Coronavirus and construction contracts FAQ

07 May 2020

We received nearly one hundred questions for our webinar that took place on Wednesday 29 April 2020 on how the coronavirus might impact on construction contracts. We answered some of those during the webinar itself but of course couldn’t manage them all. We have therefore taken some of the most frequently asked questions and set out our thoughts below.

View our construction webinar here.

Does the coronavirus (and pandemics in general) constitute force majeure?

Probably, but it depends upon the terms of the particular contract in question. Under JCT, force majeure is undefined, and there are no reported UK construction cases to provide guidance as to the English courts’ interpretation of the term. This creates uncertainty as to how force majeure in JCT contracts will be interpreted. There is precedent in general commercial law cases to indicate that epidemics (and by extension pandemics) will constitute force majeure. The NEC does not refer to the phrase ‘force majeure’, but does contain a force majeure type provision in the list of compensation events and describes this as a ‘prevention event’ which requires an instruction. This compensation event contains a foreseeability pre-condition, so is less likely to provide relief under contracts which were entered into once the market had become aware of the potential impact of COVID-19 on construction projects.

Was there ever a more obvious Force Majeure event?

Probably not, but see above!

Does the enforced closures of sites as a result of the virus constitute a force majeure?

The government has said that construction sites can remain open, subject ‘where possible’ to observing guidance on social distancing. An employer or contractor who decides unilaterally to suspend work on site on the basis of the COVID-19 outbreak is likely to have taken the risk of the time and cost consequences of that suspension. There may be certain projects where it is impossible for any work at all to continue on site, but we suggest that these projects will be few and far between. Generally, it seems it will be possible for a contractor to continue making some progress on site, albeit at reduced levels of productivity.

How do you foresee future projects dealing with the risk of COVID-19 now that it is no longer force majeure?

It depends on the form of contract whether the risk of COVID-19 ‘is no longer force majeure’. JCT does not contain a pre-condition that the force majeure event was unforeseen to the contractor, so future epidemics and the future effects of COVID-19 may still be covered by ‘force majeure’. However, under NEC contracts there is a requirement that the changes of the event occurring would be so small that a reasonable contractor would not have allowed for it – a foreseeability test. Whatever the form of contract being used, we anticipate that contractors will request bespoke drafting being included to provide for the sharing of risk in relation to COVID-19 related delays, and possibly increased costs too. This could range from including an express definition of ‘Force Majeure’ (including epidemic / pandemic) in a JCT contract, through to including fluctuation provisions allowing contractors to claim increased material and labour costs where a project is delayed due to COVID-19. We also anticipate that NEC contracts will be amended so that COVID-19 delays are not deemed reasonably foreseeable for the purposes of NEC’s equivalent of the ‘force majeure’ compensation event. We have published an article setting out some possible amendments to JCT contracts and subcontracts to provide contractors/ subcontractors with a more certain / balanced approach in relation to Covid19 related delays. You can find a copy of the article and amendments here.

What does the ‘best endeavours’ obligation under the JCT contract require a contractor to do? Would it have to continue to perform work albeit with reduced operatives?

Possibly. A best endeavours obligation requires a party to take steps which a “prudent, determined and reasonable owner acting in his own interests and desiring to achieve that result would take”. This means that the party might have to spend money to achieve it, and it is clearly a more onerous obligation than one to provide ‘reasonable endeavours’. Keating on Construction Contracts (a leading textbook) provides some guidance on the position under a JCT contract: “These provisions are an important qualification of the right to an extension of time. Thus, for example, in some cases it might be the Contractor’s duty to re-programme the Works either to prevent or to reduce delay. How far the Contractor must take other steps depends upon the circumstances of each case, but it is thought that the proviso does not contemplate the expenditure of substantial sums of money”. As to what will constitute ‘substantial sums’, this is likely to depend upon the circumstances of a given project.

Does JCT 2011 D&B Clause 2.26.12 (exercise after the base date by the UK Government of statutory powers) offer any help for contractors who wish to claim an EOT?

Possibly. The position is unclear, and it remains to be seen whether adjudicators, courts etc will agree that this Relevant Event has been triggered by the statutory powers exercised by the Government to date. We suggest that contractors should apply for an extension of time on a dual basis by reference to both clauses 2.26.14 (force majeure) and 2.26.12 (exercise after the base date by the UK Government of statutory powers) (as well as any others which may be applicable).

