Construction Contracts: the COVID-19 Effect
Whilst the COVID-19 pandemic is undoubtedly having an impact on construction projects that were underway before the outbreak began, it will also have an effect on those construction contracts that are in the pipeline though not yet signed or started on site.
Given the majority of construction projects in the UK utilise the JCT/SBCC standard form contracts, the comments below are restricted to those contracts.
Parties to a construction contract will often amend standard form contracts, so when considering what effect COVID-19 will have on a contract it’s important to have regard to the precise contract terms.
The standard JCT/SBCC contracts entitle a contractor to additional time to complete the works where a ‘Relevant Event’ occurs. If the works are delayed as a result of force majeure, being an event which is unforeseeable, extraordinary or beyond the control of the parties and prevents the parties from fulfilling their contractual obligations, the contractor is entitled to claim for additional time to complete the works. Whether the COVID-19 outbreak is considered to be force majeure will depend upon a number of factors, such as when the contract was entered into, what if anything was known about COVID-19 at that time, whether the delays suffered were unforeseeable and beyond the parties’ control and whether the contractor used his best endeavours to prevent delay to the works. A force majeure event does not, however, entitle a contractor to claim for additional loss and expense.
If the UK Government were to order a shut down of all construction sites, this would amount to an exercise of a statutory power after the Base Date, entitling a contractor to claim for additional time, but again not to a claim for loss and expense. As at today’s date (15 April 2020), it is questionable whether in Scotland we are yet in that situation, as the UK Government have advised that construction sites can remain open provided they comply with construction industry COVID-19 safety measures, and the Scottish Government has issued ‘guidance’ that non-essential construction sites should be closed, but has stopped short of passing legislation to that effect.
One way in which a contractor could be entitled to both additional time and additional money as a result of the COVID-19 effect is where the employer under a JCT/SBCC contract instructs a contractor to shut down the site or to suspend some/all of the works or restricts the contractor’s access to the site. Such an instruction would be a contract change/variation, amounting to both a ‘Relevant Event’ (required for an additional time claim) and a ‘Relevant Matter’ (required for a loss and expense claim).
Parties should also bear in mind that the JCT/SBCC contracts provide that where the works are suspended for a continuous period of two months by reason of force majeure or the exercise by the Scottish or UK Government of statutory powers, either party is entitled to terminate the contract.
Where a construction contract has not yet been entered into, the effect of COVID-19 on that future contract would not amount to force majeure as at the time of entering into the contract the parties should have in their contemplation that COVID-19 is likely to have an impact on the contract. COVID-19 and its likely effects are no longer unforeseeable. Only a Government ordered shutdown of construction sites or an employer’s instruction to stop works etc would lead to a contract claim for additional time, and in the latter case only, additional money. It is therefore to be expected that ‘COVID-19 clauses’ will be added to future construction contracts. What such clauses will say will depend upon the risk-share that is agreed between the parties. Some of the issues that should be taken into account in drafting such clauses are:
- the extent of the contractor’s entitlement to claim ie additional time only or both additional time and additional money;
- what types of delay will entitle the contractor to additional time ie site stoppage, delays caused by supply chain issues, delays caused by a lack of materials or workforce due to illness etc;
- whether the contractor will be entitled to claim for additional costs in the event of materials becoming more expensive due to materials shortages etc; and
- whether the contractor will be entitled to the additional costs of complying with social distancing/health and safety measures that may be implemented by the UK or Scottish Governments.
The parties may also wish to amend the contract’s termination provisions which permit either party to terminate the contract where the works are suspended for a continuous period of two months by reason of the exercise by the Scottish or UK Government of statutory powers.