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Coronavirus - Contractual Implications

01st April 2020

Coronavirus - Contractual Implications

At the time of writing (01/04/20) there has been no clear direction from the Government enforcing the closure of construction sites. It is therefore essential that employers and contractors consider the provision within their contracts to determine what rights and duties the parties have under such unprecedented circumstances, and the impact these actions will have.

The Coronavirus has now officially been declared a pandemic by the World Health Organisation. As such it is highly likely to be considered, in principle, as a force majeure event under a contract (at least in relation to contracts entered into before parties had an understanding of the potential risks that the outbreak currently presents).

Within an unamended JCT contract, force majeure is identified as a ‘relevant event’ allowing for the provision of an extension of time. It is not, however, listed as a ‘relevant matter’ meaning the contractor is unable to recover loss and expense for such a delay. Accordingly, the risk for a force majeure event is shared between the parties and seen as a ‘cost-neutral’ event under the contract, meaning the employer covers the ‘time’ risk and cannot claim liquidated damages from the contractor and the contractor incurs their ‘cost’ risk and cannot claim loss and expense.

There is no definition of ‘force majeure’ within the JCT contract. Case law has generally established that force majeure involves “acts, events or circumstances outside the reasonable control of the parties”.

In addition to force majeure, the JCT also includes the following the relevant event: "the exercise after the Base Date by the United Kingdom Government of any statutory power which directly affects the execution of the Works". It therefore seems arguable that an epidemic and/or governmental restriction on the movement of persons would be an event outside the reasonable control of the parties to a construction contract.

If a force majeure event is prolonged beyond a specified length of time, one or both of the parties may be entitled to terminate the contract, but possibly with conditions attached. in the event the works are suspended due to events including force majeure, such suspension must continue for the continuous length of time stated in the Contract Particulars (default being two months).

Furthermore, other than for non-payment, there is no provision allowing a contractor to elect to suspend the works. Rather, if a contractor elects to stop working, they would need to prove that they had to cease working due to circumstances beyond their control and there were no reasonable steps the contractor could take otherwise.

A contractor therefore may seek an entitlement to extensions of time and/or additional payment in the event that:

•           They incur labour shortages as a result of any preventative measures to alleviate the outbreak spreading, or any subsequent quarantine, or self-isolation which may be required.

•           Difficulties with the supply of materials and plant.

•           Construction sites are closed or access restricted as a result of measures to contain the Coronavirus outbreak.

and/or

•           The contractor is unable to able to continue working as a result of direct action by the Government to prevent the spread of the outbreak.

Claims for Time

To support any claim an extension of time for force majeure under the contract, there is a requirement for the contractor to evidence that the event has delayed the works and subsequently the completion of the works beyond the contractual completion date.  This duty to prove such a delay lies with the contractor.

The contract also requires contractors to demonstrate the use of best endeavours to mitigate the effects of such a delay. In order to comply with this, a contractor might have to ensure all on-site workers required by the latest government guidance to self-isolate do so for the appropriate period to avoid other workers becoming infected.

Claims for Money

The JCT is provides that ‘relevant matters’ causing a delay to the works, allow the contractor to claim for loss and expense as well as an extension of time under the contracts referred to above. This may include changes to on-site requirements, such as:

•           The issuing of contract instructions, including any instructions to postpone work.

•           The issue of contract instructions to change on-site access requirements, an additional restriction on working arrangements, or an instruction to alter working hours or access to all or parts of the site.

Careful thought should be given before issuing any instructions or guidance generally and in particular regarding working hours, access and working space.

A contractor who is entitled to recover loss and expense for delay, would still be required to demonstrate that they have mitigated any losses. This may mean that after a possible delay as a result of the coronavirus outbreak a contractor would not be expected to claim for its full preliminaries costs, but it might seek de-mobilisation and re-mobilisation costs.

Points on what to do now:

This is a time of uncertainty for clients and contractors alike. The constructive approach is to open up an early dialogue to find solutions to problems, including the following points for consideration:

•           Look to reach an agreement that the current events are a relevant event, enabling an extension to the completion date without the contractor incurring liquidated damages.

•           If possible look to carry out more frequent valuations to assist contractor cash flow and to ensure projects are valued up-to-date in the event that sites are forced close.

•           Whilst it remains safe and practical to do so, look to continue work on site for the time being, potentially with alterations in sequencing of work and/or numbers of workers on site in order to adhere to Public Health England’s guidance on distancing and work in accordance with the Site Operating Procedures (SOP), published by the Construction Leadership Council which align with the latest guidance from Public Health England.

It is important that employers and contractors also include any relevant third parties in such discussions. (e.g. funders, landlords or any other who may have an interest in the site/project). All parties should ensure that all insurance in relation to the works and site are up to date and cover remains in place during any possible suspension of the works.

The situation could change at any moment if the Government declares that construction sites are to close, it is therefore essential for the construction industry as a whole to work together through open discussion to mitigate disruption to projects and in any future contracts.

As the Government have not yet unequivocally stated that construction sites must be closed, employers and contractors will need to consider the provisions of their contracts in order to determine what rights the parties have in the circumstances, and the impact of their actions.

This article if for guidance only and does not constitute legal advice. Every building, site and construction contract is different and these unique factors must be taken into account when assessing appropriate actions or determining duties under legislation. The situation surrounding Coronavirus is changing rapidly so this advice could quickly change.

If you require advice relating to the management of your estates or a specific building project, please contact Barker on 01279 647111 for assistance.