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Construction Contracts and Coronavirus - What now?

As we work through this pandemic I am aiming each week to write a pair of articles with a construction focus: one for what NOW, one for what NEXT?  I am not inclined to write for the sake of it, so I will only produce articles where I consider there is something new to say that could benefit any reader who operates in the construction industry here in the UK (specifically England and Wales).  There are many sector-specific publications and organisations giving their opinions and advice and I believe that it is more important now than ever to “stick to your lane” and so my articles will focus on construction contracts: drafting them, negotiating them and resolving disputes under them.  As at 8 April 2020, here is what I believe you need to know about the situation NOW:

The law concerning work on site (statute and regulations)

In the early days of enforced working from home and then the more formal "shutdown" there was much talk in our sector about whether or not sites were obliged to close. The Coronavirus Act 2020 and the Health Protection (Coronavirus Restrictions)(England) Regulations 2020 are now in force and do not make any specific reference to construction sites.  The statutory position therefore remains that a site can remain open if the works are BOTH "essential" AND able to be carried out in accordance with Public Health guidance (i.e., observing the 2m distancing rules).  The word "essential" will be open to interpretation, but government ministers have been quoted interpreting this as "critical to the economy" rather than any measure relating to, say, structural integrity, gas or water leak, or the purpose of the completed works, e.g., a hospital.  

In terms of guidance that should be adhered to, the newly issued Site Operating Procedures are clear regarding distancing and physical contact.  

The law concerning work on site (contract interpretation)

I have advised previously on contract interpretation and early commentary focused on the allocation of the time and cost risk associated with the delays caused by Coronavirus and the government response.  The sensible advice remains that it is important to check the exact wording of your contract and to keep communications between all members of the project team clear, regular and properly recorded.  

If work is continuing, albeit at a much slower pace due to re-programming and a reduced on-site presence, the contractual issue is one of delay rather than suspension.  Where there is an obligation to proceed "regularly and diligently" with the works, a contractor's compliance with that obligation will need to be considered taking into account all the circumstances.

If the site is closed, then so far as the contract is concerned, the key question is "who made that decision?".  Over the last two weeks, many many contractors and employers found themselves in a contractual staring contest: no-one wanted to blink first due to the financial consequences. One hopes that where decisions were reached amicably and following sensible discussion, the parties took time to agree the consequences of the site closures, as well as the fact of the closure itself.  Do remember that if you are working under a JCT contract then (depending on the amendments, of course) the standard period of suspension is 2 months, following which the contract may be terminated.  It is therefore important to diarise deadlines and allow time for proper discussion around any further extension that may be required.  If key staff have been furloughed, consider bringing them out of furlough in time to have these decisions, if others do not have the necessary understanding of the site or relationship with the other parties.  

Other government schemes that may benefit your business

Speaking of furlough, my colleagues in our Employment Team have been producing some excellent articles to help employers (and the self-employed) safely tread the tricky path through furlough.  Rent/mortgage payments will also have been high on people's priority lists and again, my colleagues in our Commercial Property Team have been busy assisting landlords and tenants with Side Letters to properly record commercial agreements reached. There are a few other bits of good news for businesses:

  • MOTs are extended for 6 months - but remember to (1) check the DVLA website and email them if it hasn't been extended and (2) keep the vehicle in a roadworthy condition
  • CSCS cards are extended for 12 months - but remember that you still need a CSCS card that is relevant for your occupation
  • If you are working for any Contracting Authorities (i.e., national or local government - anything through an OJEU notice) the government produced Public Procurement Policy Note 02/20 asking them to shorten payment terms which should help with cashflow.

On that note about cashflow, whilst the government hasn't made any specific comment about retention (and indeed the retention deposit scheme bill (2017-19) did not get carried through into the current Parliament and so is, in effect, cancelled), now is a good time to carry out a full retention audit and do what you can to collect unpaid retentions.  Make sure you have complied with all paperwork obligations to facilitate that release - get all Collateral Warranties returned, for example.  

Terminating your construction contract (deliberately or accidentally!)

As mentioned above, many construction contracts and consultant appointments allow for a period of suspension, following which the party which received the suspension notice (usually the contractor or consultant) can call upon the other party to resume the project, or otherwise terminate their engagement.  This is primarily done so that contractors/consultants don't need to keep staff on standby but can allocate them to other projects.  We recommend that where a project (or your role in it) has been suspended, diarise key dates and allow time to discuss properly with other project parties.  

If now, after the initial and somewhat frantic reactions of the last two weeks have calmed down, you find yourself still bound into contracts that you wish to terminate, what are your options?  Unsurprisingly my answer is that this depends on the wording of the contract.  What is important to note is that most standard form contracts do not have "termination at will" provisions, for the simple reason that most parties agree that it is only 'fair' that unless you are in breach, you are allowed to continue, and unless the other side breaches, you in fact must continue.  The complication with Coronavirus then, is that if under the contract the contractor is entitled to an extension of time for any delay stemming from the pandemic, then he is not in breach (for that).  If the employer is able to continue providing instructions and payment on time, then he is also likely not in breach.  

So what if it simply doesn't suit your business to remain involved in the project?  I recommend exercising extreme caution if you are trying to "get out" of any contractual obligation.  Any badly made attempt to terminate a contract could amount to a repudiatory breach, meaning that the consequences of termination are likely to be more detrimental to your business than you had intended.  

Dispute resolution - update on court litigation and adjudication

Difficulties around termination leads neatly on to the final section of my article, which looks briefly at dispute resolution and what the Courts have been doing to handle Coronavirus.  The Commercial Courts have moved to virtual hearings, with both telephone and video links being used.  If you are currently unrepresented and dealing with your own litigation, please do not assume that everything is on hold.

Just like building contracts, the Civil Procedure Rules make allowances for the parties to litigation in England and Wales agree to extensions of time.  Usually, the parties may only agree extensions up to 28 days with any longer extension requiring a Court Order.  The Justice Department issued Practice Direction PD51ZA on 2nd April, which now allows the parties to agree extensions up to 56 days without requiring the Court's involvement.  Although the individual circumstances must be considered, parties to litigation would do well to consider this carefully before troubling the Courts unnecessarily in these difficult times.  

Whilst the Courts have made allowance for slowing down litigation, not so for their approach to adjudication.  Long known as "quick and dirty", adjudications are meant to be concluded within 28 days although they are regularly extended to 35.  Of course speedy processes are always risky: the advantage of putting the other side under time pressure has been known to then become an issue for the referring party.  So is the current Coronavirus situation a reason for the adjudicator to extend time frames? Can adjudication be expected to proceed at all?  

Earlier this month the TCC dealt with an application for an injunction from a responding party Contractor seeking to prevent the continuation of an adjudication commenced against it by a homeowner.  In Millchris Developments Ltd v Waters [2020] 4 WLUK 45 the contractor's submissions were based on difficulties it would have collating evidence and providing instructions to their solicitor.  In the circumstances, the TCC decided that none of the difficulties were insurmountable and that the adjudication could continue.  This sets a strong precedent and all companies should remain alert.  For this reason, amongst many others, it is important to ensure that the address you have given for service in all of your contracts and appointments is attended regularly to check for the service of legal documents.  

 

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

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