A great deal has been written about force majeure and change in law in the context of COVID-19. This blog considers as an alternative whether a contractor can recover time and/ or money as a contract variation, with particular reference to three standard form contracts – FIDIC’s 1999 Yellow Book, NEC4’s Engineering and Construction Contract and JCT Design and Build Contract, 2016 Edition.
We typically think of a variation as being a change to the permanent works and the COVID-19 crisis will have resulted in many instances of this type of change. For example, where a specified product is not available and needs to be replaced with something else – a situation most people in the construction industry are reasonably familiar with. Instead, this blog focuses on changes to the way the works are undertaken and whether this can be said to be a variation, entitling a contractor to additional monies. For example, as a result of changes to site procedures or methods of working.
It is useful to break this topic down into three separate points:
- The need for an instruction.
- The type of change that can qualify as a variation under a contract.
- Whether the change is outside the contractor’s risk.
I will look at each of these points in turn before considering the ramifications of being able to claim compensation for increased costs arising from COVID-19 as a variation.
The need for an instruction
Construction contracts will normally only entitle the contractor to extra money for changes where they have been instructed by the employer. But many changes to site organisation implemented as a result of COVID-19 will not be instructed. They will be instigated purely on the initiative of the contractor, responding to public health concerns.
There may, of course, be some situations where the employer (or its representative) has been involved in the process and where emails on the issue could be construed as a qualifying instruction. It is important to note that the three standard form contracts being considered in this blog have traditional variation mechanisms where the instruction simply needs to be in writing. Other contracts, in particular those used on substantial EPC projects, will often have a regime where the instruction needs to self-identify as a “variation instruction” by reference to a specific clause or where a particular pro-forma instruction document needs to be used. Those forms of instruction create obvious challenges in this situation.
The type of change that can qualify as a variation under a contract
Most contracts define variations to include changes to the method of undertaking the works, rather than just alterations to the permanent works. For example, under:
- FIDIC Yellow Book 1999, “variation” is defined as being any change to the Employer’s Requirements or the Works, which is in turn defined as including both permanent works and temporary works.
- JCT D&B 2016, “change” (in clause 5.1) is said to include:
“the imposition… of any obligations or restrictions in regard to the following matters or any addition or alteration… that are so imposed in the Employer’s Requirements in regard to… access to the site… limitations of working space [or] hours… the execution or completion of the work in any specific order.”
- NEC4 “compensation events” include an instruction changing the Scope which is defined as information which either specifies and describes the work or states any constraints on how the Contractor provides them.
Therefore, under each of these contracts, a change to the working methodology or site procedures could be a variation. However, a great deal will depend on how the technical documents (such as the Employer’s Requirements) describe the working procedures and how variations are defined in the contract.
In Strachan & Henshaw v Stein, a sub-contractor was undertaking the installation and commissioning of generators at a power station. The contract documents contemplated a site facilities camp directly adjacent to the workface. The sub-contractor was then instructed to move the camp half a mile away and, on this basis, claimed the extra costs of operatives’ walking time as a variation. The variations clause allowed for “any alteration to the Works whether by way of addition, modification or omission”. The term “Works” was defined as “work to be done by the Contractor under the Contract”. On this basis, the court found that the definition of “Works” did not encompass the arrangements for operatives to be transported to the workface and so the change to the working arrangements was not a variation as defined by the contract.
The case is a useful pointer to the issues that must be considered. In short, a change to site procedures can be a variation but it will depend on the particular wording of the variations clause and how the relevant operating procedures are referred to in the scope of works.
Whether the change is outside the contractor’s risk
This will typically be the most difficult of the three tests to apply.
In order for an item of work to be a variation, it needs to involve a change in the contractor’s duties under the contract. To illustrate the principle, it is worth considering this issue in the context of changes to the permanent work. Suppose the contract scope requires a D&B contractor to incorporate item X but it transpires that this product is not fit for purpose. The contractual design obligations require the contractor to correct this error. It must install item Y instead, in order to fulfil the contractual fitness for purpose duty. Such changes to the specified works (which are necessary to comply with the contractor’s overarching contractual duties) are not variations. This is because the contractor takes the risk of these changes under the contract. In short, one has to analyse the contractor’s duties holistically before coming to a conclusion as to whether a change to the technical specification is a variation.
