Coronavirus: The impact on construction contracts and property developments
We look at the contractual impact of the COVID-19 outbreak on two of the most common forms of construction contract.
Contractors and employers across the UK will be concerned that they could face delays and/or increased costs as a result of the COVID-19 outbreak, and they would be well advised to consider the relief events under their construction and supply contracts. For example, construction projects may be impacted by a combination of the following:
- Shortages of labour arising as a result of preventative measures to alleviate the outbreak spreading and the resulting quarantine, or self-isolation, required;
- Shortages of plant and materials arising from delays in manufacture, importation or transportation;
- Sites closing or access being restricted as a result of measures to contain the covid-19 outbreak; and/or
- Contractors and/or sub-contractors not being able to carry out the works as a result of action by governments to contain the spread of the covid-19 outbreak.
In this note, we look at the contractual impact of the COVID-19 outbreak on two of the most common forms of construction contract, the JCT Design & Build 2016 Contract and the NEC 4 ECC Contract. We also touch upon some relevant considerations under the Construction (Design and Management) Regulations 2015 and take a look at some issues that landlords and developers will need to consider.
1. Force majeure
Force majeure, at its simplest, can be described as matters that are outside the control of the parties, which could not reasonably have been foreseen at the time of the contract being entered into and whose effects prevent the performance of the contract.
The JCT contracts
Under the JCT Design and Build 2016 Contract, for example, the most obvious and widely considered provision within which an outbreak may fall is 2.26.14 – force majeure. Under clause 2.26.14, if a contractor can show that a force majeure event has occurred and this has impacted upon the projected date for completion of the works, the contractor is entitled to claim an extension of time. The difficulty with relying on this clause is that the JCT Design & Build 2016 Contract does not provide a definition of 'force majeure'. Force majeure could therefore be interpreted by a party, or tribunal, widely or narrowly. A lot will turn on what was, or could have been, anticipated at the time the contract was entered into.
Although each case needs to be considered on its merits and following detailed analysis of the terms of the contract, our view is that force majeure could be relevant for those contracts already in place (although this will depend on the actual impact the COVID-19 outbreak has on the performance of the works), but for those contracts being negotiated now, a widespread outbreak of COVID-19 is arguably foreseeable and therefore force majeure may not provide contractors with relief from completion dates and delay damages.
Under the JCT Design & Build 2016 Contract force majeure is not a ‘relevant matter’ that would entitle the contractor to loss and/or expense. Therefore, for force majeure, under the JCT Design & Build 2016 Contract, the contractor is entitled to time but not money.
The NEC contracts
By contrast, the NEC4 contracts do not expressly refer to force majeure, but contain similar provisions within the compensation events concept. Clause 60.1(19) applies to an event which:
- Stops the contractor from completing the works; and
- Neither party could prevent; and
- An experienced contractor would have judged at the contract date to have such a small chance of occurring, that it would have been unreasonable to have allowed for it; and
- Is not one of the other compensation events stated in the contract.
Of course, the NEC4 compensation events regime deals with impacts of time and money together rather than separating them out.
It goes without saying that for either the JCT or the NEC Contracts, the contractual notice requirements and other mechanisms must be followed properly in the above instances, for example, an early warning notice and risk reduction meeting under the NEC and a notification ‘forthwith’ under the JCT forms. Further, the duty to mitigate delays (best endeavours under the JCT forms) must be complied with.
The points and considerations raised above will likely be relevant to the COVID-19 outbreak for contracts already entered into prior to the outbreak. However, if you are not yet under contract the requirement for the event not to have been reasonably foreseen may not be met and therefore you might not be able to rely upon force majeure provisions under JCT or related NEC4 provisions. Our advice is therefore that for contracts currently under negotiation the parties discuss and agree how this risk is to be dealt with under the contract and ensure that the drafting is clear. We experienced a similar approach to bespoke drafting dealing with change in law provisions around Brexit – we knew things would change but not quite how and to what extent. At its simplest, contracting parties may agree to refer to the COVID-19 outbreak as being a force majeure event. Agreement would need to be reached at a commercial level as to whether an extension of time (without cost entitlement) provides adequate protection to a contractor. More complex drafting may be required depending on the agreed allocation of risk as to time and money. One of the key difficulties is of course that events are unfolding at a rapid pace. There is also the possibility that some negotiations may simply cease in such uncertain times pre-contract execution, as projects become secondary to requirements for dealing with the COVID-19 outbreak in terms of business resilience.
