COVID-19 | Construction contracts and the coronavirus disruption

COVID-19 | Construction contracts and the coronavirus disruption

The government’s position that construction sites can remain open subject to complying with Public Health England recommendations, has not made it easy for contractors with a reducing workforce and supply chain constraints, it has made the risks of delay, additional expense and suspension provisions of contracts more difficult for all parties to interpret.

In this webinar, we’ll look at how different standard form contracts (JCT, NEC4) deal with the different types of disruption that might arise from COVID-19, the disruption under design team appointments, what parties should be doing now in respect of projects that are already under contract and considerations for contracts currently under negotiation.

Further information on how to manage the impact of coronavirus can also be found on our coronavirus resource hub and you can view past webinars at SHMA®ON DEMAND.

Please do let us know of future topics that you are interested in, or for more information about our webinars please contact us.

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Webinar transcript

(Please note this is auto-generated and un-edited)

Ian Griffiths partner in the construction and engineering team here at Shakespeare Martineau. Welcome to today's webinar on construction contracts from the coronavirus disruption. You will see on your screen that you're able to ask questions. So please do ask questions along the way I'll answer as many as I can and we've also share summary of questions with everyone after the webinar.
Today we'll be looking at the government guidance on construction sites will have a look at standard form contracts and covid-19 and concentrate on two contracts. We were looking at disruption and the Consultants appointments and also looking at issues to consider relation to projects under construction and those that are currently being negotiated.
The current situation in England and Wales for into construction works on site hasn't changed since the initial government guidance provided on 23rd March here. The government stated that you can leave home for traveling to and from work. But only where this is absolutely necessary and cannot be done from home which suggests the construction works on site could continue. This was subsequently clarified by the housing Minister Robert Generac who tweeted later that evening the advice for the housing Construction.
Baloo maintenance Industries if you work and work from home do so if you're working on site you can continue to do so but follow Public Health England guidance on social distancing. This is more recently reinforced on Tuesday 31st, March by Alex Sharma the business secretary published an open letter to all of those working in the construction sector stating the government is advice that wherever possible people should work at home. However, we know that for me.
People working in construction and their job requires them to travel to their place of work and they can continue to do so, this is consistent with the chief medical officer's advice to help ensure that it is safe for you to operate in your workplace. The industry has worked to develop the site operating procedures which were published by the construction Leadership Council.
These are line with the latest guidance from public health England as this health guidance updates the Sap will reflect any changes. So in essence the construction sites during the whales are to remain open if they meet the conditions set out in the guidelines public published by public health England, which aligns with the clc's site operating procedures.
This guidance obviously includes the rule that individuals should maintain a distance of two meters from each other where this rule or others cannot be consistently adhere to in the site may be wired to be shut down unless disclosure causes an unsafe or dangerous situation or the project is critical to society's immediate need this position does not make it easy to interpret issues of suspension delay or additional expense in construction contracts.
So let's look at standard form contracts. The key issues presented by covid-19 relate to who is responsible for delay the impact of additional cost and the potential for suspension or termination of a contract.
Let's consider the position of the two most popular industry standard form contracts in the UK the engineering and Construction contract published by the NEC. We're looking at the NEC for addition and the JCT designer build contract and we'll be looking at the 2016 Edition comments are obviously on the standard forms without any amendments or modifications. So looking firstly at the NEC ECC contract.
The NEC must say to begin with has a single contractual approach to these issues through the application of compensation events compensation events determine claims and assessments for both extensions of time and additional expense to all of the potential compensation events under the NEC. So firstly in the current circumstance compensation event, most likely to be applicable to the difficulties posed by Coronavirus.
Iris is Klaus 60.1 19 this Clause essentially is essentially a force majeure provision and relates to an event which stops the contractor completing the whole as a works by the date planned for completion and which could not be prevented by either party and wood has been unreasonable to expect the contractor to foresee at the formation of the contract and there is not one of the other compensation events.
The phrase the whole of the works is key in this Clause essentially the delay must be on the critical path and the later a section of the works only or delayed that can be fully mitigated. When not be sufficient. Secondly in terms of conversation events, the NEC encourages a proactive approach from the project manager and if we would not be difficult to imagine a project manager giving an instruction for the work to stop or for a key date.
Change to allow the client more control of the project particularly, if either the contractor or the project manager had previously given an early warning notice. This would then be a compensation event and a clause 60.1 for thirdly in the event the government decided that sites were too close then if option X2 which is changes in the law was incorporating the contract a restriction due to such change would be a compensation event.
Be aware than this but this provision only applies to changes in the law in the country in which the site is located. If there were government restrictions affecting an overseas supplier in the contractor supply chain. It would not be a compensation event unless it's satisfied the prevention compensation event. We discussed earlier.
