26 March 2020

Construction contracts – the impact of Covid-19

Over the past few weeks, developers and contractors have been assessing the potential implications of coronavirus and COVID-19 on construction projects. Whilst matters continue to change on a daily basis (and this note considers the position as things stand on Thursday 26 March 2020) we have summarised the key contractual principles below.

This note assumes that the parties are contracting on the terms of a contract within the JCT suite of contracts ("JCT") and considers two scenarios:

  • where the building contract has been executed prior to the outbreak of the coronavirus and COVID-19 pandemic ("C19"); and
  • where the building contract is still being negotiated.

CLIENT IN CONTRACT

In order to ease the effects that C19 may be having on a contractor, the contractor may seek to use the terms of the contract to apply for an extension of time and/or loss and expense or to suspend and ultimately terminate its employment.

Extension of Time

To be entitled to an extension of time the contractor needs to establish that

  • a Relevant Event has occurred;
  • that Relevant Event is causing delay to the completion of the Works.

A pandemic like C19 is not expressly catered for by any of the Relevant Events in the JCT. However, should the UK Government exercise statutory powers which directly affect the execution of the Works (by, for example, closing building sites or ordering the general population to self-isolate) this could constitute a Relevant Event (2.26.12 in the JCT D&B). It should be noted that it is only the exercise of statutory powers by the UK Government that will constitute a Relevant Event; exercise of powers by a foreign Government will not be a Relevant Event.

If the UK Government does not exercise any statutory powers which affect the execution of the Works, the contractor may seek to argue that C19 constitutes the Relevant Event of force majeure. Force majeure is not defined in the JCT. Whether C19 constitutes force majeure will require an analysis of:

  • the facts at the time the Relevant Event is said to arise (e.g. how widespread and severe the effects of C19 are);
  • what the parties can reasonably have been taken to understand by the term force majeure at the time of entering into the contract.

To be awarded an extension of time, the contractor must also establish that the Relevant Event is actually causing delay to the completion of the works. Additionally, the contractor is under an obligation to use best endeavours to prevent delay caused by C19, and, in the event of any such delay, the contractor must do all that may be reasonably required to the satisfaction of the employer to proceed with the Works.

Loss and Expense

It is unlikely that C19 will be captured by any of the Relevant Matters under a JCT and as such, under a JCT, it is unlikely that a contractor would be able to recover loss and expense caused as a result of C19.

Termination

Under a JCT, if certain events cause the Works to be suspended for the period specified in the contract particulars (the default being 2 months), either party may terminate the contract by giving notice. Two such events are the exercise by the UK Government of its statutory powers and an event of force majeure.

Employer Shut Down

The employer may consider closing down the construction site of its own volition, notwithstanding that such closure is not mandated or required by the UK Government. For this to be lawful under the contract, it would need careful consideration based on the facts of the specific project and the prevailing government guidance/legislation.

Letter of Intent

If the parties are operating under a letter of intent pending completion of a building contract, then the employer may have the right to terminate at will on giving a specified period of notice (set as 7 days in the City of London Law Society standard form). From the contractor's point of view, it may seek to rely on the provisions of the underlying building contract discussed above. It may also seek to negotiate C19 specific amendments to the building contract, or decline to execute any works in excess of those instructed under the letter of intent.

Development Agreements

The employer should refer to any development agreement (such as an agreement for lease or a sale contract which contain development obligations) it has entered into to establish the potential liability of either party to such an agreement in the event that there is a delay or suspension to the works occasioned by or linked to C19.

CLIENT IN NEGOTIATION

As is apparent from the foregoing, the standard contractual position relating to the effect of C19 on the works is not certain. As such, it is likely that the contractor will want to make express provision for C19 in its contract.

While the employer may feel that it should resist any amendments on the basis that the JCT already sets out a comprehensive code for how the risk of delay and loss and expense should be balanced, it is likely to be a key point for the contractor. Additionally, both sides will likely benefit from the certainty express drafting will deliver.

Deferment of Possession

The employer may consider applying the deferment of possession provisions in this situation. However, deferment of possession constitutes a Relevant Event and a Relevant Matter, entitling the contractor to an extension of time and to loss and expense.

Extension of Time/Loss and Expense

If it is agreed to provide for C19 in the contract, it is recommended that C19 is added to the list of Relevant Events and/or Relevant Matters, depending on whether the employer is prepared to allow the contractor an extension of time and/or loss and expense should C19 affect the Works. The commercial considerations of each project will dictate the approach that the parties take.

In the event that C19 is expressly provided for, the employer will be afforded the following existing contractual protections:

  • The requirement for the contractor to establish the causal link between the Relevant Event/Relevant Matter and the delay/loss and expense;
  • In the context of delay, the requirement for the contractor to:
    • use its best endeavours to prevent delay; and
    • in the event of any delay, do all that may be reasonably required to the satisfaction of the employer to proceed with the Works.

Termination

Parties may also wish to consider catering for C19 in the JCT list of events entitling the parties to terminate the contract. The ability to terminate on the basis of C19 may be to the benefit or detriment of either party, depending on the circumstances. The parties need to balance their desire for security against their desire for flexibility.

Letter of Intent

If the parties are negotiating a letter of intent, the employer may wish to shorten the period of notice it has to give when terminating at will from 7 days to, say, 3 days.

Development Agreements

The employer may also be in the process of negotiating a development agreement with a third party. In this instance, it would be prudent for the employer to seek to agree suitable extension of time and/or loss and expense provisions with the other party to the agreement.

A PDF copy of the article above is also available to download here.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

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