Is the Relevant Event, under JCT D&B 2016, prior to 23 March Force Majeure and then 2.26.12 (exercise after the base date by the UK Government of statutory powers) post 23 March?

It is possible for there to be more than one applicable Relevant Event. There is no express requirement in a JCT contract for the ‘force majeure’ event to have been unforeseeable to the contractor and once a force majeure event has begun, there is no reason why it would lose its status as a Relevant Event while its effects are ongoing. Consequently, to the extent that the critical path has been impacted by COVID-19 related delays, contractors should notify and claim extensions of time pursuant to the Relevant Events related to force majeure and / or exercise after the base date by the UK Government of statutory powers (and any other event that may be applicable, such as employer instructions).

Under JCT, how is it best to obtain EOT and associated L&E due to reduced productivity due to new CLC guidance on social distancing?

Our view is that the CLC (Construction Leadership Council) guidance (Site Operating Procedures) will not qualify as a Relevant Event in relation to changes in Statutory Requirements after the base date. In the absence of any instruction from the employer, we therefore anticipate that contractors should frame their extension of time claim for COVID-19 related delays under the Relevant Events for (1) force majeure; and / or (2) exercise after the base date by the UK Government of statutory powers. A successful extension of time claim under either of these Relevant Events will provide the contractor with relief from liquidated damages for delay. However, neither of these Relevant Events is also a Relevant Matter, so they will not entitle the contractor to loss and expense.

We as a main contractor are willing to continue working whilst observing social distancing / CLC guidance, but our main problem is an inability to source materials due to suppliers and merchants having closed down their depots. Who is responsible for the delay caused by this?

As a general rule, shortage of labour and material supply is the contractor’s risk, subject to any fluctuation provisions which may be included in the contract. However, we expect that contractors affected by material shortage will apply for an extension of time on the basis of force majeure type provisions, depending upon the form of contract being used for a given project. Whether adjudicators and the Courts will award extensions of time on these grounds remains to be seen, but we anticipate that the majority, at least of adjudicators, will be relatively sympathetic to contractors, given the unprecedented nature of the COVID-19 outbreak.

Where a sub-contractor is unable to source basic (but critical) materials due to merchant closures, how is this dealt with?

This will be similar to the above, although the terms of the sub-contract will prevail rather than those of the main contract. If a sub-contract has a force majeure provision that may allow the sub-contractor to an extension of time if it can be shown that the delay was caused by the inability to source materials, although showing that that material shortage was linked to coronavirus-related issues may not always be straightforward.

What can the Client do if the CA under a JCT contract stops the works because he is not satisfied that the Contractor is properly adhering to the if CLC’s Site Operating Procedures (SOPs)?  The CA would be acting primarily to protect their Client who is ultimately responsible under CDM for H&S on the site – potentially for corporate manslaughter charges in the worst cases – but would the Client be liable for EOT costs etc?

The position is not straightforward, but our view is that in this scenario the employer / CA would be better off allowing the project to continue but recording (in minutes etc) any instances of non-compliance with the SOPs. We say this for a number of reasons. Firstly, the Government’s guidance for construction sites is that social distancing should be observed ‘where possible’ – i.e. it is not an absolute obligation. Secondly, the SOPs are guidance only, and not statutory requirements, so failing to comply with them is not a breach of contract per se. Finally, whilst not impossible, it seems unlikely that corporate manslaughter charges could be brought against the client in this scenario. It would be difficult to prove that an operative had caught COVID-19 whilst on the construction site, and query if the HSE would seek a prosecution of the client if the client has made the appropriate appointments in writing under the CDM Regulations (principal contractor, principal designer etc). 

Under NEC contracts, who is liable for the contractor’s costs of increasing resource to mitigate lost time?

If an event outside the parties’ control occurs which delays completion or a key date being achieved, it is a compensation event provided it had such a small risk of occurring at the contract date that a competent contractor would not have allowed for it (a ‘prevention event’). It is likely that the coronavirus and its effects will come under this definition, at least for contracts entered into before, say, the turn of the year (anything from January 2020 onwards becomes greyer). A compensation event provides for the contractor to recover time and money (unlike under JCT contracts where the concepts are treated differently). As such, subject to proper notice being given, it is likely that the employer will bear the time and financial risk of the effects of this coronavirus. Where there is a ‘prevention event’ the Project Manager is also obliged to issue an instruction as to how to deal with the prevention – which may also be a compensation event. If the contractor is told to increase resource to mitigate lost time, that should therefore also be a compensation event and they should be able to recover their cost as a result.