Two issues are particularly important to bear in mind in relation to compensation events. Firstly the contractor has to notify the client within eight weeks of becoming aware of the event or a where it is to occur. This provision is expressed as a time bomb if the contractor fails to notify the client within this time, it's entitlement to compensation Falls away secondly as indicated earlier the NEC requires the use of early warning.
This is these are to assist the parties in adopting a heads-up approach to removing all mitigating risk, if the contractor fails to deliver an early warning notice, he does not lose entitlement to compensation event. That is he's assumed that an early warning notice has been given in assessing the compensation.
Then which means that any amount of would have been safe due to an early warning notice is taken off the compensation event assessment the impact of cost increases under the NEC would also very on which are the main pricing options were chosen such as option C or option + e to Target cost and cost reimbursable. So termination under the NEC for prevention force majeure the client May terminate if a prevention event arises and the works are forecast to be delayed by more than 13 weeks.
Two key points should be borne in mind in this issue firstly only the client has the termination option and not the contractor. And secondly the delay must only be forecast delay not actual delay. However, it would be a brave project manager or client forecast 13 weeks in advance in this current crisis.
A brief word on the NEC term service contract where you may have a contract lesser under those terms. It is not the intention to discuss the entire Suite of NEC contrast. But just in terms of this particular one, the terms service contract does not contain a prevention clause or a compensation event for prevention or force majeure. And so the early warning notice system is all you have in that circumstance.
JC T design and build than unlike the NEC the JCT has separate mechanisms for determining whether the contractor is entitled to extensions of time to the completion date and loss and expense in addition to the stated contract price.
The JCT utilizes a long list of relevant events that trigger time extensions before being allowed an extension of time. If the delay event fits the description of a relevant event. However, the contractor has an owner has hurdle to clear Clause 2.25 .6 requires the contractor to constantly use his best endeavours to prevent or delay to the progress of the works or any section.
However caused So what are the potential relevant events?
As with the NEC and lesson until the government or other Public Authority closes construction sites the most relevant of the relevant events if I can say that would appear to be closed 2.26 point 14, which is force majeure.
A force majeure is undefined in JCT contracts and has not been the subject of extensive judicial comment the law of England and Wales. So whilst this creates a degree of uncertainty as to how the version would be interpreted the cases we have would seem to give us a general understanding of force majeure, which is not too dissimilar the definition of prevention in the NEC. I an event which is beyond the responsibility control of either party.
Attributable I did to the force of nature or other circumstances not confined in their effect. Holy are principally to the parties.
If the government or another Public Authority intervenes with the site operations in England Wales, the appropriate relevant event would be that contained in Clause 2.26 Point 12, which is the exercise of statutory Powers many in the industry had expected this over a week ago but has yet to occur.
So once we will keep you updated if there are any developments Miss front the only point to raise is that where the whether the This will seek to enforce social distancing following the passing of coronavirus. I 2020 entitlements who lost an expense depends on the event or matter giving rise to the expense being defined in the contract as a relevant matter.
The list is found in Clause 4.21 of the JCT designer Bill contract, but it does not include equivalent events to force majeure or the exercise of statutory powers and as such there is is no entitlement to lost and expense.
In the event the parties agreed to the inclusion of the fluctuations provision.
Contained in schedule 7 the contractor is able to increase their prices and inflation rate Market, which could be of comfort of contracted both where prices increased due to contraction in the supply chain as a result of the regional and Global Effect of coronavirus and potentially where there is an increased demand when normality resumes in practice.
However, as you may be aware, the fluctuation Provisions are often deleted through schedules of amendments So as to keep the contract some to a fixed price can a party terminated jcd contract due to the force majeure Clause 8.11 is the relevant provision for this question. If the coronavirus is a force majeure event and it leads to a suspension of a project or sites are shut down by the exercise of statutory powers for the continuous period of suspension chosen by the parties in the contract particulars.
The default period is two months if nothing specified unlike the NEC. Both parties have the right to terminate. The contract is more common for appointments of professional consultants and design teams to a construction project. We drafted on a bespoke basis. This is particularly the case where the project is funded by an Institutional funder who tend to just like consultant friendly limitations on liability and conditionality of copyright.
Licenses found in standard contrast produced by professional bodies such as the Royal Institute of British Architects the RBA and the association for consultancy and Engineering acte extensions of time there bespoke appointments often include obligations to comply with the program.
Or work to a service completion date with that rights to any extension of time bespoke appointments often. However have reporting obligations similar to an advancement early warning notice mechanism increasingly found in standard form contracts.
These mechanisms provided in the event. The consultant is aware that there is a risk of an escalation in the project completion date or the project budget. They should inform the client clearly any such notice is required by the contract should be issued in order for a sensible conversation with the client to commence even if the contract does not expressly require an early warning notice. It is likely the common law or contractual duty of care.