2. The exercise of statutory powers
As the UK Government’s response to the COVID-19 outbreak escalates and enhanced steps are taken to reduce the spread of the virus, it is conceivable that statutory powers are used to prevent projects from proceeding and reallocate resources.
The JCT contracts
If that does happen then the parties would likely look to Relevant Event 2.26.12 of the JCT Design & Build 2016 Contract, which if triggered allows the contractor to claim an extension of time (again not a Relevant Matter entitling loss and expense). The wording of this clause limits its application to the exercise of any statutory power by the UK Government or any local or public authority.
On the face of it, this means delay to progress caused directly and solely by the COVID-19 outbreak would not of itself entitle a contractor to an extension of time under that clause. Rather, it would only be entitled to an extension of time in the event of a delay to progress caused by the exercise of an authority's statutory power in response to the COVID-19 outbreak.
As an illustration of the above, a lack of labour due to the COVID-19 outbreak affecting a contractor's workforce alone may not be enough to justify an extension of time. However, if that workforce was required by direction of the UK Government to stay at home in self-isolation (as under The Health Protection (Coronavirus) Regulations 2020) and that directly affects the execution of the works, then the contractor may have a valid extension of time claim.
Equally, a lack of materials owing to a shortage of staff might not be enough to justify granting an extension of time, but if the UK Government were to exercise its statutory power to ban construction imports from an affected country, and this delays the progress of the works, it is likely that an extension of time would, or should, be awarded.
The NEC contracts
The statutory powers equivalent (or nearest thing) is not found in clause 60.1 but is in Secondary Option X2 (change in law), which the parties would need to have selected at the outset of the contract to apply.
3. Other relevant provisions
The JCT contracts
Other provisions which could apply on a case-by-case basis include:
(i) If the employer instructs a change to deal with the outbreak (2.26.1);
(ii) If the employer elects to suspend the works (or part thereof) using its power under clause 3.10 (2.26.2);
(iii) The employer invokes a deferment of possession or restriction on access to the site (2.26.3); and/or
(iv) The employer (or one of the employer's persons) is unable to provide goods or materials that it is required to provide under the contract (2.26.6).
Although the response to the COVID-19 outbreak is fluid we do not consider the 'lock out' provisions of clause 2.26.11 to be relevant at the date of publication. Our view is that at this time such an argument would be difficult, and others offer a more natural route to relief.
Clause 4.19 of the JCT Design & Build 2016 Contract provides that if direct loss and/or expense is incurred, or likely to be incurred, as a result of a 'Relevant Matter' causing a delay in handing over possession of the site (or part thereof), the person suffering the loss may be entitled to reimbursement.
Clause 4.21 provides a list of those Relevant Matters. However, none stand out as being directly applicable in the case of the COVID-19 outbreak and parties would therefore likely bear their own costs, except perhaps in the circumstances of the employer instructions above, for which there is a corresponding Relevant Matter. That, said, and subject to the contract specifics, if the employer is responsible for providing certain goods and/or materials under the contract it may be that clause 4.21.5 applies (as for the equivalent Relevant Event at clause 2.26.6).
The NEC contracts
The other types of instruction we consider for the JCT contract above could also apply under the following compensation events (remembering that there is no differentiation between time and money in an unamended NEC4 compensation event regime):
- 60.1(1), if the project manager gives an instruction changing the scope;
- 60.1(2) if the client prevents access to the site;
- 60.1(3) if the client does not provide something (such as materials), which it is to provide by the date shown on the accepted programme; or
- 60.1(4) if the project manager gives an instruction to stop (or not start) any work.
The JCT contracts
Under clause 8.11 of the JCT Design & Build 2016 Contract in the event that the works are suspended for the continuous period stated in the Contract Particulars (2 months unless the parties have expressly provided otherwise) as a result of a force majeure event and/or the exercise of an authority of a statutory power (as described above) then either party may give 7 days’ notice to terminate the employment of the contractor (note that further notice of actual termination is required).
The NEC contracts
Clause 91.7 of the NEC4 contracts gives the client the ability to terminate the contract for a force majeure-type compensation event, but not the contractor.
Frustration of a contract may occur where a serious event occurs without default of either party after the formation of the contract which is unexpected but which renders it physically or commercially impossible to fulfil. The parties are discharged from further performance as a result. It is important to note however that there are very few cases in this jurisdiction in which a party has successfully argued frustration and at this stage we see it as unlikely that the COVID-19 outbreak would render a contract frustrated, but this will of course need to be monitored closely as events develop over the coming weeks and months.
