(Co-written by Fainche Whelan, Solicitor and Claire Egerton, Partner)
The Coronavirus impact on construction projects means it is necessary to carefully consider the relevant contract provisions vis a vis the current position with the works.
The construction industry, amongst many others, is feeling the effects of Coronavirus. Whilst the government has permitted sites to remain open, the effects of illness, social distancing, reduced availability of supplies and materials, payment issues, delays and increased costs are being felt but the ultimate impact of the virus remains to be seen.
We provide some guidance on what employers and contractors involved in active construction projects should take note of.
Employers take care to monitor the government and industry guidance and requirements as to how sites can remain open and keep communications open with your contractor as regards the same. Also consider the knock-on effect of the site possibly having to close in the future (see below the wider implications for employers) and the differences in impact (both on the building contract and wider implications) of a voluntary site closure versus a government/industry guidance-mandated closure.
Contractors should, where acting as main contractor, be careful to take all government/industry approved and recommended steps to limit spread of the virus and maintain safe working conditions. Update risk registers, consider appropriate requirements for sub-contractors to ensure safety and check impact on supply chain. Also carefully consider the impact on progress and cost of the above and liaise closely with your employer, taking care to consider the contractual terms that might be relevant in advance.
As contractor, are you entitled to additional time, and additional cost (see the notes below on extra time and money)? If you are able to justify either, ensure the necessary notices are served per the contract to protect your position. Consider also how extra time can reduce liquidated damages and take care to mitigate all delays.
As employer, has your contractor requested additional time or money? If so, consider and respond in accordance with the contract (see the notes below on extra time and money). Has a planned completion date been missed and if so, how do you protect your position with regard to liquidated damages and delay? Ensure you serve all relevant notices required under the contract in order to reserve your position, even if you do not intend immediately to actually charge or deduct the relevant damages.
Using the language and terms of a JCT DB 2016 as an example, we set out below things to consider in relation to your contract.
All relevant government guidance for those working during lockdown, including those as to social distancing should be followed as required by the guidance. The CLC (Construction Leadership Council) updated its latest Site Operating Procedures (SOP) on 15 April by issuing version 3, after version 2 was removed due to negative feedback on its unworkability in terms of 2m distancing on site. The government has encouraged use of the CLC SOP, which follows government and WHO guidance and sites can choose to adopt it within their own site procedures. The latest version sets out guidelines sites can adopt to mitigate Covid-19 risks. Site work does not have to stop if the 2m rule cannot be maintained safely but if it cannot, the importance of affected tasks needs to be considered and there is a hierarchy of controls introduced to risk assess those activities.
The CLC published version 4 of the SOP on 19 May – the changes are minimal and the position remains the same on the 2m rule as mentioned above. The Government has also recently published its own guidance on safe working and the virus for construction. Version 4 was superceded on 5 July by version 5.
If the works have been delayed by a relevant event (as defined in the contract), an extension time could be available. Possible applicable relevant events in this context could be:
Contractors remember – you need to apply for an extension of time and to mitigate the effects of a relevant event.
Loss and expense will be available where the contractor incurs cost because the works have been materially affected by a relevant matter (as defined in the contract). Neither of the first two relevant events mentioned above are relevant matters so it is currently accepted that under a JCT in the current situation, time but not money would be available to the contractor in the event of such a delay. A delayed permission could entitle a contractor to loss and expense in the required circumstances, as could the fourth relevant event above. One additional consideration here could be changes or an impediment by the employer, and whether, if an employer was overzealous in its exercise of social distancing measures in excess of current government and industry guidance, it may be possible for a contractor to argue one of those grounds applies.
These would only be applicable where provided for in the contract and where a relevant event was not available and delays had occurred, leading to failure to achieve the planned completion date(s).
The standard JCT allows for termination by either party if before PC the works (or substantially the whole of them) is suspended by 2 months (or such other period as is stated in the contract particulars) due to a number of factors including force majeure, exercise of statutory power and delay in receipt of necessary permissions for development control requirements, so these may be options for both suspension and later termination, depending on the circumstances.
Otherwise, the JCT in its standard unamended form does not allow a general right of termination at will to either party, so in order to terminate otherwise, either party would need to fall within any of the other various categories for termination, by default by the other party, or insolvency etc if applicable.
Under the JCT then if either the contractor or the employer becomes insolvent, the other party has the right to terminate. The obligation to carry out the works is also suspended from insolvency. Both parties should also keep abreast of any potential reliefs from the government being introduced, such as the decision to relax the wrongful trading rules under the Insolvency Act 1986. The key point is to try and avoid this worst case scenario occurring, keeping lines of communication open and discussing cashflow, cost and payment issues before they become serious enough to precipitate an insolvency event.
Check contractual notice requirements and ensure that you follow them. Think about this as early as possible, and check impact of the virus on delivery services, as the Royal Mail and other such service providers are becoming increasingly stretched by the virus and may not be able to continue to meet pre-virus delivery timescales.
Employers’ and developers’ positions will be impacted by their position under other agreements/requirements relevant to the project, such as planning permissions/agreements, development agreements, agreements for lease or sale and/or funding arrangements. Check and make a note of any key dates and deadlines. Such documents may contain both target dates for completion (which usually can move with extensions of time under the building contract) and also potentially unmoveable final longstops which can entitle parties to terminate, plus liquidated damages. Funding arrangements, including those for a forward funded sale, may incur additional costs/interest for extensions beyond target dates. Loss of rent or business/income could also be an issue and business interruption or delayed start-up insurance may not cover this instance.
If you have any questions about this topic or any other Covid-19 related issues affecting your project, please contact our specialist Construction team, who will be more than happy to help you.
We have a dedicated page, Coronavirus (COVID-19) – Legal advice and guidance, which we are continually updating with information as and when new measures come through from the government and other bodies.