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Coronavirus – The current impact on the construction sector

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The construction industry is facing unprecedented disruption due to the coronavirus (COVID-19) crisis. There are many obvious issues which businesses in the construction sector could face such as cash flow issues leading to delayed payments (both making and receiving), potential force majeure events, delay in performance and of course issues surrounding the safety and wellbeing of the work force.

Phil Morrison, Head of Construction, provides an overview of the issues currently impacting the construction industry.

Responsibility for safety of the construction workforce

A growing number of construction companies have said they will stop all non-essential work in light of coronavirus, but others continue to operate amid confusion over the government's advice.

The UK government’s latest advice, following the 23 March 2020 announcement of a wide-ranging lockdown, is that UK construction sites may remain open, subject to workers maintaining appropriate social distancing.

Health and safety of the party’s employees when on-site is always of paramount importance. In the context of Covid-19, the government has said work can continue so long as people are 2m (6.5ft) apart. Contractors may also want to consider revisiting their health and safety policies to ensure that adequate procedures are in place that can be quickly deployed if the infection is reported locally so that the contractor can minimise the risk of the virus being spread to others on-site.

The CLC has published a full list of site operating procedures designed to protect site workers.

Managing cash flow

Contractors should ensure that they have provided all critical workers with the ability to work from home so that they can still manage payroll, collect and make payments and recover debts.

For more information on managing your cash flow during economic uncertainty please see our blog

Contractors should also keep up to date with the latest government guidance and assess their eligibility for business support.

Managing commercial relationships

Contractors/subcontractors should take proactive steps to ascertain if critical materials or supplies for incorporation in the works are being, or are likely to be, delayed and maintain an audit trail to prove all possible steps are being taken to mitigate such delays. Parties should also maintain detailed records about their workforce and why they are unable to work (i.e. self-isolation, infected or lockdown due to imposed restrictions).

Parties to a construction contract, and the project itself, may be insured for various eventualities. It is important that if issues do arise on the project, the terms of the insurance are checked as soon as possible to ascertain whether cover is available.

What if coronavirus is preventing a contractor from fulfilling their contract?


Frustration, force majeure and statutory power clauses

Some of the losses resulting from the disruption caused by coronavirus will be recoverable under construction contracts. Parties are potentially able to claim that the pandemic amounts to frustration of contract, force majeure or a change in the law.

What is frustration of a contract?

This occurs when, after the contract is made, an event occurs (without either party's fault and for which the contract makes no sufficient provision) which so significantly changes the nature of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time it was made, that it would be unjust, in the new circumstances, to hold them to its literal wording. It is important to note that because something becomes more expensive or more difficult, this is not enough to satisfy frustration of a contract.

Frustration is an extreme remedy, in that under English law both parties are automatically discharged from further performance. Legislation deals with the recovery of monies paid and compensation for any valuable benefit provided.

There are, however, very few cases where a contracting party has successfully claimed that a contract has been frustrated. For ongoing projects, frustration is unlikely to be a feasible option.

What is a force majeure clause in construction contracts?

Aforce majeure clause relieves one party from performing their contractual obligation. The clause identifies that an unforeseen event occurring during the duration of the construction contract will excuse the party from fulfilling the contract. The events that this applies to are events that cannot be controlled by either party, without any fault or negligence of the party that should be performing under the contract.

It is open to the parties to define, via the contract, exactly what circumstances are agreed to constitute force majeure. The contract also needs to set out the consequences of any event of force majeure, for instance suspension of performance until the force majeure event ceases.

As is the case above, most standard form contracts include force majeure clauses e.g. cl. 2.26.14 of the JCT 2016 Design and Build Contract Conditions.

Although force majeure events are undefined in these standard form contracts, courts have in the past, defined a force majeure event as “situations where circumstances beyond the control of the parties render performance impossible by one of the contracting parties” Lebeaupin v Crispin [1920] 2 K.B. 714, 718.

In order to benefit from force majeure, the contractor must also show that performance has become physically or legally impossible, and not simply more difficult or unprofitable.

Whether the implications of COVID-19 amount to force majeure will depend on the individual circumstances of each case. If it is found that the current pandemic is a force majeure event, contractors must then establish that it is the cause of the delay.

Government intervention and statutory power clauses

Most standard-form contracts include clauses relating to the exercise of statutory power, which may give rise to an extension of time. Importantly, this clause stipulates that the government intervention must have occurred after the Base Date for it to be construed as a Relevant Event under the contract. For future projects currently at tender stage, this gives the parties an opportunity to include an amendment which expressly refers to COVID-19.

In the majority of cases, it is unlikely that parties could have expected the severity of the current outbreak and the consequential government interventions prior to the contract’s base date.

Most standard form contracts include clauses relating to the exercise of statutory power: e.g. cl. 2.26.13 of the JCT 2016 Design and Build Contract Conditions. This clause provides that a Relevant Event (as defined) which may give rise to an extension of time will include:

the exercise after the Base Date by the United Kingdom Government or any Local or Public Authority of any statutory power that is not occasioned by a default of the Contractor or any Contractor’s Person but which directly affects the execution of the Works.”

Giving the right notices, at the right time and to the right people

Many construction contracts (including the JCT and NEC forms of contract) require certain notices to be given if the relevant remedies are to be available. On occasions these need to be given within a particular time frame.

It is crucial therefore that timely notices are provided.

Conclusion

It is likely that there will be disputes about whether specific COVID-19-related events are covered by the above clauses. Recovery will depend on the individual circumstance of each case and the specific wording of the contract.

Contractors should check their current contracts to determine whether they include clauses relating to government intervention and force majeure. If there are no such provisions, a contractor should open dialogue with the employer to determine whether the contract can be varied to include a mechanism to deal with any events and delays associated with the coronavirus.

In addition, contractors should be vigilant in respect of their supply chain management and subcontractor relations to ensure they are not assuming all the risk in the event the coronavirus adversely affects the progress of ongoing projects.

The delay and additional cost consequences resulting from these implications will need to be assessed should contractors claim relief from performance or request instructions. Contractors may look for extensions of time (in order to avoid paying delay damages), the recovery of additional cost and in extreme circumstances even termination.

If you would like further advice on any of the issues in this blog, please contact Phil Morrison, Head of the Construction Team.

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.