(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.
Coronavirus impact on construction projects – Points for employers and contractors to note
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.
If works are running late
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.
Things to consider relevant to your contract
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.
What relevant site precautions should be taken?
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.
Should extra time be awarded?
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:
- Force majeure – this is not defined in the standard JCT but is essentially a factor outside the control or imagination of either party – the effect of lockdown, illnesses reducing workforce, lack of availability of supplies and the reductions in workforce needed to implement social distancing on sites are anticipated to fall within this category, although in the absence of caselaw in this context there are questions as to whether performance would have to be impossible rather than merely more costly or more difficult.
- Exercise of statutory power – this could be relevant if lockdown is extended and all active sites are decreed to close.
- Delay in receipt of necessary permissions – if for example particular consents are delayed due to the effects of the virus and lockdown.
- Impediment by the employer/employer’s persons – if for example lock down and office closures affected their or their consultants’ ability to comply with contractual obligations as required by the contract.
Contractors remember – you need to apply for an extension of time and to mitigate the effects of a relevant event.
What about the extra costs incurred due to the delays?
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.
What about liquidated damages?
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).
Can the contract be suspended and/or terminated?
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.
What if one of the parties becomes insolvent as a result of the current economic impact of Covid-19?
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.
How should contractual notices be served?
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.
What wider issues should employers consider?
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.
What wider issues should contractors consider?
- Impact on supply of materials and goods for the works – availability may be restricted or items may no longer be available at all. Costs may have increased and transit costs may also have increased due to global and UK restrictions and lockdown. Consider if you have the ability to alter or re-procure a similar product. If a particular stone is required which is only available from one producer whose facility is closed, the impact will be greater than where there is more leeway for a contractor to choose an alternate but similar material, even if at additional cost.
- Workforce issues – employees may be furloughed, sickness may have reduced available workforce, ‘back-office’ operations such as procurement, internal design services, contracts or accounts may have been impacted, slowing down processes. Staff, sub-contractors or independent contractors may be self-isolating and unable to work. Consider the knock-on effects of these issues, other than just in regard to delays to a project and take specialist advice where needed.
- Contracts may be more difficult to physically compile and sign in these circumstances, particularly given the usual volume of documents that will accompany a typical building contract or sub-contract. Consider the risks inherent in not being able to enter into the affected contract, whether it be the building contract for the works, sub-contracts, warranties or security documentation.
- Impact down the contractual chain – with sub-contractors and suppliers – Supply issues and workforce issues may also be affecting them. Liquidity pressures may impact ability to make all payments due in the short term before government funds are available or cash is moving through the chain. Industry pressure is for payments to be made when due so if employers are not making payments when due and that is affecting your ability to make payments down the line, take advice.
- Impact on projects that have been awarded and not yet commenced – do delays on this project have a potential knock-on effect on programmes for forthcoming projects you are already committed to. If so, start discussions with your employers early to try to mitigate such effects.
- Impact on insurance and security (e.g. bonds) and availability – Lockdown and its impact may make these harder to obtain or could increase the length of time it takes to obtain them. Keep in contact with brokers/providers as necessary and keep Employers abreast of any issues, remembering to consider your contractual obligations with respect to such matters.
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.