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Negotiating construction contracts in a COVID-19 landscape

In the continuing fallout from the COVID-19 pandemic, the immediate ramifications from a construction law perspective have naturally concerned ‘live’ building contracts, with Employers and Contractors rushing to ascertain where the associated time and cost risks sit under the agreed contractual terms. But what of contracts yet to be drafted and/or negotiated? In this article, we explore key considerations for parties looking to finalise building contracts in a COVID-19 landscape.

After the event

Arguably the most critical consideration from either party’s perspective is the fact that the building contract in question will be entered into after the effects of COVID-19 have manifested themselves. The operation of many key standard form provisions (which will have been irrefutably triggered under countless ‘live’ building contracts) could well be limited or even extinguished under new contracts moving forward.

‘Force majeure’ clauses are a classic example. It is generally accepted at law that force majeure events can be broadly characterised as unexpected and exceptional circumstances that arise outside of a contracting party’s reasonable control and which prevent that party from performing its contractual obligations. It seems fair to say that COVID-19 could fit squarely within that description in terms of contracts entered into prior to the effects of the outbreak taking hold in the UK. In terms of new contracts under negotiation, however, it is unlikely that COVID-19 will be treated as a force majeure event. Everyone now knows about it and so, broadly speaking, its effects can no longer be said to be ‘unexpected’. Parties will be expected to price and programme accordingly or draft for it in the contract.

As such, Contractors in particular should be very wary moving forward of relying on existing standard form provisions granting relief for ‘force majeure’ (JCT), ‘Exceptional Events’ (FIDIC) and the like. Instead, parties should be carrying out full risk assessments and negotiating specific points into the contract as risk management measures against the likely impacts of COVID-19.

Time, money or both (and how much)? 

Having established that bespoke drafting is most likely required, the parties will need to agree the commercial principles that are to underpin such drafting. In a construction context, this is likely to boil down in basic terms to:

  • whether the Contractor will be entitled to programme extensions, monetary entitlement or both, if the Works are delayed or disrupted due to the effects of COVID-19; and
  • the exact circumstances that will entitle the Contractor to such relief.

From the Employer’s point of view, care will be needed to avoid open-ended drafting that risks giving the Contractor effective ‘carte blanche’ to submit any number of (possibly tenuous and/or unquantifiable) claims arising from generic matters such as global economic downturn, supplier insolvencies and national labour shortages. Depending on how the longer-term effects of COVID-19 play out in the coming months, such drafting could in the right circumstances introduce a virtual ‘cost-plus’ payment mechanism by the back door and/or remove much of the Employer’s ability to hold the Contractor to the tendered programme.

Instead, the Employer will ideally wish to limit any COVID-19 relief clause to a defined list of key events that could feasibly have a direct, tangible and quantifiable effect on the specific project in question. Such events might encompass for instance:

  • the imposition of any new (or re-introduced) restriction on the activities and/or personnel permitted on site at any time; or
  • a delay in the delivery of goods, materials, plant or equipment arising due to international border control restrictions and/or domestic transportation restrictions imposed by legislation.

From a Contractor perspective, a combination of tenacity and commercial creativity is likely to be key in ensuring sufficient post-contract flexibility on costs in particular. For the reasons outlined above, many Employers are likely to have reservations about introducing potentially wide-ranging price adjustment clauses linked to COVID-19. The position is not helped by the fact that a number of standard form contracts (including the JCT suite) adopt a general rule of permitting time and cost relief for ‘Employer-led’ events (e.g. variation instructions) but only time relief for neutral events outside the Employer’s control. It may be that Employers take a firm line in insisting that this general principle is retained, even in the context of COVID-19.

Possible routes forward for Contractors in dealing with this kind of approach and mitigating the risk of being tied into an unfavourable price might include:

  • strategic use of Provisional Sums;
  • pricing for risks in the contract sum, but offering savings on an open book basis for specific items if the landscape does not turn out to be as bad as predicted; or
  • negotiating the inclusion of a bespoke mechanism for significant increases in labour and materials costs (perhaps above a stated percentage threshold) to be shared with the Employer, subject to the Contractor doing all it can to source suitable alternatives.

Contractors should also carefully review the wording of any COVID-19 relief clause(s) proffered by the Employer, to avoid being caught out by a drafting technicality. For example, does the Employer’s suggested definition of the COVID-19 pandemic expressly cover a secondary or subsequent wave of infections, together with any mutated form of the existing virus?

Dispute Resolution

Once the parties have dealt with how the contract will apply in practice to such situations, they must not forget about the dispute resolution clauses also. Whilst the Courts have imposed measures for remote hearings and other such adjustments in light of COVID-19, the same does not apply automatically to arbitration proceedings. Whilst it is hoped most parties will cooperate to facilitate the progress of an arbitration despite the impact of the COVID-19 measures, this is not always the case and if arbitration is to the be the dispute resolution forum of choice parties should consider whether provisions should be drafted to cover:

  • automatic transition to remote hearings (via video or telephone conference) in the event of (i) restricted movement either within the UK or from abroad if parties are based in different jurisdictions; or (ii) public health emergency;
  • express agreement of the parties that no objection shall be raised to the decision, order of award of the tribunal as a result of a hearing being held remotely;
  • mandatory use of electronic working and electronic exchange of all documents in the event of restricted movement and working from home requirements;
  • parties’ right to agree extensions of time to any directions for up to a specified period of extension (e.g. 56 days) without permission of the tribunal on the condition it does not impact any scheduled hearings.

Don’t forget the bigger picture

With so much focus understandably on COVID-19, it is more important than ever for parties to comprehensively consider the proposed contract terms as a whole and ensure that nothing is overlooked. At the time of writing, for instance, a ‘No Deal Brexit’ is still a tangible possibility at the end of the calendar year, and this is also likely to warrant bespoke drafting to reflect the parties’ intentions as to associated time and cost risk. As always, early and thorough engagement on all legal and commercial issues will help to ensure that the final contract clearly sets out a pre-agreed and mutually acceptable position should delay or additional expenditure arise.

If you require any advice on the impact of COVID-19 on your building project, please contact our Construction & Infrastructure Team or visit the Coronavirus/ COVID-19 area on our website.

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