With the COVID-19 crisis bringing many building projects to a standstill, Alex Rayner, head of construction and engineering at award-winning law firm Sintons, examines the potential contractual options that exist if work has to stop for a period of time
The current COVID-19 pandemic is placing significant strain on the construction industry and will continue to do so for some time to come. At the time of writing, the majority of the country is in lockdown, with people being advised to stay at home and work from home unless it is impossible to do so. The guidance for the construction industry is less clear and there is a feeling, perhaps justified, that yet again the construction industry has been left behind in the government’s approach.
After some initial confusion following the Prime Minister’s lockdown announcement, the government confirmed that construction sites should continue to operate during the pandemic, providing this can be done while following Public Health England and industry guidance, most notably the Construction Leadership Council’s Site Operating Procedures. This led to some sites remaining open and others closing as contractors grappled with the guidance and the reality of a shortage of labour and materials. It is perhaps telling that the CLC Guidance is now on its third version. In contrast to this advice, many high-profile figures, including the Mayor of London Sadiq Khan, believe that construction sites should be closed.
The decision as to whether or not to close sites has therefore fallen to contractors, as the principal contractor under the CDM Regulations, and many have decided to do so until the lockdown is ended on the basis that they cannot work safely. We have given a great deal of advice to both contractors and employers as they look to the contractual consequences of suspending the works and we have set out below some of the key issues and potential contractual issues that arise. As ever, the factual scenario and the terms of the particular contract will affect any advice.
The most commonly asked question in the initial stage of the pandemic was whether it could be categorised as a “force majeure” event.
Force majeure, at its simplest, can be described as matters that are outside the control of the parties, which could not reasonably have been foreseen at the time of the contract being entered into and whose effects prevent performance of the contract.
Under the JCT Design & Build Contract, for example, force majeure is undefined and is a “Relevant Event”, which may entitle a contractor to an extension of time. It is not, however, a “Relevant Matter” entitling the contractor to loss and/or expense.
By contrast, the NEC 4 contracts do not expressly refer to force majeure, but contain similar provisions within their compensation events (ie potentially time and money), with Clause 60.1(19) describing events that stop the contractor completing the whole of the works, which neither party could prevent and which could not reasonably have been allowed for at the contract date.
It goes without saying that the contractual notice requirements and other mechanisms must be followed properly in the above instances, for example an early warning notice and risk reduction meeting under the NEC and a notification “forthwith” under the JCT forms. Further, the duty to prevent and mitigate delays (in the case of the JCT contracts an obligation to use best endeavours) must be complied with.
It is our view that COVID-19 is likely to fall within the definition of force majeure for construction contracts already entered into prior to the outbreak, however, as ever, this is subject to the contractor demonstrating cause and effect and having an audit trail to justify its decision to close a site, referencing the current industry guidance. Indeed, given the changing nature of the guidance, contractors should review this decision periodically in order to determine whether in fact some parts of the works can proceed.
It may be a different story for construction contracts entered into after the outbreak, or after it became foreseeable that the outbreak could potentially reach the UK. That is to say that in those circumstances the requirement for the event not to have been reasonably foreseen is unlikely to have been met; this will depend upon the circumstances and we can foresee disputes arising as to whether or not COVID-19 was foreseeable at a given time.
The exercise of statutory powers
The government’s response to the pandemic is likely to be fluid and largely determined by the impact of the current restrictions. It may be that under certain circumstances, particularly if statutory powers are used to close certain construction sites or to stop types of construction activity, the parties may look to Relevant Event 2.26.12 of the JCT DB 2016, although again this is a Relevant Event but not a Relevant Matter.
Under clause 8.11 of the JCT DB 2016 contract, in the event that the works are suspended for the continuous period stated in the Contract Particulars (two months unless the parties have expressly provided otherwise) as a result of a force majeure event then either party may give seven days’ notice to terminate the employment of the contractor (note that a further notice terminating is required).
