Coronavirus - Construction and Engineering Contracts - Delay and Expense

The key provisions here are those concerning 'Adjustment of Completion Date' (2.23 – 2.26) and 'Loss and Expense' (4.19 – 4.21).

Starting with delay to the Completion Date, the Contractor is entitled (subject to various notice provisions and provisos) to an extension to the Completion Date as a consequence of 'Relevant Events'.  Of these, the two that would appear most directly relevant to Covid-19 are:

• 2.26.12 -  exercise after the Base Date by the UK 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; and 
• 2.26.14 - force majeure.

Dealing with the exercise of statutory powers ground, if the UK Government exercises such a power after the Base Date (a date selected by the parties in the contract), for example, by closing the borders preventing essential deliveries or quarantining an area where the relevant site is located, this would seem to fall within the 'exercise' ground provided for in clause 2.26.12, could not be said to be due to any Contractor-related default and would seem to directly affect the Works.

Turning to 'force majeure', the standard JCT form contains no definition of this particular Relevant Event.  Likewise, there is no clear definition under English case law but to constitute  'force majeure' an event would have to be causative of the relevant delay and would probably have to be outside of the will and control of the parties to the contract and not be due to any default on their part.  Obvious examples are war, strikes and weather (albeit exceptionally adverse weather and strikes are covered elsewhere in the JCT form) and an epidemic would also seem to potentially fall under this heading. 

When assessing whether the 'force majeure' Relevant Event applies it is important to consider whether the event itself has actually delayed performance or simply made it more expensive to perform.  The Courts tend to construe force majeure type clauses very narrowly (particularly where, as here, other events that would otherwise constitute force majeure are dealt with elsewhere) and in the latter case it will be difficult to argue that because an event has caused cost increases it will also fall under this heading as a ground for an extension of time.

It is often forgotten that even if an occurrence is a Relevant Event, these grounds are subject to an important proviso contained in clause 2.25.6; namely that the Contractor must "constantly use his best endeavours to prevent delay in the progress of the Works or any Section, howsoever caused, and to prevent the completion of the Works or Section being delayed or further delayed beyond the relevant Completion Date".  Whilst there is no clear legal definition under English law of 'best endeavours' it probably requires the Contractor to at least take all commercially reasonable action, incur reasonable expenses, re-programme and divert reasonable resources in order to prevent any delays to completion. What this means in practice will depend on surrounding circumstances but may go as far as a requirement to take all the steps that a prudent and determined person acting in their own interests would take to bring about the desired result even if that means subordinating its own commercial interests. So, by way of an example, if equipment supply for a project is delayed by the exercise by the Government of a statutory power in relation to the Covid-19 outbreak but the Contractor could foresee this prior to the event becoming critical and use an alternative (albeit more expensive) source of supply, then any delay incurred by a failure to do this may fall foul of this requirement and prevent an extension being granted as a consequence.

Turning to Relevant Matters (the grounds for a loss and expense claim), these are more limited in extent than the Relevant Events under JCT.  There is no reference to exercise of statutory powers or to force majeure in clause 4.21 of JCT and Relevant Matters are largely concerned with acts or omissions of the parties to the contract.  Consequently, even if a delay to completion as a result of Covid-19 or any resultant exercise of statutory powers could be established as a 'Relevant Event' on either of these two grounds, it is unlikely that there would be any similar 'Relevant Matter' or loss and/or expense entitlement based upon a viral incident such as this.

Clause 2.15.2 of the JCT sets out when changes to Statutory Requirements are treated as a "Change" for the purposes of the contract (carrying an entitlement to time and money).  This clause talks about "a change in the Statutory Requirements which necessitates an alteration or modification to the Works" being treated as a Change for the purposes of the JCT rather than restrictions on how sites are operated and labour and materials procured.  If legislation brought in to deal with Covid-19 issues means that certain materials cannot be procured and the Works have to be modified accordingly, Contractors may look for a Change under clause 2.15.2 as it brings the advantage of potentially triggering a claim for additional costs as well as time.  When considering this issue it is important to bear in mind that the drafting of the clause requires the change in Statutory Requirements to necessitate the alteration.

