The pandemic COVID-19 (coronavirus) continues to throw new challenges at each and every one of us – not least (at the time of going to press, on 26 March 2020) given the hotly contested debate as to whether all “non essential” construction sites should be forced to shut down. Therefore, it is essential for all parties involved to consider taking all the necessary and precautionary measures to mitigate the impact of the current situation as soon as possible.
Whilst the situation is uncertain and could develop in a wide variety of ways, it is important now to consider the terms of the building contract to determine the allocation of risks, and understand and action the relevant contractual procedures. Where necessary, it might be practical to obtain legal advice to understand your position under your contract.
Based on the commonly used industry contracts the JCT and the NEC, whether amended or not, the key clauses that might be triggered as a result of COVID-19 are:
1. “Relevant Events”
1.1 If the contractor can prove that the delay to the agreed scope of work is as a result of a “Relevant Event”, they may be entitled to an Extension of Time. If granted, this will provide relief from liquidated damages. However, they will also need to prove that they used their best endeavours to prevent such delay.
1.2 It is critical to ensure that all amendments (if any) are checked and in particular whether certain viruses/diseases are specifically included as a “Relevant Event”, either named specifically or referred to more generally as an ‘epidemic’ or a ‘pandemic’.
1.3 The particular Relevant Events which may be applicable, in the standard un-amended JCT contract, in response to the COVID-19 outbreak are;
1.3.1 Any actions by the UK government or Local or Public authority after a specific date, which directly affect the execution of the works - this may cover the situation where the government enforces complete lockdown as a measure to contain the virus, which will mean closures of sites.
1.3.2 Force Majeure:
(a) Force Majeure has no fixed meaning in English law, and is not defined in the unamended JCT contract forms. It is generally considered to be an event or condition which did not exist at the time of entering into the contract and was not foreseeable or within the control of either party. It is one which limits/prevents the ability of one or other party or both to perform their contractual obligations, or which makes the performance of such obligations so difficult or costly that it becomes commercially unreasonable under the contract;
(b) Very often, amendments to JCT forms will include an express definition of force majeure which could serve to limit what is covered, so check if at the very least that it covers epidemics/pandemics; if it does not, then there will be no contractual entitlement to an extension of time for COVID-19.
1.4 It is crucial to remember that under unamended JCT forms, an extension of time does not automatically grant the contractor financial compensation. This is the case for the above two relevant events – they are not in the list of relevant matters which entitle a contractor to loss and expense.
1.5 If any of the Relevant Events result in a suspension of works in excess of a stated period of time, either party to the contract can terminate. However, termination of a contract must be dealt with strictly in accordance with the contract to ensure that there can be no claim for repudiatory breach.
1. Compensation Events
1.1 Under the NEC suite of contracts, a contractor will look to rely on the “Compensation Events” in order to seek an Extension of Time and compensation.
1.2 This is triggered where the event falls within the scope of the following:
1.2.1 Where the event prevents the completion of the whole of the works or prevents the contractor from completing the works by the planned completion date shown on the accepted programme; and
1.2.2 Which the contractor could not have prevented at the time of entering into the contract or that an experienced contractor would have, at the time of the contract, judged to have had such a limited chance of occurring that it would have been unreasonable to have allowed for it.
1.3 It could be argued that COVID-19 will fall under the scope of the above – although the position is less certain with contracts that have been entered into since COVID-19 was first widely reported. That is subject of course to ensuring that there are no amendments to the standard form that exclude such viruses. NEC has recently listed a major virus outbreak as being included within the scope of “Compensation Events”. That being the case, a contractor would be entitled to both extra time and money.
1.4 What is crucial under the NEC suite is that there are early warning procedures that a contractor must abide by, otherwise the right to claim an entitlement to either time or money may be lost.
1.5 With regard to termination, very similar considerations apply in relation to the NEC form as to the JCT forms, as described above.
2.1 There is a common law rule of frustration which completely releases the parties from their contractual obligations, but this only applies when it is impossible to perform them. It will not apply just because performance has become more difficult or expensive – it is a high bar to have to get over and, absent a mandatory shut down over a very prolonged period, is unlikely to apply.
3. Practical steps to consider
3.1 Check your existing contract terms – are there any provisions which deal with or react to COVID-19?
3.2 Ensure that you understand the notification requirements under your contract, should there be reasons that you cannot perform your obligations i.e. who you need to notify what steps need to be taken etc., especially any time limits and/or conditions precedent.
3.3 Keep detailed reports of steps you are taking to mitigate any delays or damages/loss incurred or suffered. Being proactive and organised will hopefully make it easier to obtain a more favourable outcome for all of those involved.
3.4 Check your insurance policies to see whether you are covered for any of the consequences of this event, although our understanding is very few policies will include such cover. Speak with your broker/insurer.
3.5 What is key and essential during a time like this is to ensure that good communications is kept up between all parties involved.
3.6 Obviously, these steps will be to subject to change, in the event of a mandatory shut down, but even without that, you will need to ensure you keep matters under regular review as the situation develops.
4. Contracts not yet entered into
4.1 Given the ever-changing nature of the current circumstances, it will be sensible to consider whether express provisions should be included in contracts to allocate any risks which will result from COVID-19.
4.2 Consider particularly the question of foreseeability and what can sensibly be anticipated and the applicability of for instance force majeure and relevant events and matters re extensions of time and loss & expense.
4.3 What will a contractor be allowed to claim for? For example, should the contract cater for the possibility that the virus itself could mutate.
4.4 There is also possibility for regulatory changes that will come into force as a consequence of COVI|D-19 and its aftermath, but their scope and effect cannot be ascertained. Therefore such changes may or may not be held to be foreseeable, and it may well be prudent to proactively allocate or apportion risk for such matters.