Clause 91.7 of the NEC4 contracts gives the client the ability to terminate the contract for a force majeure type compensation event, but not the contractor.
Again, we can foresee disputes arising with regards to the exercise of termination rights under the current scenario. By way of example, the JCT suite of construction contracts state that the parties should not exercise any such rights “unreasonably or vexatiously”. There is limited guidance from the courts on how this would be interpreted, albeit the following six propositions were derived from the authorities in the case of Reinwood Limited v L Brown & Sons Limited:
- It is for the employer to show on the balance of probabilities that the contractor has determined the contract unreasonably or vexatiously.
- By vexatiously it is meant that the contractor determined the contract with the ulterior motive or purpose of oppressing, harassing or annoying the employer.
- The test of what is an unreasonable determination is to be ascertained by reference how a reasonable contractor would have acted in all the circumstances.
- It is not for the court to substitute its own view of what is reasonable for the view taken by the contractor if that is one which a reasonable contractor might have taken in the circumstances.
- Although the motive or purpose which a contractor had in exercising the right of determination is a relevant consideration, the test of what is unreasonable conduct in this context is objective and the fact that the individual contractor may have thought that his conduct in determining the contract was reasonable is not conclusive.
- The effect on the employer of determination by the contractor is a factor to be taken into account and a determination may be unreasonable if it disproportionately disadvantages the employer.
Frustration of a contract may occur where a serious event occurs without default of either party after the formation of the contract which is unexpected, but which renders it physically or commercially impossible to fulfil the contract. The parties are discharged from further performance as a result. It is important to note, however, that there are very few cases in this jurisdiction in which a party has successfully argued frustration and at this stage we see it as unlikely that COVID-19 would render a contract frustrated, but this will of course need to be monitored closely.
Pragmatic, commercial solutions
The construction industry often talks about collaborative working and indeed an obligation on the parties to act in a spirit of mutual trust and cooperation underpins the ethos of the NEC suite of construction contracts. In our experience, competing stakeholder interests sometimes, if not often, act as a bar to the parties acting in this way.
What does seem certain is that no one in the construction industry is likely to come out of the current restrictions unscathed. We would encourage parties to work together to find a commercial solution, which may be outwith the terms of the contract, to deal with the inevitable disruption that this may cause and to document any such commercial agreements as clearly and timeously as possible.
If parties to a construction contract find themselves in an adjudication during the pandemic, they should be alive to the fact that adjudicators and courts are unlikely to accept COVID-19 as an excuse to delay or injunct the progress of the dispute. This was shown in the very recent case of MillChris Developments Ltd v Waters, handed down on 2 April 2020.
In that case, a homeowner commenced an adjudication against a contractor. The contractor applied to the court for an injunction prohibiting the homeowner from proceeding with the adjudication because it claimed that it could not comply with the timescales required to respond to the referral notice (note: the adjudicator had already offered the contractor a two-week extension) due to the COVID-19 pandemic.
The contractor’s application was refused because it had failed to demonstrate that the COVID-19 health crisis (and also the fact that it was no longer trading) had prevented it from preparing for the adjudication so that if the adjudication proceeded, it would have resulted in a breach of the rules of natural justice.
Of course, a party’s ability to delay or injunct proceedings due to the current pandemic will depend upon the factual scenario but the case of MillChris demonstrates that parties will need to be able to overcome the high bar imposed by the courts in order to injunct any proceedings and, overall, the approach of the courts (and adjudicators will no doubt follow suit) is to facilitate the continuation of proceedings wherever possible, providing they can do so within the bounds of natural justice.
MillChris also provides a timely reminder of the benefits of acting reasonably (and the pitfalls of acting unreasonably) in a dispute scenario. Parties should try and find reasonable solutions, such as extensions of timetables and relaxations of the method of delivery of documents, or else risk adjudicators resigning or unsuccessful attempts to injunct proceedings together with the associated time, cost and hassle involved.
Head of construction and engineering
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