The same applies to changes to working methods and procedures. The contractor may already have a duty to comply with a certain working method. In particular, this may arise via the contractor’s obligation to comply with the law and, in particular, health and safety regulations. A construction contract will typically contain a wide definition of applicable “laws” (including all statutes, public regulations etc.), which the contractor is required to comply with. In turn, this gives rise to the question of whether the working procedures in question that the contractor is instructed to follow are within the applicable “laws” and/or whether there has been a change in law.
These points are best considered in the context of the Site Operating Procedures (SOPs), drawn up by the Construction Leadership Council (CLC) in response to COVID-19. They give a good working example of the issues that arise.
The CLC is not a government body, so one may come to the initial conclusion that the SOPs do not represent a change in law and therefore (on the above analysis) an employer’s instruction to follow them could be a variation. However, the position is more complex than that. It seems highly arguable that a contractor is obligated in law to follow the SOPs. Under the Construction (Design and Management) Regulations 2015 (CDM 2015), the contractor has various health and safety duties, including an obligation to manage the works to ensure that they are carried out as safely as reasonably practicable (regulation 13).
This issue must also be considered in the context of guidance issued by government bodies, such as the Department for Business, Energy & Industrial Strategy’s document Working safely during coronavirus (COVID-19) (last updated on 29 May 2020), stating that firms should follow sector advice in terms of workplace practices, which for contractors is likely to mean the SOPs. It is also worth mentioning the HSE Statement on 3 April 2020, stating that it will seek to enforce the relevant COVID-19 measures in workplaces via enforcement and prohibition notices.
In short, therefore, it seems likely that contractors have a contractual duty to follow the SOPs via CDM 2015 and that the HSE will enforce compliance. It also seems likely that the contractor will take the risk of complying with CDM 2015 as part of its contract and therefore must follow the SOPs. On this analysis, an instruction to follow them would not be a variation as it is encompassed by its contractual duties.
It is also worth pointing out that while the SOPs may be treated as something that a contractor must legally comply with, arguably, their introduction may not be a change in law under a construction contract. It depends, of course, on the terms of the contract in question, but it is certainly arguable that the SOPs are not “law” as defined by most contracts. Further, CDM 2015, which would be the means of enforcing them, has not changed. It is the factual circumstances that have changed, against which the “law” as embodied in such provisions as regulation 13, is being considered.
The SOPs are considered here only as an example of how the arguments may play out. There may, of course, be other changes to the site procedures that the employer may direct which are not matters the contractor is legally obliged to follow. The employer may insist on changed processes that go beyond what is required under CDM 2015. Such directed changes could amount to a variation under the contract.
Ramifications of COVID-19 entitlement as a variation
A great deal has been written about whether COVID-19 is force majeure or a change in law. It depends on the contract but, in short, the contractor may be unable to retain relief via those clauses in relation to COVID-19, or only an extension of time (EOT) may be on offer. In other words, contractors will often be on the look-out for alternatives.
If a variation can be established it will often give a wider entitlement in terms of relief and compensation. It will normally trigger a right to both an EOT and time-related costs. But more importantly, the contractor will be due direct costs. Those costs may represent a better means of recovery because many of the additional resources that a contractor will have to pay for will not be time-related costs. In addition, the financial entitlement for a variation is normally calculated on the basis of the rates and prices in the contract rather than by reference to cost. This will often be quicker and simpler to establish and may indeed result in a higher recovery than would be obtainable under any cost-based compensation system.
It is also important to remember that notice procedures for variations are normally less rigorous than claims clauses, such as force majeure and change in law. A contractor will typically have to give notice for an EOT and time-related costs claim but not for direct costs. If the contractor has not given a notice, it may therefore still be able to recover as a variation.
Therefore, to conclude, when a contractor is considering its entitlements arising from COVID-19 events, it should consider its entitlement via the contractual variation mechanism, in addition to force majeure and change in law.