The UK construction and engineering industry has been hit hard by Covid-19. Of course, delay in a construction project is not a novel occurrence, however the impact of Covid-19 is.
Many construction projects will have been severely affected by lockdown and the rippling impacts of the pandemic. There are many consequences of Covid-19 which might cause delay to a construction project, periods of closed construction sites, a reduced labour force (due to infection, self-isolation or reorganising team structures as a preventative measure against spread) and delays in transportation or importation of materials.
In these circumstances parties will be considering the following:
- When a party might claim an extension of time (EOT).
- Frustration and force majeure.
This blog gives an overview of the key principles applying to the above in England and Wales.
Overview and relevant guidance
The entitlement under any contract to an extension of time, additional costs or termination as a result of Covid-19 will vary depending upon the terms and conditions of the specific contract. Readers of the blog will be familiar with the JCT Design and Build Contract, 2016 Edition (JCT DB 2016) and NEC4 Engineering and Construction Contract (NEC4 ECC). These are used as two examples below to illustrate how standard form construction contracts may respond. However, parties should also consult the individual terms of their own contract and account for any variations which may have been made.
Adding to the contractual picture is recently published guidance, which includes:
- The Cabinet Office has published Procurement Policy Note for public bodies on payment of their suppliers to ensure service continuity during and after the current Covid-19 outbreak. As part of that guidance the Cabinet Office has also published model deeds of variation which provide a set of terms that contracting authorities can use for NEC3 and JCT standard forms of contracts.
- Further guidance produced by the Cabinet Office includes non-statutory guidance for parties to contracts impacted by the COVID-19 emergency. The tone of the guidance is very much that parties “should act responsibly and fairly, support the response to Covid-19 and protect jobs and the economy”.
- The Construction Leadership Council (CLC) Covid-19 Task Force has also published practical guidance for all companies involved in the construction supply chain on how to minimise potential disputes. The CLC advise that employers and suppliers should seek to take a collaborative approach towards successful project delivery and discuss whether an EOT can be granted and any additional costs shared. To assist the industry in adhering to their contracts in relation to an EOT or a compensation event, CLC have produced guidance at Annexes 3-4 of their May 2020 guidance document.
Extensions of time
Most construction contracts expressly provide for the date for completion of the works. Even where parties have orally agreed a contract or done so over email, it is often one of the few things that parties have provided for. Delays may occur which are not the contractor’s fault or responsibility and so most construction contracts contain express provision for the completion date to be extended in certain circumstances. This is an EOT.
Points to consider:
- Most standard form construction contracts, perhaps unsurprisingly though going forward this may change, do not include an express provision which would entitle the contractor to claim an EOT due to an epidemic or pandemic itself. Consequently, parties should look carefully at the terms of their particular contract and consider if current circumstances may fall within the broader terms of the contract.
- For example, many standard form contracts will entitle a contractor to claim relief where there is a change in law or government action which affect execution of the works and therefore delay to the project. However, parties should critically look at whether the change they rely on is a change in the law or a change in guidance (of which the government has published much during the pandemic).
- Under the JCT, the contractor is entitled to claim an EOT if a ‘Relevant Event’ causes delay to the progress of the works. Examples to consider include: (i) the exercise of statutory powers by the UK government; (ii) force majeure (discussed below); (iii) instructions by the employer to postpone any work; (iv) impediment, prevention or default by the employer; and (v) changes or variations by the employer which restrict working hours or access to the site. However, it is important for parties to keep in mind that while the contractor may be entitled to claim an EOT where a Relevant Event delays progress of the works, it is not entitled to claim loss and expense unless the event is also a ‘Relevant Matter’ under the contract. Therefore both sections should be cross-checked against each other.
- Meanwhile, NEC4 ECC entitles the contractor to claim an EOT and additional cost if a ‘Compensation Event’ occurs. Relevant Compensation Events include events which stop the contractor from completing the whole of the works or cause delay, which neither party could prevent, and an event which an experienced contractor would have judged to have had a small chance of occurring (this is judged by reference to the date the contract was entered into).
Frustration and Force Majeure
“Force majeure” offers relief to a party under a contract from performing some or all of their contractual obligations. It typically covers an event which is: (i) beyond the control of the parties; (ii) was not foreseeable at the time of entering into the contract; and (iii) which prevents or delays performance.
Force majeure usually entitles the contractor to an EOT and relief from liability for delay liquidated damages. However, in terms of the cost consequences, some contracts treat them as neutral (so that the risk lies where it falls), whereas other contracts entitle the contractor to recover any costs suffered or incurred as a result of the force majeure event.
Points to consider on force majeure:
- If the contract does not provide for force majeure, a party cannot raise it.
- The purpose of force majeure is a practical one – it avoids frustration of the contract. A contract may be discharged on the ground of frustration where something occurs, after the formation of the contract, which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation into something radically different. Frustration is permanent and so not only may the parties not wish to resort to this, it also can be difficult to demonstrate. Raising force majeure can therefore offer one potential route out, by allowing the parties to be excused from performance under the contract or allow a party to suspend performance of some or all of its contractual obligations.
- Some contracts may include a list of events which would give rise to force majeure – this list may be exhaustive or not. If a contract does list examples consider whether they include an epidemic, pandemic, act of God or act of nature, act or government or more generally acts beyond a party’s reasonable control. Meanwhile other contracts do not define what amounts to force majeure, for example the JCT DB 2016.
Finally, the parties may also consider termination.
- The effect of the pandemic may be that the works are suspended for a continuous period. Under the JCT if “the carrying out of the whole or substantially the whole of the uncompleted works is suspended for a continuous period of two months by reason of any impediment, prevention or default… by the employer”, this may ultimately trigger the contractor’s right to terminate the contract. In addition if carrying out the whole or substantially the whole of the uncompleted works is suspended for a continuous period of two months, including as a result of force majeure or “the exercise by the UK government or any local or public authority of any statutory power that is not occasioned by a default of the contractor… [that] directly affects the execution of the works”, the right to terminate may also be triggered.
- By way of further example, under NEC4 ECC the project manager may instruct the contractor to stop or not to start any work – a Compensation Event. Where that event prevents the contractor from completing the whole of the works by the date for planned completion shown on the Accepted Programme and this delay is anticipated to continue in excess of 13 weeks, the contractor, is entitled to terminate.
- Parties are reminded, as always, to terminate with caution. Wrongful termination can incur both significant time and cost.
Given the nature of Covid-19, government rules, industry guidance and, therefore, legal advice will change over time.
Timing will be crucial, much will depend on the stage of the pandemic response the parties find themselves in and importantly when the contract was entered into. Clearly for contracts entered into after parties would have been aware of Covid-19, different considerations arise in respect of ‘reasonable foreseeability’.
The current situation is unprecedented in our lifetimes. Nonetheless, parties must be mindful of their existing contractual obligations, which in the absence of one of the options above, continue to apply. Parties must continue to update on progress and warn of delay, keep records to document the cause of delay and comply with notice requirements under the contract, including payment notices.
To the extent that the parties can try and keep their project on track and avoid claims, this will likely be the optimum outcome both in terms of time and costs. As always employers and contractors can vary the contract or renegotiate its terms. However, parties should do so in writing, contemplate their positions and consider any variations in the context of the contract as a whole.
In light of the constant state of flux employers and contractors now find themselves in, parties should review contracts periodically to ensure that they are mindful of their contractual rights and obligations, along with any remedies which may be available to them.