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COVID-19: Construction Projects – where is the risk allocated?

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Overview

COVID -19 has already had an impact on construction projects and will continue to do so.

If a site is closed or the works on site are delayed due to late delivery of materials or reduced workforce what relief is the contractor entitled to?

Ultimately, this will depend on the form of contract in place between the employer and the contractor and the underlying circumstances entitling the contractor to make its claim.

Under the JCT contracts, the contractor may be entitled to an extension of time but is unlikely to be able to seek reimbursement of direct loss and/ or expense unless the employer itself has suspended works on site or otherwise restricted the contractor’s access to the site.

Under the NEC contracts the contractor may be entitled to a compensation event giving an entitlement to both an extension of time and/ or additional monies.

Depending on the length of the impact of Coronavirus, the contractor and the employer may also have a right to terminate the contractor’s employment.

JCT contracts

While the JCT contracts do not have express provisions allocating the risk of infectious disease, pandemic or epidemic, there are a number of relief events pursuant to which a contractor may claim an extension of time (and the resultant relief from the payment of liquidated damages) and/ or direct loss and expense.

Extensions of time (but no direct loss and expense)

Two ‘Relevant Events’ under the JCT contracts that a contractor may rely on when claiming an extension of time only are:

  • ‘force majeure’; and
  • the exercise after the Base Date by the United Kingdom Government or any Local or Public Authority of any statutory power that is not occasioned by a default of the Contractor or any Contractor’s Persons but which directly affects the execution of the Works.

Force majeure

Under English law there is no generalised doctrine of ‘force majeure’. The applicability of ‘force majeure’ is purely contractual and it is entirely up to the parties to define the events that constitute ‘force majeure’ and their rights and obligations upon the occurrence of such events.

The JCT contracts do not define ‘force majeure’ however the contracts are often amended to include a list of specified events that will fall within the scope of it. Where such amendments have been made the specific terms of the amendment will dictate whether the current Coronavirus situation entitles the contractor to an extension of time.

In the absence of such amendments there is some uncertainty as to whether ‘force majeure’ applies to the current Coronavirus situation. Where the term ‘force majeure’ is not defined, it is generally given the usual meaning of ‘an event beyond the control of a party that could not reasonably have been avoided and was not contributed to the counterparty’.

While there is case law confirming events such as war and widespread strike action constitute ‘force majeure’, there are no reported cases as to whether a pandemic or similar events do. Notwithstanding this, there are persuasive arguments that the current ‘Coronavirus’ situation is within the general understanding of a ‘force majeure’ event.

Careful consideration of the actual impact of Coronavirus on the contractor’s ability to carry out the works will be needed to determine whether there is an entitlement to an extension of time for ‘force majeure’.  We have written more about ‘force majeure’, here.

Statutory Power

To date, government has yet to order the shutting of construction sites across the United Kingdom (or such similar measures) and therefore it is unlikely, at this stage, that contractors will be entitled to an extension of time on the basis of an exercise of statutory power by the government.

However, given the speed at which the government’s approach to Coronavirus is moving, measures may eventually be taken that would entitle the contractor to an extension of time. The nature of the restrictions imposed by the government and the effect of them on the contractor’s ability to carry out the works will be the key determining factor in whether they constitute a Relevant Event or not.

Extensions of time and direct loss and expense

If an employer issues an instruction suspending work or restricting access to the site as a result of Coronavirus, this may constitute a ‘Variation’/’Change’ under the contract (i.e. a restriction to working hours). Such an instruction would be both a ‘Relevant Event’ and a ‘Relevant Matter’ giving rise to an entitlement to an extension of time and reimbursement of direct loss and/ or expense.

Alternatively it could be contended that such actions constitute an act of prevention by the employer which would also constitute both a ‘Relevant Event’ and a ‘Relevant Matter’ under the contract.

Termination

JCT Contracts

Under the JCT contracts, if the whole or part of the works is suspended due to ‘force majeure’ for longer than the relevant period specified in the contact particulars, both the employer and the contractor are entitled to terminate.

The default period under the JCT contracts is two months.

NEC contracts

Similarly to JCT contracts, the NEC contracts do not have an express term allocating the risk of infectious disease, pandemic or epidemic.

The NEC contracts contain a concept of a ‘prevention event’ which constitutes a compensation event entitling contractors to an extension of time and additional money.

Prevention event

A ‘prevention event’ under NEC contracts broadly corresponds with the generally held understanding of ‘force majeure’.

It is any event which ‘stops the contractor completing the works, or completing the works by the date for planned Completion shown on the Accepted Programme, that neither party could prevent and an experienced contractor would have judged at the date of the contract to have such a small chance of occurring that it would have been unreasonable to allow for it’.

If a contractor can demonstrate the impact of Coronavirus satisfies those requirements it will be entitled to a compensation event.

Statutory Power

In addition to relief for ‘prevention events’, under NEC contracts there is an optional clause which entitles the contractor to a compensation event where there is a change in law after the date of the contract.

If this optional clause has been included then actions taken by the government in response to Coronavirus may eventually result in an entitlement to a compensation event.

Suspension by the employer

Under the NEC contracts if the employer (via the project manager) issues an instructing suspending any work then the contractor is also entitled to a compensation event.

On this basis if, in response to Coronavirus, the employer instructs the contractor to suspend works or closes the site the contractor will be entitled to an extension of time and additional monies.

Termination

Under NEC contracts if a prevention event is forecast to delay Completion of the whole of the works by more than thirteen weeks then the employer is entitled to terminate the contractor’s employment.

The contractor does not have corresponding right to terminate for a prevention event.

If the employer instructs a suspension of the whole or any substantial part of the works for a period longer than thirteen weeks, then both the employer and the contractor can terminate the contractor’s employment.

Other Considerations

It is important to remember that while the effects of Coronavirus may entitle a contractor to a ‘Relevant Event’, a ‘Relevant Matter’ or a compensation event, such rights will still be subject to any conditions precedent or other obligations contained in the relevant contract (i.e. notice requirements and duties to mitigate).

Further to this, to the extent employers and contractors are currently negotiating contracts, the ‘force majeure’ and ‘prevention event’ provisions are unlikely provide the contractor any relief for the effects of Coronavirus, as it will be difficult for the contractor to satisfy the requirements for these events.

On this basis, contractors and employers should consider including bespoke clauses dealing with the effects of Coronavirus.

For further information, please contact either Michel Nee or René Theelen.

This update is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this update may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.
René Theelen

Director (New Zealand Qualified)

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