3/4 that it does not identify events like COVID-19, and as such, causes the Client / Employer to carry certain risks for these.
This is where a Contractor may be able to take advantage of the situation.
If possible, a Contractor, knowing such delay event is on the horizon, could speed up procurement of materials, equipment, plant and/or kit to be incorporated into the works. If these are ready for use, and there is an event, prolonging the Contractor's stay on Site, and it could potentially use these materials and/or goods on other projects, then on the basis of the changes in Defined Cost there is a legitimate claim for this standing time. A Contractor would have to evidence that it could have used these materials and/or goods elsewhere, however, and if its governmental action stopping all works, this may be difficult or impossible to do.
Any Contractor should also make sure it adjusts its programme to be submitted for acceptance. It should place prelim and overhead costs expressly and clearly; so as to claim these costs due to delays to its planned Completion. A Contractor must be sure to include a good length of terminal float in its next programme submitted for acceptance.
As with the JCT, such prolonged suspension (if not for reason of a valid compensation event) may give rise to termination – regardless of whose fault the suspension may be.
Termination also arise in circumstances of insolvency, and as well Project Manager's instructions to stop (or not start) substantial works for more than 13 weeks. Be mindful, that termination may be an extreme option, but for problematic projects, may be worth exploring.
It sounds like people could take advantage of this situation?
That's correct. It may not seem just or right, but it all depends on what your contract says. Save for any direct governmental decisions or guidance on how works can or will be suspended, and the repercussions of this under each individual contract, unfortunately a lot are at the mercy of their contractual provisions. On this, we advise:
• Read the Contract – for many (although you deserve a slap on the wrists for it) the contract will have been placed in a drawer after signing, and is currently gathering dust. Blow the cobwebs off and read the provisions to see what protections are in place. Make sure you follow the contract, and act within the boundaries, as failure to do so, even in these extreme circumstances may come with significant repercussions;
• Mitigate – do what you can to minimise the effects on your business. Have policies and procedures in place to deal with the changing situations, and follow the correct contractual processes;
• Keep Records – never has this been more important. Keep records of all internal and external correspondence – especially relating to your health and safety requirements. Meetings, emails, discussions had should be recorded. Make sure you collate these. Start to develop a picture of what the contract requires, and evidence how you are following this (and perhaps how others are not)
This whole thing is a mess – can I not just sit down with the other side and talk about how to deal with this?
Of course you can, and we encourage this. If you realise the contract you have entered in to is not going to sufficiently or adequately protect either side, there is little that will prohibit you sitting down (whilst ensuring social distancing rules) and looking at a collaborative approach on how to deal with this.
Consider Deeds of Variation, or separate agreements to depart from some of the more stringent rules. Discuss introducing an agreed suspension period, where both parties can mitigate the risks they may be exposed to. Put in place arrangements where neither party unduly suffers, and you both agree moving forward how to ensure the financial and physical safety of your company and employees.
We encourage you to talk! At this time of crisis, it is best not to become insular and worry about how this will effect just your business under this contract – as everyone will be in the same boat, and may just be waiting for you to suggest such a meeting.
Closing Thoughts
It is likely COVID 19 is going to have extreme and detrimental impacts on supply chains, costs of carrying out works and site health and safety. With all of these brought into play, it is hard to know where the edges are.
However, as a general principle, it is likely that delays caused by COVID 19 should not cause either Employers or Contractor to be punished for delay, and temporary suspensions should be allowed – and agreements are likely to be put in place between to help counteract these issues.
For any guidance or assistance on your construction contract during this difficult time, please contact Richard Twomey or David McNeice.
