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23rd March, 2020 by Simon Franklin
The COVID-19 virus will undoubtedly have a significant impact on the construction industry, given its reliance on a readily available supply of labour and materials. Contractors, sub-contractors and professional consultants are all likely to be affected, and construction projects at every stage will face potential delays and disruption. Obviously, we are in unprecedented times, and the situation is changing on a daily basis, but we have set out below a brief summary of the issues that will need to be considered in order to try to minimise the impact of COVID-19 on your project.
At this stage, before work has begun on site, an employer may not yet have engaged a contractor, or contracts could be out for tender. However, an employer will have almost certainly engaged professional design consultants and possibly other professional advisers. They will therefore need to liaise with these consultants to understand how COVID-19 has affected their business and the work being undertaken.
In light of the governmental guidance regarding social distancing, it is likely that a number of professional designers etc. will have the facilities to work remotely so can carry on with their services, albeit maybe in a more limited capacity. However, there may be practical issues with sharing information between the different disciplines, for example face to face design meetings will not be taking place, so can the information be shared effectively electronically, is video conferencing an option? If feasible, the use of Building Information Modelling (BIM) could be very advantageous in this regard.
If the work of the professional consultants is disrupted, then the employer will need to consider the terms of their appointments in order to assess the consequences of that disruption. Commonly professional appointments will require the consultant to carry out their services in accordance with an agreed timetable and exercising a degree of “reasonable skill and care”. However, such provisions are not usually subject to specific conditions/exceptions. Therefore it is not clear if a failure to perform due to the effects of COVID-19 would constitute a breach of contract. A careful review of the actual terms of each appointment would be required.
The termination provisions to ascertain whether either party can bring the appointment to an end as a result of inability on the part of the consultant to fulfil its duties, or whether a suspension of the services can be instructed. Of course, in the lack of any such specific provisions, the parties can agree to terminate/suspend the appointment, but this should be carefully documented. Alternatively, the parties may be able to rely upon the doctrine of frustration to bring the appointment to an end, but to do so the appointment must effectively have become impossible to perform, not simply more difficult and/or expensive.
In terms of contractors, if contracts are out for tender, an employer may want to consider extending the deadline for submissions. If contracts have been awarded, but not yet commenced, an employer will want to check the terms regarding the right to delay commencement/defer possession. If tender documents are being negotiated, then the employer should consider whether any amendments are required to address the effects of COVID-19 (e.g. to deal with the issues raised in this note).
If the parties are already under contract and works are progressing, then as well as the above considerations for any ongoing professional appointments, an employer will also need to consider the impact of COVID-19 on the contractor.
Standard forms of building contracts in the UK do not specifically refer to the consequences of a pandemic affecting a project. Therefore, the general provisions of the contract that deal with delay and disruption should be considered. Those provisions vary depending upon the standard form of contract being used, but taking the commonly used JCT forms, the positions are as follows.
Under the JCT form of contracts delay and disruption are dealt with as Relevant Events (which entitle the contractor to claim an extension of time) and Relevant Matters (which entitle the contractor to claim loss/expense).
Subject to the comments below, to obtain an extension of time for COVID-19, the contractor would need to show it was an event of force majeure. However, as the JCT does not define force majeure, the precise meaning of the term and what it covers is open to interpretation. So whilst it is reasonable to assume that the current situation would be deemed force majeure, from a purely contractual point of view, a pandemic such as COVID-19, is not, in itself, automatically a Relevant Event.
However, the consequences of a pandemic could give rise to a claim for an extension of time. As an alternative to force majeure a contractor could rely on an alternative Relevant Event which states that “the exercise after the Base Date by the United Kingdom Government or any Local or Public Authority of any statutory power that is not occasioned by a default of the Contractor or a Contractor’s Person but which directly affects the execution of the Works” is a Relevant Event. Accordingly, any dictates from the Government as to site closures, restrictions on people working, quarantine requirements etc. will more than likely qualify as a Relevant Event. However, it should be noted that the exercise of such powers must directly affect the works, and, as with all Relevant Events, it must actually delay completion, so again there is no automatic right to an extension of time. However, it is likely easier for the contractor to evidence the effect of the government exercising its powers than relying on the more general concept of force majeure.
It should also be mentioned that, as with any other request for an extension of time, the contractor should ensure that it complies with all the applicable notice provisions. Namely, notify the Contract Administrator as soon as it becomes reasonably apparent that the progress of the works is or is likely to be delayed, setting out causes of the delay and identifying any Relevant Events. Along with that notice, or as soon as possible thereafter, the contractor is to provide details of the expected effect, including the estimated period of delay.
Finally, as with all Relevant Events, if the contractor wishes to rely on either force majeure or the government exercising a statutory power, it is under a best endeavours obligation to mitigate the effect of any delay.
As opposed to Relevant Events, please note that force majeure is not a Relevant Matter. This is because, force majeure events are generally considered to be those outside of either parties control, and therefore the risk is shared. The Employer takes the time risk, the contractor the costs risk. Nor is the exercise of statutory powers a Relevant Matter.
However, a potential loss/expense claim may arise if the Employer were to impose any restrictions on the contractors access to the site/works, or limitation on their working hours/working space, or in any way impede or prevent the contractor from carrying out the works as such would be deemed Relevant Matters. Obviously, in the current circumstances, any such imposition would likely be for the purpose of preventing/containing the spread of the virus, but the contract does not make any allowance for such purpose, so strictly speaking, the contractor would still be entitled to claim for loss and/or expense.
It is unlikely that an argument that the contract has been frustrated would succeed in light of the force majeure clause. Similarly, it is highly unlikely that an attempt to terminate on the grounds of the contractor failing to proceed regularly and diligently would be successful, particularly bearing in mind that any valid extension of time claims will need to be taken into account. As mentioned above regarding professional appointments, there is nothing stopping the parties agreeing to bring the contract to an end, but such agreement needs to be properly documented.
As an alternative to termination, an employer does have the right to instruct the works be suspended. However, such an instruction is deemed both a Relevant Event and a Relevant Matter, so the contractor would be entitled to claim both time and money. In addition, if the suspension continues for longer than a specified period (2 months under the standard JCT), then it becomes a ground for the contractor to terminate the contract.
The effect of COVID-19 on projects post-completion will be lessened, however there could still be issues. Following PC there will be a defects liability period during which the contractor is responsible for rectifying any defective/snagging items of work. Obviously, the consequences of the measures being implemented to fight the virus could have a significant impact on the contractor’s ability to attend to any defects, whether it is restrictions on access to properties or the ability to source materials/labour. This could be a particular issue if strict time limits are placed on dealing with defects. For example, it is often the case that defects that represent a danger to health and safety need to be attended to immediately. Failure to meet these time limits could result in financial penalties for the contractor (e.g. loss of retention).
However, it is not just contractors that need to be aware of their duties in terms of defects. If a property owner has sold or leased a property within the Defects Liability Period, they will more than likely have obligations to the purchaser/tenant to rectify defects. Again, the consequences of not complying with these needs to be understood.
Finally, just a word on insurance. Pandemics are not an insured risk under the JCT contracts. Therefore, anyone involved with a construction project who may suffer as a result if that project is delayed/disrupted should check with their insurers with regards to any cover that may be in place. It’s pretty safe to say, if you’re not already covered, the chances of getting pandemic cover added to your policy are virtually zero.
We hope the above has provided some useful guidance as to the sorts of issues those in the construction industry need to be thinking about. However, if you require any more specific advice in relation to any of the points raised or any other concerns you have arising from the impact of COVID-19 (including the contractual position under different standard forms), please do not hesitate to get in touch with our expert construction team.
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