The World Health Organisation has now classified the coronavirus COVID-19 as a public health emergency of international concern. European countries have advised protective measures to encourage social distancing, with Italy going so far as a total lockdown. The international reaction is already putting a strain on supply chains into the UK and, with the likelihood of similar protective measures being introduced by the British Government over the coming weeks, where does that leave Employers and Contractors engaged on active construction projects?
The key question will be: Who carries the risk for such an event delaying the project or preventing its completion? The place to find the answer, so far as can be ascertained, given that this is such a new phenomenon, will be in the written form of contract between the parties.
The terms of unamended NEC3 and NEC 4 are likely to provide compensatory protection for Contractors for delays and for additional costs incurred as a result of the impact and effects of COVID-19. Clause 60.1(19) includes, as a Compensation Event, an event which:
- stops the contractor completing the works at all or by an agreed completion date; and
- neither party could prevent; and
- an experienced contractor would have judged the event as having such a small chance of occurring it would have been unreasonable for him to have allowed for it when entering into the contract.
In order to benefit from this provision the Contractor will only have the right to seek an extension to the completion date and/or to seek additional costs if it complies with the strict condition precedent for notifying a Compensation Event. Under the NEC Main Contract, the Contractor must give notice of an event within 8 weeks of becoming aware that the event has happened. For Sub-Contractors also working under NEC 3 or NEC4, they should note that their notice period is only 7 weeks.
If notice is not given within this time period, the right to any change to the price or the completion date is lost.
It will also be necessary to check the completed Contract Data to ascertain if the risk allocation for such an event precludes either an entitlement to an extension to the completion date or to associated costs. In any event, an early warning notice should be given, by one or other of the parties, as early as possible in order that the parties can engage in discussions to manage and reduce the impact of COVID-19 before either party is required to take more draconian steps to best protect themselves.
In terms of the Employer’s options, the Project Manager can instruct the Contractor to stop work for up to 13 weeks under unamended NEC, before either party can seek to terminate the contract under clause 91.6. Such instruction would be a Compensation Event giving rise to a Contractor’s right to an extension and to additional cost.
The Employer only also has a separate right to terminate under clause 91.7 for an event which stops the Contractor completing the works or is forecast to delay completion by more than 13 weeks and which neither party could have prevented and which an experienced contractor would not have judged as occurring when entering into the contract.
Under unamended JCT the position might not be so clear. The specified Relevant Events, which give rise to a right to an extension of time for completion, include, at clause 2.26.14, ‘force majeure’ but which term is not defined and currently has no recognised meaning under English Law.
Force majeure is generally understood to cover an event or circumstance beyond the control of either party, and so, on a reasonable interpretation, a proven adverse impact of COVID-19 may be a force majeure event but this is by no means certain.
The time period for giving notice of delay under unamended JCT is whenever it become reasonably apparent that the progress of the works is being or is likely to be delayed. However, amendments to the JCT terms often include a strict time period for so notifying.
Also, under JCT, force majeure is not a Relevant Matter so there is no means for the Contractor to seek recovery of the cost of the delay, even if an extension of time is secured.
Under clause 3.10, the Employer could postpone operations on site, which in itself is both a Relevant Event and a Relevant Matter entitling the Contractor to claim an extension and associated loss and expense. Any Employer seeking to postpone must also be aware that JCT does include a force majeure event as a ground for termination by either party if the works are suspended for the continuous period of time specified in the Contract Particulars. The default period of suspension in JCT is 2 months but this may have been expressly amended.
It is important to review the express amendments or additional terms incorporated into a contract. The terms may provide the Employer with the right to terminate at will, or to suspend the works for a certain period.
Conversely, the express terms could limit the Contractor’s rights in such circumstances, limiting the grounds for securing an extension, and precluding it taking steps to terminate.
At common law
In the absence of adequate grounds for securing an extension under the contract or for suspending or terminating, the common law offers little assistance.
It is only possible to avoid the express terms of the contract addressing delaying events which give rise to an extension if the Employer has prevented performance. COVID-19 is not an Employer act of prevention.
The common law doctrine of frustration, which would discharge the parties from all future obligations, only applies in certain restricted circumstances where performance has become physically or commercially impossible, which the Courts have interpreted narrowly. If the Contract can be performed, but subject to delays, it is not impossible to perform, so will not provide sufficient ground to seek to terminate the contract.
If you are due to enter into contract, be warned – The potential delaying impact of COVID-19 is now reasonably contemplated. That means that it will not be deemed a force majeure event. It will therefore be necessary to either expressly provide for the impact of COVID-19 in the terms of contract or factor in sufficient float to the programme in order to avoid the delaying impact of this pandemic over the coming months.