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Construction contracts and COVID-19

Published: 17 May 2021

There’s no escaping the financial impact that the Covid-19 pandemic has had on most business sectors around the world. The construction industry hasn’t been left unscathed, with continuing challenges to bring staff and equipment to the island, supply chains still operating below optimum and, at the simplest level, delays being brought about not only from these factors but also earlier site closures.

Fortunately, the Jersey Government issued construction specific legislation early, which likely prevented many issues (which might lead to disputes) from arising. This doesn’t mean, however, that disputes won’t arise in the future. Even as we emerge from the pandemic – contractors still concerned that they could be hit by delays or increased costs as a result of Covid-19 should seek legal advice as it may be that they have express entitlements to relief under their contract.

For example, a contractor may seek an entitlement to extensions of time and/or additional payments in the event that:

  • A site was closed, or access was restricted because of measures to contain the pandemic; and/or
  • There were shortages of labour arising because of infection and/or measures to prevent future outbreaks; and/or
  • There were shortages of plant and materials arising due to importation or transportation delays.

Two of the most widely used domestic standard forms of construction contracts are the Joint Contracts Tribunal (JCT) contract and the New Engineering Contract (NEC).

Force majeure as part of a JCT Contract

Force majeure typically refers to events that are outside of the control of parties to a contract. Clauses allocate risk for future potential events that, if they occur, will affect the ability of a contracting party to meet a contractual obligation.

The JCT suite of contracts make express reference to force majeure being a ‘relevant event’ and a potential termination trigger. Importantly, however, what constitutes a force majeure is not defined.

As epidemic or pandemic events are not listed as a separate relevant event in a standard unamended JCT contract, the only clear way they would be considered as such is if the parties agreed to add a definition to the contract.

Parties should therefore, in the first instance, check for a contractual definition of the force majeure term in any schedule of amendments which accompanies the JCT contract.

Without a specific definition provided in the JCT contract, and without common law precedent, the meaning of force majeure may have to be determined by the courts.

Some commentators have indicated that the interpretation and circumstances which would constitute force majeure under the JCT contract is likely to be restrictive because similar events, which would typically constitute force majeure, are already expressly listed as relevant events. If the court agreed, it would however still appear reasonable for contractors to seek to argue epidemics and pandemics constitute a force majeure on the basis they are not expressly included and it is difficult to see what other events are likely to fall within this terminology.

It is also worth highlighting that force majeure is also not included in standard form JCT contract as a ‘relevant matter’, so while a contractor may be entitled to an extension of time for a force majeure event, they would not be entitled to recover any financial loss and expense. The effect of this is that whilst a contractor does not have to pay damages for delay, it will have to bear any cost resulting from the delay – effectively meaning that a force majeure event is treated as a neutral event, where the financial risk is split between the parties.

Force majeure as a termination trigger

In a worst-case scenario, instead of claiming for additional time, parties may wish to consider their termination rights. Clause 8.11 of the unamended JCT Standard Building Contract 2016 allows for termination by either party, as a result of force majeure.

The right to terminate arises if all or a substantial part of any uncompleted works are suspended for the period set out in the contract – the default position being two months. In the event of suspension for the specified period due to a force majeure event, either party may give notice to the other that, unless the suspension ceases within seven days of receipt of the notice, the contractor’s employment may be terminated on the service of a second notice, which is given upon the expiry of the first notice period.

Parties should be conscious of the risk of terminating by reason of force majeure. If the event is deemed not to be force majeure, the party seeking to rely on it could leave itself open to a claim for repudiatory breach of contract.

This would entitle the innocent party to compensation which seeks to put it back in the same position as if the contract had been properly performed.  This could potentially mean the repudiating party paying the other a significant sum. In addition, parties should consider carefully the other potential effects of triggering a termination event, such as reputational risks, and the potential damage to long-term supply chain relationships.

Compensation under an NEC

Clause 60.1(19) of the NEC 3/NEC4 Engineering and Construction Contract entitles a contractor to an extension of time as well as compensation if an event occurs which:

  • Stops the contractor completing the whole of the works, or from completing the whole of the works by the date for planned completion shown on the accepted programme; and which:
    • Neither party could prevent
    • 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 compensation events stated in the contract.

The second point of this three-stage test may prove troublesome, particularly for a contractor looking for an extension of time/compensation under a contract signed now, given the known scale of the pandemic and its economic impact and effect on trade.

As such, it would be difficult for a contractor entering into an NEC contract now to argue that the effects of Covid-19 had such a small chance of occurring that it would have been unreasonable to have allowed for it when assessing how long the works would take.

Contractors that had already entered into an unamended NEC standard form before the pandemic was widely reported are more likely to succeed in arguing that such an outbreak had such a small chance of occurring and impacting on the community in the manner it did, that they could not reasonably have allowed for it.

The increasing prevalence of epidemics, however, does suggest that parties will be increasingly expected to make allowances when entering into these contracts for the possibility of such outbreaks – even if it is to agree with the other party that it is specifically referenced in the contract as not being a compensable event.

Conclusion

Parties to construction contracts will naturally be concerned about the commercial effect of Covid-19 on their operations.

Parties should consider expressly providing for such events in their contractual arrangements with a view to recognising dealing at the outset what the risks associated with them are and agreeing what rights each party has.

For expert advice and assistance in supporting you through all aspects of construction contract law, speak to Julia Smirnova an English Solicitor in Viberts Litigation Team or contact one of our other litigation specialists by emailing: litigation@viberts.com or telephoning +44 (0) 1534 632283.

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