At the time of writing, the UK is ramping up measures to suppress the outbreak of COVID-19. In the construction industry, Employers and Contractors alike will be keen to understand where the associated time and cost risks of site closures, supply chain delays and other related issues sit under the terms of their building contracts. In this article, Laura Reeve, Associate in Ashfords’ Construction & Infrastructure Team, explores the position under the JCT 2016 suite.
The JCT suite of contracts includes the following ‘Relevant Events’ entitling the Contractor to an extension of time for completion of the Works:
- "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 the default of the Contractor or any Contractor’s Person but which directly affects the execution of the Works”;
- “force majeure”; and
- “civil commotion […] and/or the activities of the relevant authorities in dealing with such event”.
It seems highly likely, therefore, that (at least in an unamended JCT scenario) the Contractor will have sufficient contractual scope to successfully claim for additional time in the context of COVID-19 related delays.
While an extension of time will relieve liquidated damages liability for the period of delay in question, COVID-19 related disruption will also invariably result in the Contractor incurring additional financial expenditure. Under a JCT contract, the ability to recover such monies will typically turn on whether the expenditure in question can properly be classed as resulting from a ‘Relevant Matter’. The problem for Contractors is that the JCT list of ‘Relevant Matters’ is far narrower than the ‘Relevant Events’ list – and does not cover any of the issues cited above.
Although, at a glance, we appear to be in a ‘time but not money’ situation, there are potential routes available to the Contractor in seeking to recover additional disruption related costs:
- Employer instructions to postpone etc.: An Employer instruction to postpone the Works (or any part of the Works) is a Relevant Matter under the JCT suite. Similarly, if the Employer and/or its contract administrator are seen to be ‘taking the lead’ on decisions regarding site closures, working restrictions etc., then this could also be construed as a ‘Change’ or ‘Variation’ within the meaning of clause 5.1.2 (namely “the imposition by the Employer of any obligations or restrictions in regard to […] access, […] limitations of working space, limitations of working hours or the execution or completion of the work in any specific order”), again giving rise to monetary entitlement as well as an extension of time.
It may be that a Contractor can persuade its Employer to issue a formal, written instruction for postponement or other on-site restrictions required as a result of COVID-19. In that event, the Contractor is likely to be able to claim direct loss and expense arising from the same. Of course, this tactic is very much dependent on how legally sophisticated the Employer is, and whether it is aware that such an instruction will trigger an entitlement to monetary relief which might not otherwise have arisen.
- Changes and Provisional Sum expenditure: It might also be possible for a Contractor to merge COVID-19 prolongation costs with instructions for Changes and/or the expenditure of Provisional Sums. Specifically, the standard JCT text states that if, as a result of compliance with an instruction for a Change or expenditure of a Provisional Sum, there is a substantial change in the conditions under which other work is executed, then that other work shall also be treated as a Change and valued accordingly. The norm is for this wording to help compensate a Contractor who prices for summer working but who then, as a result of Changes, finds itself carrying out some or much of the original scope of work in difficult winter conditions (where increased costs and disruption to progress ensue). However, the wording could also be used by a Contractor if it finds that costs escalate due to disruption, shortages, increased lead-in times etc. caused by COVID-19 when there would have been no such escalation but for earlier instructions for Changes and/or Provisional Sum expenditure.
- Termination leverage: Under clause 8.11 of the JCT suite, either Party can terminate the contract if the whole or substantially the whole of the uncompleted Works is suspended for a continuous period (of the length specified in the Contract Particulars) by reason of (inter alia): (i) 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 the default of the Contractor or any Contractor’s Person but which directly affects the execution of the Works; or (ii) force majeure. Depending on how the current ‘lockdown’ situation evolves in the context of the construction industry, it may well be that this termination right becomes ‘live’ under many JCT contracts. This in turn could provide Contractors with useful leverage for negotiating a commercial ‘pain sharing’ agreement on additional costs incurred (despite a lack of contractual entitlement). When faced with the prospect of the Contractor walking away from the project completely, with all the re-procurement and associated costs that this will incur, an Employer might be more willing to engage in commercial discussions aimed at relieving the financial burden on the Contractor.
In addition to the above contractual considerations, it is of course important not to underestimate the benefits that sensible commercial engagement can potentially yield. This is an extreme and unprecedented situation. Employers will undoubtedly be mindful of the financial pressures being placed on Contractors, and equally conscious that a strict contractual approach ultimately might not result in the most beneficial outcome. In many cases, the commercial pull of maintaining a positive relationship with the Contractor and mitigating the risk of supply chain insolvencies (with the long-term benefit of achieving the ultimate objective of project completion) might just be enough to persuade an Employer to bend the JCT rules.
If you require any advice on the impact of COVID-19 on your building project, please contact our Construction & Infrastructure Team.