Is the government’s direction to stop all non-critical work a change in law under Option X2 of the NEC3 EEC?

There has not been a specific direction to stop all non-critical construction work – on the contrary, the government has encouraged construction sites to remain open where health guidance including social distancing can be put in place. Our experience is that most sites have been able to put these in place to allow at least some works to continue, in line with the CLC’s Site Operating Procedures (SOPs). While there have been changes in law which may engage X2 – the Coronavirus Act 2020 and the Health Protection (Coronavirus, Restrictions) England Regulations 2020 – they do not prevent work, and there is a specific carve out from the general obligation to stay at home in the Regulations for those travelling to work where they cannot work from home (which is the case for a lot of site-based construction workers). As such, it is difficult to see at present how any of the changes in law would actually have led to time and cost which is recoverable under the contract.

Could recommencing on site with revised procedures and PPE jeopardise a contractor’s claim for EOT in the period when it was not on site?

Arguably, yes, on the basis that some may say ‘if you’re working now, you never needed to stop’. However, our view is that a contractor who stopped work which may not have been safe in order to carry out risk assessments, and is now resuming with revised working practices and new procedures in place, is likely to be viewed favourably by courts and adjudicators in the future, should a dispute arise.

Where police have stopped to question contractors and instructed them not to go to site (even where this was not apparently the right course of action), where might a contractor stand in deciding not to proceed with the project?

Whilst there have been reports of this kind of thing happening, particularly in the earlier days of lockdown, our understanding is that the police should not be taking this kind of action provided that the person travelling to site needs to be on site. That will be the case with most but not all site-based workers. Where this kind of incident has occurred it should be logged but it should not have an effect on a contractor’s decision to stop works because ultimately it could well have been an improper instruction from the police. Contractors should instead base their decisions on whether to continue work on instructions from the employer, and a careful risk assessment to consider whether works can be safely carried out.

If a site choses to close down fully, should the delay be assessed as the period that would have been lost had they stayed open?

If a risk assessment could have been carried out which may have allowed works to continue with revised working procedures in place, then arguably if a contractor has failed to do this it should be factored into an assessment of delay. That is particularly the case where, as under most JCT forms, the contractor has an obligation to use its ‘best endeavours’ to mitigate delay (see above). This question does raise an interesting point regarding assessment of delays from coronavirus. It will not generally be a straightforward task of looking at the period of lockdown and adding that to the contract period. For example, where a site has continued to work, it is likely to be at a reduced output, which will need to be considered. A contractor will also have to show which works were delayed – if those that could not be carried out were not critical, or only became critical for a period of the delay, an entitlement to an extension of time will have to be adjusted accordingly. Employers may argue that a contractor should not be excused for pre-existing delay which had it not existed, would have seen the works finished before lockdown; while contractors will argue they should be given extensions for remobilisations and possibly re-procuring works from failed sub-contractors. All in all, our view is that delay analysts are likely to be very busy over the coming weeks and months.

Is the client exposed in anyway if he has a gentleman’s agreement with the contractor to standstill during the period?

Yes. Reaching agreement is a sensible way of proceeding if a mutually satisfactory position can be found, and under the NEC’s ‘duty of mutual trust and cooperation’ (clause 10.1) it is arguably required (at least to be attempted). However, if an agreement is reached it should be documented. If it is not, there is a risk for both parties that should the picture change – and at the moment it is very difficult to predict what will be happening in days let alone weeks or months’ time – and the ‘agreement’ becomes less advantageous to one of the parties, one party may seek to walk away from it. Although the employer may find themselves exposed, there is arguably greater risk for a contractor that thinks it has an agreement but can’t prove it, as it may have lost its chance to put delay and loss and expenses notices in. We recommend that even if there is an apparent agreement, these should still be put in as a fall-back position.

The views set out above are not legal advice – every project and contract is different and requires consideration of the specific facts which apply. If you have a query arising out of the coronavirus crisis and how it affects your contract, or if you have any general construction queries, please contact Stefan Harris-Wright or Oli Worth to discuss this further on the contact details below.

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