6. Notice requirements
The terms and scale of relief that contractors may be entitled to as a result of the COVID-19 outbreak will depend both on the terms of the contract and the specific circumstances of the project (including how the employer or client reacts).
What is important to note is that the usual mitigation and notification clauses will also apply, as well as the usual causation and concurrency rules.
Under NEC contracts, this also raises the question of if and when parties should be sending Early Warning Notices.
Whilst the CDM Regulations are relevant, the wider assessment of the risks associated with the COVID-19 outbreak and taking appropriate steps to address those risks form part and parcel of any employer fulfilling its primary duties under the Health and Safety at Work etc. Act 1974 (to “ensure the health and safety of its employees and others that might be affected by the undertaking”).
Under the CDM Regulations, a client’s principal duty is to ensure that suitable arrangements are in place to ensure so far as is reasonably practicable, that construction work is carried out without risks to the health and safety of persons affected by the construction project. What suitable arrangements are will depend very much on the nature and size of the project. However, a specific element of the suitability of arrangements relates to ensuring that there are adequate welfare facilities for workers for the duration of construction work.
It is the duty of the principal contractor to plan, manage, monitor and coordinate health and safety during the construction phase of the project. With this in mind we set out below a number of hints and tips for the entity performing the role of “client” under the CDM Regulations:
The client should ask the principal contractor how it is assessing and managing the risks associated with COVID-19 and press for a response (until it receives an adequate one) under its duties to ensure adequate health and safety arrangements are in place;
The principal contractor and principal designer should prepare a response/strategy and update the construction phase H&S plan and any risk register accordingly. This would likely include updating its induction processes etc;
The client should keep the process under review and maintain pressure on the principal contractor;
From a wider perspective, the impact of the COVID-19 outbreak should also trigger any business to review its business continuity processes and major incident response.
Will my development agreement/agreement for lease be affected by COVID-19?
Consider whether your contractual obligations in the agreement will be affected directly or indirectly by COVID-19.
Look at the terms of the agreement:
- Does it contain a longstop date for completion of the development?
- Is there a delaying event definition and if so could covid-19 either directly or indirectly fall within the definition which could have the effect of extending the longstop date?
- Does any extension of time allowed under the terms of the building contract qualify as a delaying event?
- Does a delaying event notice need to be served? If yes check the notification requirements (e.g. In writing, method of service)
- Is there a maximum extension on the longstop date i.e. An ultimate longstop date?
- Is there a force majeure clause that could excuse one or both of the parties from compliance with their contractual obligations?
- Does the agreement contain step-in provisions?
In the absence of a qualifying delaying event or a force majeure clause, parties might have recourse to the common law of frustration which if established would discharge the parties from their contractual obligations. Please note that as above, at this stage we think it unlikely that the COVID-19 outbreak would render the agreement frustrated.
If non-performance is not covered by a delaying event or force majeure clause consider taking legal advice on potential liability and potential solutions before contacting your counterparty with a view to identifying commercial solutions. Commercial solutions can then be documented by an agreement to vary the agreement.
These are uncertain times and parties will need to work together to find commercial solutions which may be outside the terms of the agreement. As ever we are available to advise and assist.
The construction industry often talks about collaborative working and indeed an obligation on the parties to act in a spirit of mutual trust and co-operation underpins the ethos of the NEC suite of contracts.
If the COVID-19 outbreak escalates and has a further adverse effect on the construction industry, then it is unlikely that any stakeholder will emerge entirely unscathed. We would encourage parties to work together to find a commercial solution, which may even be outside the terms of the contract, to deal with the inevitable disruption that this may cause. As ever we are available to assist with documenting such arrangements.
Basic health and safety considerations become more relevant than under “normal” circumstances. Understanding your rights and obligations is key to successfully managing a path through the current (and future) consequences of the COVID-19 outbreak.
For developers and landlords alike it is a time when the future of existing and planned developments comes into question.
We are advising an increasing number of clients in relation to the COVID-19 outbreak. If your business is being affected by COVID-19 and you would like our assistance in considering your contractual rights and obligations, please do not hesitate to contact us. We are ready to help you.
If you are a developer, contractor or operator please contact us if you are concerned about any of your development agreements or construction contracts right now and we will be happy to review and talk it through. Our team is available to provide urgent advice, please contact:
DDI: 0121 200 7297
DDI: 020 8036 6963
Mob: 07458 002 903
DDI: 020 8036 6963
Mob: 07458 002 903
DDI: 0121 200 5759
Mob: 07458 003 408
For further guidance on any issues relating to construction contracts, contact our construction law solicitors.