Last month, Chris Kirby-Turner was invited to take part in a panel discussion hosted by Base Quantum on Covid-19 and de-risking a “second wave”. The speakers offered a broad range of industry perspectives based on their experiences so far, and expectations as we move forward.
We share below the top 10 points arising from the panel discussion, which we feel are important considerations to bear in mind as we navigate the months ahead.
1. What is the risk of “another shutdown”?
Whilst there was never a mandatory shutdown for the construction industry, the panel agreed that for many projects it was considered socially responsible to do so. We now know a lot more than we did then and have developed working methods to operate sites in a “Covid secure” way, supported by ever developing industry guidance.
Although much will depend on whether there is a national second wave and its severity, the political will is that another national lockdown will be a matter of absolute last resort.
2. The impact of local lockdowns and lockdowns abroad
Many projects have already experienced severe disruption to their supply chain both domestically and from overseas. The panel agreed that local lockdowns could have an impact well beyond their immediate area, given the potential impact on the supply chain.
As well as local lockdowns within the UK, there are significant risks for projects reliant on supply of specialist materials from abroad; these may be impacted by restrictions in the originating countries or those through which the goods pass in transit.
3. How should we price Covid?
The contractors on the panel agreed that it is those without a full order book who are taking a risk and pricing jobs more or less normally. Some are accounting for the additional preliminaries associated with, for example, the increased welfare facilities required. However, the panel agreed that piling too much risk into pricing will simply make some schemes over budget and jeopardise the chances of new projects commencing.
When surveyed, 78% of the webinar’s attendees considered that the risks posed by Covid should be a shared risk. The key is to identify project specific risks and the impact of Covid restrictions to the execution of various stages of the project, and where possible look to agree a tailored risk sharing mechanism.
4. Brexit hasn’t gone away…
Even before March 2020 it was noted that there were signs that the economy was slowing as a result of uncertainties arising from Brexit. Many were already engaging in competitive pricing in order to maintain a full order book, putting a further squeeze on margins.
The risks arising from Covid, and the additional costs of operating within the current restrictions, put even more financial pressure on many contractors and subcontractors. It will be extremely challenging to deal with the considerable uncertainty over the coming months, as the risks from Brexit and a potential resurgence of Covid co-exist.
5. Risk sharing arrangements
The panel discussed whether Covid related risks warrant a move away from traditional, binary risk allocation. Considering the inherent nature of the risk, one option would be to embrace relational or alliancing contracts, i.e. those with an emphasis on good faith, collaboration and a relationship of trust and confidence, in order to work through the challenges posed by Covid.
Arrangements based on construction management, management contracting or the PPC 2000 may all have advantages, provided all stakeholders have the appropriate experience and resources to properly set up and run the contracts on that basis. So too may using target pricing options C & D under the NEC suite tailored to the project specific risks, or indeed negotiating amendments to the JCT suite. The key will be to focus upon the potential project specific risks, their impact, and their measurability.
6. Lender driven requirements
The developer on the panel noted that most lenders have been charging interest during the “shutdown”, which greatly restricts their ability to waive their entitlements that may otherwise apply, for example in respect of deduction of Liquidated and Ascertained Damages.
It was also noted that given the importance placed on cost certainty, currently many lenders will not entertain entering into significant risk sharing arrangements. It remains to be seen whether pricing trends will increase significantly, where contractors are required to assume Covid related risks, and the flexibility that lenders may be willing to offer as a result.
7. When would Covid clauses actually bite?
There has been much legal commentary in relation to whether Covid amounts to a force majeure event. Increasingly, it is becoming clear that even if Covid is a force majeure event for contracts entered into before the Covid pandemic arose, a claiming party must still demonstrate the actual effect arising from Covid in order to secure its entitlement. Most bespoke clauses that make Covid a relevant event and/or matter are likely to be subject to the same requirement.
An example of where the actual effect is very difficult to determine in practice is on those projects that experience a degree of delay irrespective of Covid. Certain trades and phases of the project will be more impacted than others, so in some cases the working restrictions arising from Covid will have a far more profound effect on the project than would have been the case, had it not already been subject to unrelated delays.
8. What yardsticks can Covid clauses be related to?
The working practices and restrictions were a rapidly moving feast, although we are (for now) in a relatively stable phase. However, it is impossible to accurately predict how the working practices and restrictions will develop over the coming months, and therefore for contracts entered into now it is very hard to define what amounts to new “Covid restrictions”, beyond those already in place.
Site specific and trade specific factors will need to be carefully considered in the context of how new projects are being programmed and priced, and these could form a useful and more robust benchmark. More generally, it may be possible to negotiate terms by reference to wider measures or industry guidance – for example, using the current edition of Site Operating Procedures as a benchmark, or in the event that the current relaxation of working hours restriction is revoked.
9. What’s the “right answer”?
Whilst undoubtedly the leading cliché of the pandemic, this situation is “unprecedented”, and the lawyers on the panel agreed that there is very little case law that sets out the “right answer” in relation to many entrenched disputes. The absence of statutory intervention to make a mandatory sector shutdown leaves many questions arising from the early stages of the pandemic open ended.
Some adjudications dealing with the fall out of the “shutdown” are now proceeding; but court decisions are likely to be some way away, with it being unlikely that there will be any landmark decisions that assist the resolution of very entrenched disputes until well into 2021. Now more than ever, the importance of dispute resolution techniques is crucial.
10. Effective dispute resolution
The panel agreed that the effect of one way risk shifting is that it carries a significant risk of insolvency of the party carrying the risk, if it occurs. It is therefore important to enter into attempts at dispute resolution with that reality in mind. Getting the decision makers to the table may usefully be facilitated by ensuring a suitable dispute escalation process is included in the contract.
Where projects are severely impacted, the lawyers on the panel endorsed the dual approach of (1) ensuring a robust “paper trail” demonstrating the actual effect of Covid restrictions is maintained, whilst (2) fully exploring ways forward on a without prejudice basis, focusing on how to move projects to a conclusion in a fair, sustainable fashion. When dealing with such unpredictable issues, the best solution will often lie outside the four corners of the contract, so a negotiated outcome will be the best for all concerned. A Judge, Adjudicator or Arbitrator can only give a binary result arising from the strict application of the contract.
It was noted that many projects have already been able to move forward from the initial impact of Covid by reaching “line in the sand” agreements to wrap up the events to date and set a new basis for moving forward. Some of those have gone beyond without prejudice negotiations to involve a mediator, with remote mediations being borne of necessity as a result of Covid, but already being well established and a positive for the future.
Chris’ fellow panel members were Barry Menzies (Technical Director, Erith Contractors), Martin Buckthorpe (Managing Director, Westridge Construction), Chris Lynch (Director, Kentish Projects), Mathias Cheung (Barrister, Atkin Chambers) and Laura Hannan (Associate Director, Base Quantum). The event was chaired by Danny Frost (Managing Director, Base Quantum). The event took place on 16 July 2020.