Coronavirus and UK construction contracts: where does the risk lie?

Coronavirus or COVID-19 is having an increasingly significant impact on businesses across the UK.  A bit like Brexit and the Millennium Bug, regardless of the actual impact if/when it happens, one thing is certain: we are all spending a lot of time in meetings and reading/writing reports and policies to deal with coronavirus!

This public health situation will impact on business in so many ways and readers will no doubt have already considered questions around the practicalities of office staff working from home, their sick pay policy, even how to ensure there is enough soap in the office!

This article is written specifically for parties to UK building contracts and focuses solely on different coronavirus scenarios and how building contracts may allocate risk.

Given that many projects have building contracts whose terms are, to some extent, bespoke (whether by a few tweaks to payment terms or a lengthy schedule of amendments to an off the shelf form, or an entirely bespoke document) this article is intended as broad guidance only and is no substitute for taking proper legal advice.  Please note that references below are to un-amended off the shelf contracts. 

In these time-pressured circumstances a tabular format seems most helpful.

Scenarios:

1. Government/local authority requires your site (or sites generally) to close
   
   
2. Site labour (whether employed by main contractor or sub-contractors) do not attend work due to ill-health/self-isolation/fear AND/OR Materials delivered to site late as supplier affected by coronavirus (directly or indirectly)
   
   
3. Material costs go up due to reduced supply due to coronavirus etc impact on market prices
   
   
4. Employer team (including client design team) too ill to issue instructions (although does manage to make payments)

Force majeure

Force majeure is not defined in many off the shelf standard form building contracts, nor does it have a statutory definition in English and Welsh law.  The generally accepted common law position is that force majeure is an occurrence which is beyond the control of either party and which neither party could prevent.  Whilst we are all being encouraged to take preventative steps against coronavirus, this is not the same as “preventing” an event in the legal sense.  Whether or not coronavirus amounts to a force majeure event is yet to be tested by the Courts (indeed the Courts have yet to report on the interpretation of “force majeure” in JCT contracts at all) but we consider that, in the context of the closure of building sites, we anticipate that the Courts would likely find that coronavirus is a force majeure event. 

Preventing delay

There is wording in the lager JCT contracts (e.g., Intermediate, Standard and Design & Build) that states that the Contractor “shall constantly use his best endeavours to prevent delay in the progress of the Works”.  “Best endeavours” is an extremely onerous obligation and does technically mean that in scenarios 2 and 3 above, Contractors could be found to be required to source alternative suppliers of labour and/or materials even if the cost of doing so means that the project runs at a loss for them and puts the solvency of their businesses under threat. 

Concurrent delay

As all construction professionals know, concurrent delay is a huge topic in itself (indeed many well-respected authors have written entire books on the subject).  We would nonetheless note that the “usual” rules on concurrent delay will apply to coronavirus and so this public health event will not necessarily “save” a contractor already in delay. 

Grounds for termination

It is assumed that on a vast majority of projects, all parties still wish to complete the works.  Delays may happen and the cost implications of those delays must be calculated properly and allocated appropriately. 

Where a Contractor is entitled to an extension of time, any delay will not be a default and therefore ought not give rise to any entitlement for the Employer to terminate the building contract.  Parties ought also to remember that party insolvency does not automatically terminate a JCT building contract but does give the other party a right to terminate. 

Clause 8.11 of the JCT Design & Build 2016 edition deals specifically with public contracts and does allow for termination following suspension for force majeure. 

Under an NEC contract, clause 91.5 allows either party to terminate if the parties have been released under the law from further performance of the whole of the contract.  That is unlikely to apply here as any statutory measures relating to public health issues are likely to be temporary (even if medium term).  However, under 91.7, a force majeure type scenario does give the Client the right to terminate the Contract and the consequences are then set out in P1, P3, A1 and A2 – this does not include lost profit for the contractor.

Communication is key

Whatever the form of construction contract (or professional appointment), communication is key.  It is vital that all parties on projects have sensible and meaningful discussions as soon as possible.  We would also remind contractors/sub-contractors to check the notification requirements of their contracts and, where prudent to do so, issue a formal notice of delay/risk notice to sit alongside more practical discussions. 

Coronavirus drafting?

If you have not yet signed your building contract for a project due to be on site some time in 2020, you may be considering negotiating bespoke amendments to deal with coronavirus.  If parties can give solicitors clear instructions, then such amendments are possible and if the drafting is done properly, may assist the parties in resolving any delay issues in the future.  However, the very real risk here is that narrow and specific drafting may miss a scenario that later transpires, even if that is not the parties’ intention, and yet wider drafting may inadvertently allow a contractor relief from delay caused by matters that have nothing to do with coronavirus.  Whilst scenario specific amendments can seem attractive, we strongly recommend such drafting only be undertaken by an expert to reduce the risk of unintended consequences. 

If coronavirus is likely to directly impact your project we recommend, as always, that communication is key: client, design team, key sub-contractors, suppliers, CA/EA and funder should discuss problems and seek to find agreed next steps.  It is also important to continue liaising regularly with your insurer. 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.