The Impact of Coronavirus on a Construction Contract: The Consultant's Perspective

Written by Ian Goodman QS, Director and JCT suite of contracts specialist and Stephen Abbott, PM, Divisional Director and NEC contract specialist.

The sudden and unprecedented outbreak of the coronavirus (COVID-19) is already affecting the construction industry, the true impact of this cannot easily be predicted as the situation changes on a daily basis. However, we can be certain that contractors will in some form suffer from issues with their supply chains and the inherent labour associated with it. This could be via increased costs or programme delay.

People inevitably turn to the construction contract in-place when unique instances such as the coronavirus pandemic occur and therefore, need to consider if there are any mechanisms for cost and delay relief under the contract.

Each contract whether that be JCT, NEC, FIDIC or bespoke forms such as PFI/PPP agreements, will take differing approaches to the outbreak of an infectious disease, often via contractual provisions around loss and/or expense, extensions of time and compensation events.

For the purposes of this article, we have taken the generic JCT Design & Build Contract 2016 as our base.

Firstly, it seems highly unlikely that any current, operational and signed construction contract will contain a ‘coronavirus clause’. Therefore, interested parties should consider if their particular contract states force majeure as a valid reason to apply for an extension of time.

Interestingly, within English law, there is neither a definition nor a recognised legal doctrine of force majeure with it being a foreign law concept, originating from French civil law, which has been introduced into English law contracts. It is usually used to refer to circumstances that are outside of the parties' control and could not have been reasonably provided against or been avoided (or used best endeavours to overcome).

The JCT suite of contracts makes express reference to force majeure being a relevant event but not a relevant matter (the outbreak of an infectious disease does not fit into any of the items listed within the relevant matters at clause 4.21 of the standard form) and where the employer takes the risk on time (programme delay) and the contractor takes the risk on the cost (no entitlement to claim for loss/expense). Hence, both main parties share the risk of force majeure.

This means that an employer is unlikely to be required to pay compensation under the unamended JCT contract, but a contractor should carefully check other provisions (such as fluctuations) or insurances (such as business interruption) in case recovery is possible through other routes. There is a clear risk of knock-on insolvency caused by disease related business disruption.

Within the JCT contract clause 2.29.15 can apply, as can the consideration and potential impact in terminating the contract via clause 8.11.

An advisable matter of course is, the contractor must notify the contract administrator “as soon as reasonably apparent that the progress of the Works or any Section is being or is likely to be delayed” outlining the applicable relevant events. Failure to notify is likely to result in the contractor losing this entitlement, so applying thorough and proper contract administration is crucial to protect both parties.

Touching on NEC contracts, contractors and employers should carefully review their contracts to ensure compliance with the early warning clauses requiring notification by either party as soon they become aware of an event which might increase the prices, delay completion or a key date, change the accepted programme or impair the performance of the works. The process as dictated by the contract should then be followed; attending a risk reduction meeting, considering proposals and solutions for risk mitigations, resulting in the project manager issuing an instruction to the contractor detailing how the change should be implemented.

Change is managed through the compensation event rules as set out in the contract. This of course considers both cost and programme implications. A word of warning though, NEC contracts do not use language such as force majeure, however clause 60.1(19) covers an event which:

• Stops the contractor completing the works or
• Stops the contractor completing the works by the date 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 for him to have allowed for it and is not one of the other compensation events stated in this contract.
  Careful consideration must be given to the compensation event rules and associated timescales as set out in the contract. The importance of an accurate accepted programme will be the drive behind any delay analysis undertaken.

As highlighted previously and in a worst-case scenario, under JCT a contractor may consider terminating their contract rather than claiming for additional time and/or loss/expense via clause 8.11 which provides for termination by either party by reason of force majeure. However, it should be noted that this is a high-risk option with considerable commercial implications.

The right to terminate under this clause will arise if the whole or a large part of the project is uncompleted for the period of time agreed and set down in the contract particulars (i.e. 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).

In conclusion, the UK Government wants to reduce the effect of the coronavirus as soon as it can and, although almost impossible, is trying not to impact on the economy. Hopefully, this will allow the construction and property industry to continue building and constructing, however, it is inevitable that most projects will suffer some form of increased cost or delay.

It will be important for both contractual parties to carefully review the terms of their contracts, (and any amendments to the standard forms) and therefore be able to understand their contractual rights (and obligations) and if they are entitled to claim for time delays and/or cost.

It is vital that either party notifies the other of potential delay but, in particular, the contractor must use their best endeavours to prevent, minimise and mitigate delay even if it is not their fault. As in any delay situation, it is also important to run a project with a good record of paperwork and be able to evidence any delay and subsequent mitigation.

For more information or further advice, please contact us.