Practical Law

Unsurprisingly 2019 novel coronavirus disease (COVID-19) and its impact on construction contracts has been a key concern for our clients recently. Many of those clients use a JCT form of contract, usually with amendments. 

Existing contracts

The immediate concern for live projects is delays caused by shortages in goods and materials (just try importing Italian marble at the moment) or delays in importing them, as well as potentially a lack of labour. Two relevant events are, well, relevant: the exercise by the government of a statutory power and force majeure.

Taking the first, under the JCT Standard Building Contract, 2016 Edition (or the Design and Build form) a claim in respect of a Relevant Event requires both the exercise of a statutory power and a power that directly affects the execution of the works. Government guidance/recommendations alone are unlikely to suffice. At the time of writing there has not been a formal government intervention in the UK such as those seen in Italy and the US and so the first of these is not in play, as yet!

As for force majeure, there is no settled definition under English law and the JCT contracts do not define it or give examples. Perhaps the next edition of JCT contracts will now do so. That said, force majeure is generally understood to cover circumstances that are not within a contracting party’s control and authority suggests it would cover epidemics. On that basis it is difficult to see how the outbreak would not constitute a force majeure event.

It is common for contracts to exclude a shortage of goods or materials arising from force majeure and under those contracts the contractor has assumed the risk. In our experience of acting for employers and contractors, many employers are considering taking a pragmatic approach and seeking a risk share agreement rather than necessarily enforcing the contractual terms favourable to them. Of course this will require buy-in from funders and end-users. It would be unrealistic to expect an employer to do otherwise.

Delay damages

What about the money? In the unamended JCT, the contractor takes the entire risk of loss and expense due to the impact of COVID-19 on the progress of its works. At least they do in theory. In our experience, employers are including this risk as part of their commercial discussions and seeking relief from delay damages. Again, what do the employers’ funders think? They hold the purse strings after all.

Suspension

What happens if the works are suspended? In the JCT there is a mutual right of termination where the works or substantially the whole of the works are suspended for a period of two months as a result of force majeure or the exercise of a statutory power, among others. Given the present state of affairs in Italy, it is not inconceivable that construction projects could be so significantly disrupted that these termination provisions could be engaged.

Presumably both parties would like to extend that qualifying period of suspension – another item for the commercial discussions.

Future contracts

In contracts under negotiation, both employers and contractors must address the issue directly and allocate the risk between the parties. Parties do not necessarily have a free hand here. Interestingly, we are seeing funders refuse to lend unless the contractor assumes the risk. If most contractors simply refuse, will we see a re-think?

It is not just that there are obvious benefits in setting out the position clearly: remaining silent could have unintended consequences. The more foreseeable the consequences of an event are, the more difficult it is to demonstrate that the event constitutes force majeure – the rationale being that it would be “reasonable” to expect a contractor to be able take steps to avoid or mitigate the consequences of that event.

There are also other considerations. Is it fair for the entire risk of COVID-19 to sit with one party, whether that be time and/or money? Is a risk share more reasonable? What will the employer’s funder agree to? What is palatable to an end-user?

Also, how do you define COVID-19? What about mutations of it? Including a widely defined event is not always best, even from a contractor’s perspective. The looser the definition the more difficult it may be for a contractor to evidence that the delay is caused by that event.

What about shortage of labour? Parties may want to distinguish between a shortage caused by the numbers of workers being ill or prevented from working due to a government order and pre-emptive measures that a contractor might choose to bring in to avoid the spread of the disease. Is it fair that a contractor who takes sensible precautionary steps for the wider good is to be penalised for doing so?

Employers will want their contractors to be proactive in managing delay as specified materials are sourced or manufactured abroad. A potential option could be to include a positive obligation on a contractor to make design proposals to mitigate the impact, something that could be added to the value engineering provisions or design submission procedure.

Termination?

Should COVID-19 lead to termination? Should the qualifying suspension period be extended to avoid the risk of termination? This is all the more reason why it is important to properly address the effects of delay at the outset.

We suspect there is much more to come on this topic.