Covid-19 Contractual Actions for Contractors

The coronavirus pandemic will affect most organisations in the construction industry. This will impact on safety, cashflow, profitability and staff/labour retention.

Inevitably, attention will turn to blame and recovery. Employers may blame the contractor for delays and the contractor their sub-contractors. Where large sums of money are at stake, it is unlikely that morals will play a part. Parties will turn to the Contract to establish their position.

Below, we seek to assist our contractor and sub-contractor clients in ensuring the impact on their business is mitigated as far as possible. We have split this document into four categories:

1. Notices
2. Cashflow
3. Dispute Resolution
4. Alternative Approach

We have had many calls from contracting clients, where comments were made such as “it will be okay as we are covered under Force Majeure provisions”. However, without some action on your part, that is unlikely to be the case and possibly may never be the case.

Why?

• Force Majeure provisions may not be incorporated into your contract. There is no common law provision (i.e. outside your contract) covering Force Majeure.

• Force Majeure may exist in your contract but may not be defined. So, there may be arguments as to whether Coronavirus is a Force Majeure situation.

• Should Force Majeure clauses exist, they may be defined. That definition will probably determine whether Force Majeure applies in these circumstances.

• Force Majeure may not be the best clause to rely upon, depending on the circumstances. Other provisions such as prevention or impediment may be more appropriate.

Despite the Coronavirus Act 2020 giving the UK Government additional powers, at the date of this document, the government has not issued a blanket direction to close construction sites.

Rather they have stated that sites should remain open, but that the 2m distancing rule should be maintained. That is a health and safety issue. Employers must ensure they maintain the safety of employees and others affected by their operations.

In certain circumstances this may prove impossible. In some cases, it will be possible, but will still delay progress and make undertaking works more expensive.

Later Repercussions

It is likely that unilateral suspension of construction operations by you, or a delayed completion of the Works will place your business in jeopardy of future repercussions.

Helping Yourself – Now

Most written construction contracts include provisions in respect of delay to the Works, or completion of the Works, suspension of the Works, Frustration, Postponement and Termination.

You will need to check your individual contracts as not all conditions are the same and they may have been amended if a standard contract form is the basis of the Contract.

Invariably, the Contract will require that you give notices, sometimes forthwith and sometimes within a stated period, or possibly another constraint.

Delay to Progress and/or Loss and Expense

In many contracts the giving of notices is an express provision to future entitlement to an adjustment to the completion dates or to receive compensation for loss and/or expense.

If you fail to give effective notices, you may leave yourself open to damages and potentially lose any entitlement to recover your own costs.

Should you have multiple projects without valid notices, then you may be subject to charges and non-recovery of your costs on all those projects.

Simply giving notices may avoid this.

Generally, you will need to give a separate notice in respect of delays to that of costs (loss and expense).

This is because notices in respect of delay and extensions of time are only relevant to maintaining the right to deduction of damages. Whereas loss and expense notices relate only to the ability to recover your costs.

Some contracts require that you state the clauses under which you are claiming. At present this may prove difficult. Indeed, as this crisis develops a notice given now may not be valid for future events, such as if the Government issue a blanket direction to close sites or place a curfew on travel.

Therefore, you need to ensure that you give effective notices at every change in circumstances.

In some circumstances, you may have been about to start a project, but the Employer defers possession i.e. giving you the site to undertake the Works, beyond the original date for possession. Again, you should issue the relevant notices.

If access to site is denied for a prolonged period, beyond that stated in your contract, you may have the right to notify that you wish to terminate the contract.

Having given the initial notice, it is then incumbent upon you to provide further information and evidence in respect of delays and costs. Timescales for these notices may be written into your contract.

Backing your notice up with substance is often complex and requires specialist input to ensure a robust case is established.

You will have to keep full records of actual cause of delay, its actual effect upon progress, which may vary across a site (sectional completions) or between sites. A delay analysis including a supporting programme will assist with this.

As for loss and expense, it will be necessary to attribute costs to specific delay. Again, this may be delays to various activities. For example, external works progress may remain unhindered as personnel can remain 2m apart, but internal works may still be delayed for safety reasons.

Check if your contract is not yet formed, you may find the final (and just amended) version excludes Force Majeure or other relevant provisions.

For new contracts, from early 2020, it may be difficult to argue that COVID-19 and its effects were unforeseen. You may wish to negotiate altering the contract before agreeing to it.

Suspension

Most contracts provide a mechanism for the contractor’s suspension of the Works.

Invariably they only relate to non-payment of a sum notified as being due. Check your contract to see what provisions apply.

Again, the correct notice must be given. Some contracts require that if non-payment continues for a further period after the giving of the notice, then a further notice is required prior to suspending the Works.

If the notice provisions are not explicitly complied with, you may put your company at a short term cash flow disadvantage and financial risk in the future.

Termination

Some contracts make provision for termination of the Works should works be suspended due to an impediment, prevention or default by the Employer or any Employer’s person, that continues beyond a stated period.

So, if the Employer closes the site for beyond the stated period, you may wish to give notice to terminate. However, first check the specific provisions of your contract.

Frustration

Some contracts include frustration provisions. There may be some doubt as to whether this would apply. Again, check your contract.

Delivery of Notices

The intent of any notice is to notify the other party of something. The contract will potentially determine what delivery method is approved for the service of notices.

You must comply with those requirements or the notice will probably be invalid.

You can assist your cashflow position by ensuring that you comply with your contracts.

Payers (those making payments), may well be looking to seek reasons not to pay sums already notified or sums that become due.

So, ensure that you issue valid applications for payment on time, including the due date and the basis for the sum due.

In terms of detail, provide evidence where appropriate to back up your position. This could be photographs, marked up drawings, measurements, invoices etc.

If you are claiming loss and expense, you will need to demonstrate the actual loss that resulted from each cause.

On a project with serious delays, the loss and expense may be the determining factor between loss or profit on a project. If you don’t demonstrate it, you may well face immediate issues and eventual loss.

All the usual dispute resolution mechanisms, such as adjudication, remain in place and can provide a speedy Decision.

The vast majority of non-domestic i.e. not between a contractor and a resident householder, will be subject to the Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009. However, even domestic contracts may still have adjudication provisions incorporated.

If you do intend to make use of adjudication, the result will be determined by the evidence.

Now is the time to maintain records and collate evidence.

Most parties to active construction contracts may to be affected and concerned about the effect of COVID-19. Therefore, it may be useful to approach your client and get the contract amended in some way to the benefit of both parties. Any amendments will need to be agreed and preferably evidenced as being agreed by both parties.

Presumably the Employer will want to continue with the project so will not wish to create a dispute which he will then need to deal with.

Possibly a liquidated damages holiday could be arranged or similar. Edge Consult would be pleased to discuss the available options with you.

Edge Consult UK LLP