On Coronavirus: Advice for the construction industry
March 20, 2020
The Coronavirus pandemic and the measures being put in place continue to evolve by the hour. The construction industry with its inherent complex supply chains and daily need for person-to-person contact, is likely to be severely impacted. All parties will need to be extremely proactive in managing their risks, but also need to consider their rights and responsibilities under their contracts. I thought it would be useful to offer some perspective and guidance from a legal point of view in the form of some Frequently Asked Questions.
This overview will consider the issues resulting from Coronavirus in the context of four commonly used standard form contracts. These are:
- The JCT Design and Build Contract 2016 (JCT),
- The NEC4 Engineering & Construction Contract (NEC4),
- The IChemE Red Book Fifth Edition 2013 (IChemE) and
- The IET MF/1 Model form of Contract for the design, supply and installation of electrical, electronic and mechanical plant (MF/1).
This guidance also assumes that no amendments have been made to the standard form. If any such amendments have been made, it will be necessary to consider their effect.
How may Coronavirus affect the management of the site?
Contractors will have various duties relating to health and safety, and in particular a duty under the Construction Design and Management Regulations (CDM) to plan, manage and monitor the construction phase, as well as coordinate matters relating to health and safety to ensure that, so far as is reasonably practicable, construction work is carried out without risks to health or safety.
That may require the works to be organised differently, so as to minimise the risk of the transmission of infection, with a possible reduction of the numbers present on site at any one time. It may also be necessary to monitor employees and ensure that any who show possible symptoms go into self-isolation. All of this may disrupt the regular carrying out of the works. Aside from that there may be staff shortages and difficulties in obtaining deliveries of materials from suppliers.
Can I get out of the contract?
There is no general rule that a party is excused just because factors beyond their control mean the contract takes longer, or is more expensive, to perform. In extreme cases the law will automatically discharge the parties from further performance where the contract has become incapable of being performed because the circumstances mean that it has become something radically different from that which was originally undertaken. This is known as frustration. Short of a government order requiring closure of building sites though, it seems unlikely that frustration would apply.
Force majeure is a term used to refer to things like wars, riots and “Acts of God”. However, it is not a rule of English law, although it has been adopted as a contractual term in many English law contracts. The problem is that it is not universally defined. Briefly, here’s how each of the previously mentioned contracts addresses it:
- IChemE defines Force Majeure as “any circumstance beyond the reasonable control of the parties which prevents or impedes the due performance of the Contract by either party including the following”. There follows a list of events, which include “government action or trade embargo” and “epidemic”.
- MF/1 contains a similar definition, which does not, however, specifically mention epidemic or government action, but does include” any circumstances beyond the reasonable control of either of the parties”. This would probably cover Covid-19 and government measures in response.
- JCT uses the term “force majeure”, without defining it. In the absence of a definition, its meaning will depend on judicial interpretation in the context of the contract as a whole. Case law suggests that it will include an epidemic such as Coronavirus, although this is not certain.
- NEC4 does not use the term “force majeure”, but makes similar provision for events which stop the Contractor from completing the whole of the works, or stop him from completing them by the date for planned completion, which neither party could prevent and which an experienced contractor would have judged at the contract date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for.
As you will see below, the contractual consequences of force majeure can vary considerably.
Am I entitled to an extension of the time for completion?
Unless the contract specifically allows additional time for completion, contractors are likely to be exposed to liability for damages if works are delayed – and will therefore need to consider seeking an extension. Again, let’s briefly look at how this is handled by each standard contract:
- JCT has force majeure as one of its ‘Relevant Events’, entitling a contractor to an extension of time where it has caused delay. Other “Relevant Events” may also apply, such as the exercise of a statutory power by the government or local authorities. However, mere advice or exhortation by the government would not amount to exercising a statutory power, so in that case contractors would need to rely on force majeure
- MF/1 entitles the Contractor to an extension of time for circumstances beyond the reasonable control of the Contractor, which would probably include delay due to Coronavirus.
- IChemE entitles the Contractor to an extension of time for delay caused by Force Majeure (as defined).
- NEC4 states that the Contractor is entitled to an extension of time where an event occurs which stops the Contractor from completing the whole of the works, provided that neither party could prevent it and an experienced contractor would have judged it at the contract date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it.
In all cases it is vital to follow the correct procedures under the contract and, in particular, to give the appropriate notices on time, because otherwise the right to an extension of time might be lost.
Can I recover additional costs?
There is no general entitlement to additional costs as a result of Coronavirus. It all comes down, inevitably, to the specifics of the contract:
- For JCT there is no entitlement to loss and expense, so the contractor will have to take that on the chin, or use their own insurance (although that is unlikely to cover them anyway).
- IChemE requires each party to bear their own costs arising from delay by force majeure
- MF/1 does not contain a general entitlement to additional costs arising from Force Majeure, but the Contractor is entitled to additional costs arising from changes to statutory and other regulations and changes in the cost of labour, material or transport, any of which may be a consequence of Coronavirus.
- NEC4 does state that the Contractor is entitled to additional costs where an event which stops the Contractor from completing the whole of the works (as described above) occurs. It is vital to follow the correct procedures in the contract for claiming such costs.
Termination for Force Majeure
Finally, it makes sense to look at what each contract allows for termination.
- Under JCT, either party has a right of termination where the carrying out of the whole or substantially the whole of the uncompleted Works is suspended for a specified period (normally two months). This may be a high bar to reach where Coronavirus causes serious disruption without actually causing a complete suspension of the works.
- Under NEC4, the Contractor has a right of termination where an event occurs which stops the Contractor from completing the whole of the works (as described above), and the event is forecast to delay completion by more than 13 weeks.
- In the case of IChemE and MF/1 the bar is set event higher: under IChemE the works must be substantially prevented for a continuous period of 123 days before there is a right of termination, while in the case of MF/1 the period is 120 days.
On top of the burden of managing the practical difficulties created by Covid-19 and keeping abreast with government measures, it is important to become familiar with the relevant terms of your contract so that you can take the appropriate actions at the appropriate times. If you are about to enter into a contract, you should consider whether to include specific provisions to deal with Covid-19. This is now a known, but unavoidable risk. How it is to be managed will need to be a subject for discussion and negotiation between the parties.
As ever, I recommend that you seek professional advice to help you through these unprecedented times.