If the Employer instructs the Contractor to close the site, then clause 3.10 of JCT (which deals with instructions to postpone works) may apply.  Alternatively, (depending on the circumstances) the instruction could fall within the ambit of clause 3.9 being an instruction for a Change of the type provided for in clause 5.1.2 of JCT (which deals with the imposition by the Employer of obligations or restrictions relating to matters such as access to the site or limitations on working space or working hours).  Instructions under either clause 3.9 or clause 3.10 will trigger an entitlement on the part of the Contractor to both time and money and as such an Employer should exercise caution and seek advice before taking any steps of this nature. 

The unilateral closure of a site could potentially in some circumstances amount to an act of impediment, prevention or default by the Employer, allowing the Contractor to claim an extension of time and additional costs arising out of any delays caused. The issue of avoiding an act of prevention may be more acute where any works are being undertaken in a building where access is not controlled by the Employer – for example works to a retail unit in a shopping centre or to a floor within a multi-let office building.  Clients need to be proactively liaising with landlords to monitor the status of any buildings where works are on-going and which could be the subject to a decision to close at short notice.  

Whilst clearly we all hope that the impact of this virus will be short lived, it is worth noting clause 8.11 of JCT, which allows for a right of termination by either party where before practical completion of the Works, the carrying out of the whole or substantially the whole of the uncompleted Works is suspended for the relevant continuous period stated in the Contract Particulars (a lot of contracts use the default period of 2 months) on account of the two delay grounds noted at clauses 2.26.12 and 2.26.14 of JCT. Clause 8.9 of JCT also allows the Contractor a right to terminate where the whole or substantially the whole of the uncompleted Works is suspended for a period in excess of that stated in the Contract Particulars (again the default period in JCT is set at two months) on account of the Employer's impediment, prevention or default (with such termination being treated as a Client default for the purposes of establishing the Contractor's entitlement to payment on termination).

Under the NEC4 suite, we are concerned here with what constitutes a 'compensation event' for the purposes of the contract (these are the combined grounds for Contractor extensions of time and additional payments - all dealt with together in one section).  Unlike with the JCT forms, there is no reference in the NEC4 core clauses to either 'force majeure' or to the exercise of statutory powers being treated as a specific extension of time ground.  

The NEC allows in the Secondary Option Clauses (X2) for changes in law after the Contract Date to constitute a compensation event.  However, as a Secondary Option, this clause is only applicable if expressly selected and incorporated into the contract.  Without this, there is no such provision in the NEC4 suite.

Turning to force majeure and/or the exercise of statutory powers, the closest equivalent under NEC4 is compensation event 60.1(19), which provides for an event occurring that:

• "stops the Contractor completing the whole of the works or
• stops the Contractor completing the whole of the works by the date for planned Completion shown on the Accepted Programme,

and which

• neither Party could prevent,
• an experienced contractor would have judged at the Contract Date to have  such a small chance of occurring that it would have been unreasonable to have allowed for it, and
• is not one of the other compensation events stated in the contract."

to be treated as a compensation event and it is this ground that we would expect Contractors to look to in the event Covid-19 impacts the operation of sites/ the carrying out of Works.

As can be seen, there are a number of criteria that must be satisfied before this provision can be relied upon.  The first two are largely in line with a general 'force majeure' definition (as per the JCT) in that the event in question must actually prevent the Contractor from completing the whole of the works and is something which neither the Client nor the Contractor could prevent (again, events which lead to cost increases would not seem to fall within this definition).  However, NEC4 then introduces an additional condition in relation to whether, as at the Contract Date, it [the event] would be so unlikely to occur that it would have been unreasonable for the Contractor to have allowed for it.  This would depend on the facts and timing in relation to the Contract Date – which is defined as 'the date when the contract came into existence".  So, for example, where an NEC4 was entered into,  some months ago, the position may be clear as the virus was unknown (and therefore had little or no chance of occurring); but what about an NEC4 entered into next week in the current climate?  The more widespread and disruptive the virus, the more it may be argued that an experienced Contractor should have made an allowance for it and this clause does not therefore apply (which under the NEC4 form prevents claims for both time and associated Defined Cost).

