Building Contracts in the Covid-19 WorldGo Back
The need to get the Building Contract right is not a novel concept. Employers and Contractors alike are familiar with the challenge of getting to grips with pages of Special Conditions, operating as amendments to already lengthy Standard Forms. The “new normal” world introduces a new dimension to this challenge – that of understanding the additional economic risks caused by Covid-19.
Take the Standard JCT2016 Design & Build Form as an example. Three major areas of practical consideration jump out: (i) Extensions of Time; (ii) Loss & Expense Claims; and (iii) Termination.
(1) Extension of Time – Relevant Events
Typically, completion of the Works needs to happen by a specified date, failing which the Contractor may be liable for LADs. The protection for the Contractor is the ability to claim an extension of time for delay caused by a “Relevant Event”.
Perhaps unsurprisingly the defined list of “Relevant Events” in the JCT2016 Standard Form makes no reference to a global pandemic, but it does refer to “force majeure” (though that term is not defined).
In practical terms assessing what constitutes a “force majeure” event under English Law is rarely straightforward. It is generally understood to be some exceptional event which prevents or hinders performance by a party of a contractual obligation. Crucially though the event must be beyond the parties’ control and must be something which could not have been reasonably foreseen at the time the contract was entered into.
Most commentators agree that Covid-19 probably (or at least very arguably) satisfied that definition, at least for the purposes of a contract entered into prior to Covid-19 becoming global news. But what about now? As of now parties are arguably armed with more knowledge of the possibility and impact of a global pandemic than was ever imagined, and are also armed with extensive Government/industry guidance as to how to operate in a “Covid-secure” manner. Are such matters therefore now reasonably foreseeable and/or within the parties’ control?
Whatever the theoretical answer, in practical terms it is for Employers and Contractors to consider these matters and appropriately allocate the risk, most obviously by either introducing a definition for what constitutes “force majeure” or by introducing further specific reference to (for example) a “Coronavirus Event” which is either expressly included or excluded as a “Relevant Event”.
(2) Claim for Loss and Expense – Relevant Matters
An extension of time may enable the Contractor to avoid LADs, but under the JCT2016 Standard Form (and others) the question of whether the Contractor is entitled to reimbursement for any additional loss and expense incurred as a result is dealt with entirely separately. Broadly, the Contractor is only entitled to such reimbursement if progress is delayed by a “Relevant Matter”.
The defined list of “Relevant Matters” in the JCT2016 Standard Form make no reference to a global pandemic and also (importantly) no reference to “force majeure”. On the face of the Standard Form wording it is therefore doubtful what remedy the Contractor would have for additional costs (which no doubt could be significant) arising from delay caused by some Covid-19 related matter.
Again, in practical terms it is now for Employers and Contractors to consider such matters. In particular, to what extent is the Contractor to be entitled to adjustment to the Contract Sum to take account of loss suffered as a result of some Covid-19 related matter, including (and perhaps most significantly) an Employer’s Instruction issued as a direct result of such matter?
The significance of Termination provisions are often overlooked – perhaps because parties optimistically look to the successful completion of the Works.
Under the JCT2016 Standard Form either party has the right to terminate the contract (subject to complying with the relevant notice provisions) if the Works are suspended for a continuous period (2 months under the Standard Form unless otherwise stated) as a result of certain specified events. These specified events include “force majeure”, as well as the exercise by Government or Local Authority of any statutory power that directly affects the execution of the Works (but is not itself caused by default of the Contractor).
Clearly such provisions now have greater potential application, which may not be the intent of Employer or Contractor. Practical considerations for such parties when negotiating the Contract range from something as simple as adjusting the defined period (i.e. from 2 months) to introducing express language dealing with the consequences of Covid-19.
We are still in early days of the “new normal” world, but as the construction industry recovers more and more Building Contracts are now being finalised. Parties are understandably focussed on getting back to the business of building, and of course generating income. But – these are important considerations with potentially significant impact on timing and cost.
Of course these considerations go beyond commercial allocation of risk. It is vital that all parties are fully aware of what risk is being taken on given the obvious potential impact on insurance coverage. That is an issue for another Insight Note, but parties across the construction world are already finding that the scope of insurance coverage they once enjoyed is being restricted. In the Covid-19 world, it has never been more important to get the Building Contract right.
Chris Dunlop | Partner
Chris Dunlop is an experienced insurance coverage and litigation lawyer. Chris has advised and represented a broad range of policyholders across various professional disciplines, including in particular construction professionals and accountants. In a construction context, Chris has advised employers, contractors and sub-contractors on both contentious and non-contentious matters, and has broad experience of various construction-related contracts and appointments.
Chris joined Wynterhill from a market leading insurance firm (Tier 1), having built a reputation litigating various high profile and reported insurance coverage and professional negligence disputes (including at both Court of Appeal and Supreme Court level). Chris has also advised on international re/insurance programmes for various global professional service providers.
This post is intended to provide guidance of a practical nature but does not contain legal advice or advice as to what action you should or should not take specific to your insurance needs or those of your business, or with regard to any particular situation.