Understanding construction contract issues during the pandemic

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From site closures and project delays to supply shortages and staff sickness, coronavirus has proved to be a rough ride for the construction sector. But in the continuing fallout, what contractors are now focusing on is where the associated time and cost risks sit under the agreed contractual terms. Here PETER BLAKE, partner at Ipswich law firm Prettys, explores possible remedies for the disruption.

Construction sites across the country are slowly reopening after the forced lockdown imposed as a result of the COVID-19 pandemic.

But it is apparent that getting back to business as usual in the construction industry will not happen overnight.

Not only is the supply chain unreliable and the management of the workforce more challenging but also projects all over the UK have been cancelled or delayed.

This is leading to further complications surrounding who foots the bill for contract terminations and postponements.

Understanding your contract

All contracts impose obligations and generally speaking, where construction projects are concerned, these include dates for delivery of the project.

Peter Blake of Prettys in Ipswich
Peter Blake of Prettys

Your contract may obligate you to give early warnings of delays and cost overruns.

It may also require you to provide regular progress reports so your client can keep track of any hold-ups.

It is important that you have adhered to these contractual commitments if there are any disputes regarding your delivery of the work.

But what happens when an unpredictable worldwide pandemic gets in the way of the plans?

Well, sadly none of the standard form contracts – such as JCT and NEC3/4 – refer expressly to epidemics or spread of diseases. If they did, everyone would know where they stood.

Instead contractors and clients have to rely on the interpretation of other clauses in the contract such as force majeure and the doctrine of contract frustration.

What is force majeure?

Force majeure events are unexpected circumstances outside of a contracting party’s reasonable control that prevent it from performing its contractual obligations.

These might include things like war, acts of terrorism and natural disasters.

The status of force majeure under English law is purely contractual. That is to say it does not apply unless the contract includes a reference to it. A well drafted contract will define force majeure.

It seems probable that the coronavirus pandemic will be found to constitute force majeure but there is no guarantee. This may help where a contract refers to “force majeure” e.g. JCT forms , although there is no definition provided.

Some contracts do not have a force majeure clause – such as NEC ¾ (although they do have a substitute which may be of practical use in circumstances where force majeure provision might otherwise be relied upon). In other cases, a contractor might be left having to rely on  the doctrine of  “frustration”.

What does this mean?

A contract is  “frustrated” if it cannot be performed.

For this argument to be successful, the claimant would need to prove circumstances have made the performance of the contract obligations impossible or significantly different than envisaged by the contract. It is not enough merely to show that performance has been made more difficult and/or expensive. Here’s an example; if the contract is for construction of a housing development over a period of two years, a delay of six months does not make performance impossible or significantly different from that envisaged in the contract. However, if the contract is a two-week house renovation to prepare it for an anniversary party, a delay of six months is a significant change.

What should I do now?

You may well be considering what you need to do next and when to seek legal advice.

First and foremost, you should:

  • Review existing contracts and look for the force majeure clause or something equivalent.
  • Check you have met any contractual obligations on giving notice or early warnings of delays and cost overruns as well as regular progress reports.
  • Pay particular attention to developments on site, whether the progress of the works is being affected by the pandemic and whether you have the evidence to prove it.
  • For new contracts, consider amending to include Covid-19 as a basis for extending time and claiming costs.

Next contact a solicitor with expertise in this line of work. A solicitor will help you explore the options with a view to reaching the best solution, which will include mediation with the client, negotiation, legal action and contract amendments.

What about insurances?

Right now every penny counts.

If your operations are – or have been – impacted by coronavirus, you may have in place insurance that responds to at least some of your losses.

Business interruption insurance policies in particular may cover disruption caused but it will be important to consider the terms of your policy and review any exclusions that may be relevant.

A large number of businesses have missed out on payouts because their insurance does not cover pandemics.

However, if you do have in place any policies that may respond to losses due to coronavirus, it is important that you notify your insurers straight away. If you do not you may lose your right to claim.

Finally

We have a specialist team ready to help you. Our solicitors can assist you with contract reviews and drafting in response to the coronavirus pandemic. We can also help you deal with avoiding or resolving specific disputes.

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