COVID-19 and construction contracts
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Our international arbitration team recently published a blog discussing whether contractors can claim extensions of time on international projects in the wake of the commotion caused by the coronavirus crisis – now labelled a 'pandemic' by the World Health Organization.
This blog looks at the wider implications for the construction industry and considers the question we have been asked more than any other since the situation escalated in the UK – whether contractors are entitled to time and/or money under the most widely used domestic standard form contracts.
The answer obviously depends on the terms of the contract.
But, what terms does an unamended JCT Design and Build 2016 Contract (JCTDB2016) contain, which may cover a contractor's concerns, where it has supply chain issues caused by COVID-19 and a defiant client?
JCT Design and Build 2016 Contract
Under a JCTDB2016, where supply of material and labour is impaired by the COVID-19 outbreak, a contractor will naturally look for any 'Relevant Events' (clause 2.26), entitling it to an extension of time (EOT) and/or 'Relevant Matters' (clause 4.20), entitling it to an EOT and loss and expense.
Below, we consider each in turn, adopting the defined terms of the JCTDB2016.
Relevant Events
Clause 2.26.14 – force majeure:
The most obvious and widely considered provision within which an outbreak may fall is 2.26.14 – force majeure.
The difficulty with relying on this clause is that the JCT D&B does not provide a definition of 'force majeure', so it could 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.
Our view is that force majeure could well bite for contracts already in place (although this will depend on what impact COVID-19 actually has on the works), but for those being negotiated now, a widespread outbreak of COVID-19 is arguably foreseeable, therefore force majeure may not provide contractors with relief from completion dates and delay damages.
Clause 2.26.12 – exercise of any statutory power by the UK government or any local or public authority.
Clause 2.26.12 may also provide relief for a contractor affected by the outbreak, although the wording of the 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 entitle a contractor to an EOT under that clause.
Rather, it would only be entitled to an extension in the event of a delay to progress caused by the exercise of an authority's statutory power in response to the outbreak.
As an illustration of the above, a lack of labour due to COVID-19 infection affecting a contractor's workforce alone would probably not be enough to warrant an EOT.
However, if that workforce was required by the 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 an EOT entitlement.
Equally, a lack of materials owing to a shortage of staff might not be enough to warrant granting an EOT, but if the government were to exercise its statutory power to ban construction imports from an affected country, and this delays progress of the works, it is likely that an EOT would, or should, be awarded.
Others?
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); 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).
We have also received queries about whether the 'lock out' provisions of clause 2.26.11 could be relevant. Our view is that such an argument would be difficult, and others offer a more natural route to relief.
Relevant Matters
Clause 4.19 of the JCTDB2016 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 bear their own costs, except perhaps in the circumstances of the employer instructions above, for which there is a corresponding Relevant Matter.
NEC4
The position under an NEC contract is different, where there are no separate 'Relevant Events' and 'Relevant Matters', but rather 'compensation events' (CEs), which can entitle contractors to time and money (consequently, unless a contract is amended by way of Z clauses to introduce time only CEs, both aspects can be considered together) for events which stop the contractor from meeting key dates and/or completing the works by the completion date.
The NEC equivalent of the force majeure provision is clause 60.1(19), and relates to an event which:
- Stops the contractor from completing the works;
- which 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 CEs stated in the contract.
As with the JCT, we expect this clause to bite (subject to the impact the outbreak has on the works) for contracts negotiated before the current outbreak, but for contracts being negotiated now, it is arguable that the contractor should have allowed for some interruption.
It is on this basis that we have seen various specific 'coronavirus clauses' drafted seeking to deal with various impacts of the outbreak (including labour and material shortages, site closures and tariffs) by way of a specific CE.
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.
The other types of instruction we consider for the JCT contract above could also apply under the following CEs:
- 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.
Notices
While we expect contractors to be entitled to some relief as a result of the outbreak, their terms and scale of relief 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.
If you have any questions or concerns about your projects in light of the coronavirus outbreak, Fieldfisher's construction and projects team would be happy to discuss your specific circumstances with you.
In the meantime, we recommend employers consider carefully what instructions they issue and that contractors consider what notices they should be serving.
Both parties should also assess what mitigation measures they could be adopting and keeping detailed records of the progress of the works.