How does the coronavirus pandemic affect construction contracts?

With the list of everyday activities on ‘lock down’ due to the coronavirus pandemic growing by the day, it seems inevitable that the normal progress of construction projects will at some stage be affected.

Contractors and subcontractors may find their obligations more difficult to fulfil if, for example, the pandemic results in shortages of labour, delays to the supply of materials and products, and increased costs.  In addition, the Government’s advice about working from home where possible, avoiding public transport and so on, will only further pressure various parts of the supply chain, including the provision of design and other professional services often relied upon by contractors and subcontractors alike. Major projects in London have already been affected – Crossrail’s Bond Street Station site and work at Google’s Kings Cross HQ have had to be suspended for deep cleaning after workers contracted the virus – and it’s difficult to see labour shortages or government restrictions not biting further in the coming days and weeks.

The obvious resulting question for stakeholders in these unusual times is: how is the time and cost risk of COVID-19 allocated between the parties to my construction contract? This article considers these points through the lens of the two most popular industry standard forms of construction contract in the UK:  JCT D&B 2016 and NEC4 ECC. Both contracts are considered in their unamended form.

JCT 2016 and the coronavirus

Is a contractor entitled to an extension of time as a result of coronavirus?

Like many industry standard forms of building contract, the JCT 2016 suite provides for a contractual completion date, combined with an exhaustive list of ‘relevant events’. If encountered, each will entitle the Contractor to claim an extension of time (EOT) as long as the contractor has used its best endeavours to prevent a delay to the works (which includes expending money), followed the contractual process for notification, and shown the event delayed the completion date.

So, which, if any, of the Relevant Events could be applicable in relation to delays caused by COVID-19?

• Exercise of statutory powers:  This arises where the exercise by the Government, local authority etc. of a statutory power directly affects the execution of the Works.  This could be applicable if the Government decides, as part of its COVID-19 containment plans, to insist upon construction sites closing down.  The provision is only applicable where the statutory power is exercised after the ‘Base Date’, which is often agreed, when the contract is formed, as being the date of the Contractor’s tender.  Contractors working under existing contracts are therefore more likely to be able to benefit from this provision, but only if such statutory powers are exercised.  As yet, they have not. It remains to be seen whether the Government will implement such severe measures, and whether this would apply to all construction sites.  It could perhaps be enacted on a more limited basis, for example, so as to apply only to those projects where more than a certain number of operatives are on site.  Watch this space.
• Force majeure:  Force majeure is undefined in JCT contracts, which means we have to rely on case law and commentary for guidance as to its proper meaning. Unfortunately, the principle of force majeure is relatively uncodified in English law.  This creates a significant degree of uncertainty as to how the provision would be interpreted, particularly as there are no reported cases regarding force majeure in JCT contracts.

The overarching principles of force majeure are that it is an event which was unforeseeable at the formation of the contract and could not have been prevented by either party. These principles were confirmed in the case of Lebeaupin v. Crispin (1920).  Although it is an old case, it is of particular interest in the context of COVID-19 as it specifically referenced an epidemic as amounting to an event of force majeure.

Can a contractor recover loss and expense as a result of coronavirus?

What about increased costs incurred as a result of the coronavirus?  JCT works on the basis that there are separate regimes for determining the entitlement to time and cost.  Not every ‘relevant event’ entitles the contractor to its costs for the period of delay.  Even if a contractor can overcome the hurdles described above in establishing an entitlement to an extension of time for coronavirus-related delays, neither the exercise of statutory powers nor force majeure are events which give an entitlement to loss and expense.

Depending on the parties’ choices in the contract particulars, fluctuations provisions may also apply. These allow the contractor to increase their prices if the market price goes up, an exception to what are usually fixed price contracts. If selected, these may offer contractors relief from exposure to increased prices as a result of reduced supply following the pandemic (and perhaps increased demand when restrictions lift and there is a rush to get projects going again).

How should a contractor notify delays as a result of coronavirus?

Under a JCT contract a contractor is obliged to notify the employer ‘forthwith’ of any event which may impact upon the progress of the works.  However, in practice, the Courts have found that a failure by the contractor to meet this requirement for timely notification is not fatal to the contractor’s entitlement.  In other words, the timing of the notification is not usually a ‘condition precedent’.  In any event, best practice will of course dictate that contractors should notify the employer in a timely manner and in accordance with the contract, in order to protect its position and avoid criticism by an adjudicator, Court or other tribunal in any subsequent claim.

Can a party terminate a JCT building contract as a result of force majeure?

If the coronavirus is a force majeure event and it leads to a total shutdown of a project, or sites are shut down by statutory power, either party may acquire the right to walk away from the contract. If the whole of the works (or substantially the whole) is suspended for more than two months as a result of either reason, either party may elect to terminate the contract.