Are owed by the professional consultant would require it to keep the kind informed of material risk and development. This is likely to be obvious in relation to a project where the construction phase has commenced. But whether the project is an early stage of Design Consultants need to be alive to the potential for the start date to be delayed due to the disruptions caused by Coronavirus.
In the RAB a Professional Services contract and close 2.3. It states that the consultant is not responsible for delays caused by circumstances outside its control Clause 8.2 of the AC Professional Services agreement provides. The consultant is be paid for additional work to do to disruption on a Time basis.
Additional fees majority as the spoke appointments provide a written approval of the client is required by means of a variation mechanism for any additional fees to be paid in respect of additional Services.
We've already seen at the AC allows for additional fees due to disruption as close a point to similarly Clauses 5.5 and 5.6 of the ri be a professional Services contract allows a Going to an additional fee if services are delayed disrupted or prolonged due to circumstances outside the Consultants control.
So suspicious suspension and termination bespoke appointments usually only include limited rights for the consultant to suspend or terminate and rarely allow the Consultants of spend for anything other than the non payment of fees. The Raba allows the consultant to terminate or suspend services on reasonable grounds. So close 9.2 nodes such an ambiguous provision could allow for suspension due to the impact of Coronavirus.
Close 13.3 of the AC allows the consultant to suspend Services if prevented or impeded due to circumstances outside the Consultants control. So what issues should we then consider in relation to projects under construction? So firstly as we've seen there should be notification of the problems that are on site and serve me in line with any contractual notification.
Asians that are there Secondly communication with insert entire supply chain should be a matter to be considered before all all the supply chain to be on the same page as to what's happening in relation to the project.
This should also be realism in resetting the program. There should be realism in being aware that there's a potential lag in re mobilizing even when issues when the circumstances return to normal the party's depending on who has the obligation in terms of insurance should inform the insurers particularly if work is to cease on site.
Site security issue should be looked at very carefully particularly where it's not clear how long the disruption is going to last or how long the site is to be closed parties are obviously really need to maintain records. Not only of where the workers got to but also has been notified and issues.
relation to notification of insurance and also administration of payment continues despite what's happened. So even if the project has stopped there will still be the need to assess what's been done up to the date that the project has stopped. So you need to look at the contractual Provisions for payment closely and keep that site going so where you're negotiating a project.
The key issue is to get rid of the ambiguity that we have seen in the various force majeure Provisions.
So a specific covid-19 or coronavirus Clause should be negotiated and the specific events that cause disruption should be defined and obviously we could easily assist with with drafting that for you and again realism is What is needed in setting the program or resetting the program for for projects that have yet to begin and there must be an understanding of the fact that there will be this lag and there will be problems in the supply chain and the purchasing chains in re mobilizing projects. Well, thank you for listening to this webinar. I hope you found it useful and relevant in the current circumstances.
Um stances, I will answer a couple of questions now and we'll also send a note of all questions and answers along with the recording of the webinar.
So the first question is what is the position and NEC Professional Services contract?
So we're an NEC for Professional Services contract is use the same point described above for the NEC for ECC apply as there are prevention force majeure Provisions in it. There's a conversation event for prevention and there is also option x24 changes of law if that is stated to be applicable.
To the contract. So essentially whatever was said earlier in relation to the ECC still applies for the NEC for Professional Services contract.
So another question that we've received.
Is if a contractor wants to continue Andhra, JCT designer Bill contract, but as client we are unable to monitor progress quality control and health and safety due to coronavirus. How do we reduce our contractual risks? And are we able to terminate the contract if we are not happy with the contractor to continue on site. So, okay. That's quite a complex one and two questions there.
So let's look first at the health and safety obligations. So assuming that the client has appointed a principal contractor and a principal designer the remaining CDM obligation that the contractor has is too is under clause and regulation 4.6. Sorry of the CDM ranks of 2015 and those to take reasonable steps.
To see that any principal contractor and principal designer comply with the remainder of their duties.
So in the context of Coronavirus disruption I'm presuming that the point the question is making here is that they are unable to access the site, but it could well be that reasonable steps in this circumstances to ensure that a project manager or even an agent who is able to and qualify to just monitor.
Your progress is being made and the Ended all the health and safety requirements are being adhered to can be dispatched to the site. So it doesn't it looks as though your obligation here can can be mitigate that can be met.
The second part of the question is are we able to terminate the contract if we're not happy for the contractor to continue on site? Well, what you could do in this instance is you could obviously postpone the project that would have not only the impact of an extension of time for also playing for love and expense for the contractor termination is not really an option.
Is the contractor will probably not be in default. We obviously need to keep that and review so it seems to me that the best answer is for you to look at what steps you can take to monitor what's going on even remote monitoring post possibly if I can be done to a reasonable level.
Well, thanks for all the questions. I will make follow I will do a follow up on all those after session and share these with you. So for further advice and guidance on the coronavirus disruption, please contact our dedicated resource Hub at shma.co.uk. Thanks for listening.

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