Where instructions are issued by the Employer or by the Project Manager to close the site, then we are potentially looking at the compensation grounds in clauses 60.1(2) and 60.1(4) of NEC4 which cover the Employer not allowing access to and use of each part of the Site and the Project Manager giving an instruction to stop or not to start any work or to change a Key Date.

It is worth flagging here that clause 61 of NEC4 includes prescribed time periods in which the Contractor is to notify the Project Manager of a compensation event and in which the Project Manager is to respond. There are also requirements in the NEC4 around the serving of an early warning notice.

Clause 19.1 of NEC4 provides that where a compensation event outlined in 60.1(19) occurs the Project Manager is to give an instruction stating how the event is to be dealt with and clause 91.7 of NEC4 gives the Employer (not the Contractor) a right to terminate the contract where the forecast is that Completion of the whole of the works will be delayed by longer than 13 weeks.  Both parties would have a right to terminate the contract where the Project Manager has instructed the Contractor to stop or not to start any substantial work or all work and an instruction allowing the work to re-start or start or removing work from the Scope has been given within thirteen weeks.   Both parties have this right of termination where there has been no default.

In its un-amended form, the NEC4 on its face seems more generous than JCT in terms of how it potentially treats the impacts of Covid-19 as it allows for all established compensation events to trigger both an extension of time and entitlement to additional costs, whereas in JCT not all Relevant Events are Relevant Matters for the purposes of the contract. Additionally, clause 60 of NEC4 is not subject to the same requirements as JCT whereby the Contractor has to constantly exercise best endeavours to prevent delay.

The notes above look at both the JCT and NEC4 contracts in their un-amended forms.  When considering any entitlement to an extension of time / additional cost (whatever form of contract applies) it is important to take into account any amendments that have been made to the standard terms.  It is not uncommon for clause 2.26.12, for example, to be deleted from JCT contracts or for a definition to be added to the JCT standard form to define what "force majeure" means for the purposes of the relevant contract.

Each application for an extension of time and/or loss & expense will turn on the facts of the case – there is no single answer here. For example, a legal obligation to close a site is potentially a different scenario to a prudent Contractor making an election to close or being unable to secure labour where teams are reluctant to work in a specific location.  The fact that the Government has made the disease a "notifiable disease" does not of itself change the overall analysis but will be one of a number of factors to consider as will the issue of concurrency and whether there are other events that have delayed the works.  Under JCT, Contractors will look to try and establish extension of time grounds that also trigger an entitlement to loss and expense, whereas Clients may look to concede extension of time grounds that do not also trigger an entitlement to additional costs. Contractors may also attempt to use Covid-19 to claim extensions to cover other delays on any project.

Clients should take care about instructing the closure of sites or for other action to be taken by Contractors to combat Covid-19, as this could leave the Contractor in a better position under the contract terms than where the Contractor elects to close the site or to take relevant action.  Where third parties control access to sites, Clients should maintain a proactive dialogue to avoid Contractors being prevented from accessing sites without warning and to allow for appropriate instructions to be issued.

Given the construction industry operates on tight margins, and Contractors' cash flow is dependent on payments from Employers and tied up in supply and sub-contracting arrangements, the fall in markets, delay in payments or similar effects of Covid-19 may have a destabilising impact on the industry. It is perhaps too early to predict if the market will respond to such risks (by seeking enhanced performance bonds or similar products) but the need for comprehensive investigations of Contractors' and Sub-contractors' financial covenants is highly recommended.

In this note we have not attempted to look at wider issues, such as contractual frustration and how rights of suspension /termination may operate in practice, as these are matters of some complexity and need to be considered separately from matters relating to delays and delay related claims.  We have also not commented on the Fluctuation provisions in JCT as the vast majority of contracts exclude the application of such clauses.