Given current forecasts, this length of suspension is a real possibility. However, the period must be continuous – two separate four-week shut downs will not be enough. And in practice, parties may be reluctant to terminate given how uncertain the future is.

NEC4

The NEC4 suite of contracts takes a different approach to JCT on the question of the contractor’s entitlement to additional time and money.  Instead of operating one regime for time, and another for money, the two areas are combined into the concept of ‘compensation events’, whereby time and money are considered together.

Is the coronavirus a compensation event under NEC?

Unlike JCT, NEC4 contracts do not expressly refer to ‘force majeure’. However, they do contain provisions which are akin to force majeure.  The Compensation Event which seems most likely to arise in the context of the COVID-19 outbreak is an event which: (i) stops the contractor from completing the works or from meeting a key date; (ii) could not be prevented by either party; and (iii) would have been unreasonable to expect the contractor to foresee at the formation of the contract.

Again, taking these three requirements in turn: (i) this would seem relatively straightforward, as long as the contractor can prove that it was a coronavirus-related issue which actually impacted on the project e.g. a shortage of labour; a shortage or delay in delivery of materials etc.; (ii) again, this would seem relatively straightforward; (iii) as with the position under JCT, the newer the contract the more difficult it will presumably be for the contractor to get over this hurdle.

How are compensation events notified under NEC?

Another area where the NEC4 contract differs significantly from JCT is in relation to the requirements for the parties to notify each other of certain events, and the consequences for failing to do so.  The contractor has eight weeks from when they became aware of a Compensation Event or think that a Compensation Event is likely to occur to notify the event and its likely consequences.

This requirement is a ‘condition precedent’, which means that a failure to notify within the given period will mean that the contractor loses its entitlement to an increase in the prices and/or an adjustment to the completion date. The timely notification of a compensation event is therefore essential if the contractor is to protect its position.

The NEC4 contract also provides for ‘early warning notices’ (EWNs). These are supposed to allow the parties to consider potential risks in advance and plan to mitigate them. Contractors who think that there may be a time or money implication should raise an EWN as soon as they can – including in relation to COVID-19. While a failure to do so does not preclude entitlement, it can be taken into account in assessing what relief a compensation event will give, and is best practice in any event because it may help defeat any time-barring arguments that are later raised in relation to the condition precedent on compensation event notifications.

What are the financial implications of coronavirus under NEC?

Aside from compensation events, which may allow a contractor to recover the financial consequences in full under the ‘force majeure’ provision, there may also be another route to recovery. Although some NEC contracts are fixed price contracts like JCT, the sum the contractor receives in others is based on the actual cost incurred and a pain/gain sharing mechanism. Depending on the Main Option selected, this may allow a contractor to at least mitigate their exposure to increased supply costs as a result of COVID-19.

Can a party terminate an NEC building contract as a result of force majeure?

Either party may terminate under NEC4 if they have been released by the law from further performance. Although the government may intervene in the construction sector, such as to stop supply-chain insolvencies, it seems unlikely they would intervene in this way so as to in effect cancel contracts.

That aside, the employer may terminate if an NEC-style ‘force majeure’ event strikes and the works are forecast to be delayed by more than 13 weeks. Unlike JCT, this termination option does not exist for the contractor. And also unlike JCT, the delay must only be forecast delay, not actual delay, although it is unlikely that anyone would suggest they could reliably forecast what will happen in 13 weeks’ time at the moment.

Conclusion

Many contractors operating under JCT forms will likely be working on the assumption that they will be entitled to an extension of time for delays caused by COVID-19.  However, unless the Government implements a forced shut down of construction sites through the exercise of statutory powers, contractors will be left to rely upon coronavirus being found to be a force majeure event.  While this is probably a fair assumption, in practice it is less than certain that an adjudicator, court, or other tribunal would agree due to the undefined nature of force majeure and the uncodified position in English law.

Contractors operating under NEC4 contracts are in a more certain contractual position.  However, they will still need to overcome the difficult hurdles required for establishing a compensation event, including showing that the coronavirus-related delays were unforeseeable, and complying with the ‘condition precedent’ notification provisions.

Whether operating under JCT or NEC, contractors’ claims for time and money related to COVID-19 will also be subject to the usual standards by which such claims are measured, including (i) a requirement to prove that the alleged delay actually caused a delay to the works i.e. that it was on the critical path; (ii) that the costs being claimed are reasonable, and have actually been incurred; and (iii) that the contractor has taken reasonable steps to mitigate the impact of the event in question.

Whatever the challenges facing the UK construction market from the outbreak, contractors will always be well advised to ensure they adopt a careful project management approach to existing contracts, including ensuring compliance with the key notification procedures to protect their positions.  This should be allied to a sensible approach to risk management on new contracts and, if possible, negotiating bespoke provisions to entitle them to relief for coronavirus-related delays and increased costs.

For further information please contact Stefan  Harris-Wright or another member of Birketts’ Construction Team.