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Brexit and Covid-19: double trouble for installation contract

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Posted by Michael Hiscock on 30 June 2020

Michael Hiscock - Construction Lawyer
Michael Hiscock Partner - Head of Construction

It is not often that two very serious global events occur in quick succession with the potential to derail productivity and economic success in the logistics sector. But when combined with the consequent pressure on the sector to maintain supply lines and delivery speeds even the best working relationships will be seriously tested.

Warehouse automation contract knocked off course by Brexit

I recently dealt with a contract for the automation and upgrade of multiple warehouse facilities. The contract was the MF/1 (revision 6), published by the Institution of Engineering and Technology and the Institution of Mechanical Engineers, for the design, supply and installation of electrical, electronic and mechanical plant. The contract was placed three years ago, due to the lead in time for the necessary materials, and the works were programmed sequentially so that the end customer, a global food manufacturer, could maintain continuity of supply without losing two major distribution facilities at the same time. My client signed the contract to upgrade, install and automate those warehouses but, shortly after work started, was hit first by Brexit and then by Covid-19.

The MF/1 contract requires the contractor to design, manufacture, deliver to site, install, test the plant and carry out the tests on completion, all within the Time for Completion, followed by making good defects and providing the necessary support and advice for performance testing, Against this are allocated a series of milestone payments and performance indicators linked to additional success payments and/or fixed liquidated damages deductions.

Port delays impact completion dates

The first problem arose from significant port delays, caused by Brexit, for imported goods and materials manufactured overseas. The contract contains detailed provisions about the conduct of the works including hours of working, deliveries to and from site, dealing with special loads and, in particular, an obligation on the contractor to be responsible for the adequacy, stability and safety of site operations, in conjunction with compliance with the general law applicable to works of this nature.

The contract requires the engineer to exercise their discretion in dealing with decisions, opinions, approvals, valuations or other actions fairly. Therefore, we immediately referred to clause 33 in the MF/1 contract that allows for a reasonable extension of time for circumstances beyond the reasonable control of the contractor arising after the date of the contract. The contract contains an express obligation on the contractor to consult with the engineer to determine how the delay can be overcome or minimised combined with the contractor’s general common law duty of mitigation.

Although the engineer has to act fairly, the argument remained that the liquidated damages for delay, and the prolonged delay mechanisms found in the MF/1 contract, should not apply because the circumstances were outside the contractor’s reasonable control and so a reasonable extension of time should be granted. The engineer did grant a short extension of time but the concurrent delay argument also caused issues due to a combination of culpable delay by the contractor, and no fault delay due to the wider circumstances. Pushing the engineer to act fairly did help but did not fully persuade him to grant the overall extension of time because the contractor could have taken other actions to avoid the delay as soon as it became aware of the problem.

Covid-19 causes further delay

The next issue was that the programme of the works ran the two sites consecutively, so the start date for phase two on the second site was linked to takeover of the first site which, despite being extended slightly, had been sufficiently delayed affecting the second site directly That immediately put the programme of works for the second site into the small degree of float available. This would not have been an issue had Covid-19 not happened.

Prior to the tests on completion, which are a pre-condition to take over the site, the engineers working for the contractor, due to arrive from Italy, were in lockdown and all non-essential travel was suspended. Therefore, the tests on completion could not be carried out effectively because the plant could not be commissioned properly. The purchaser highlighted the contractor’s obligations to test and commission the works in accordance with the specification; in turn, we highlighted the contractor’s responsibility for safe operations on site meant that another force majeure scenario had arisen which entitled the contractor to a further extension of time.

I suspect that the authors of the MF/1 contract considered safety to mean moving heavy plant and machinery around a site. In this case we argued that safety included a requirement to implement social distancing measures to slow the transmission of the Covid-19 virus. This was impossible where some workers had to work in close proximity to complete the works. As well as the engineer’s duty to act fairly we were also able to point out the purchaser’s risks, including breach of contract, as well as the force majeure argument of circumstances outside the contractor’s reasonable control, and the extension of time provisions which allow a similar test.

Spirit of cooperation keeps project on course

We argued that not awarding a suitable extension of time to implement safe working practices to protect against Covid-19 was a breach of statutory duty as our client would be unable to comply with its health and safety obligations. We also stated our desire to comply with Public Health England guidelines. This, combined with our health and safety obligations, could have led to the works on site being suspended for which we could have claimed additional cost. However, in light of the health and safety argument, and the pressure being exerted by government on contracting parties to act fairly and reasonably, the engineer granted a suitable extension of time.

One positive effect of consecutive sites was that the required additional capacity could flow through site one, completed after the Brexit delays, therefore not disrupting the overall provision of goods and allowing all parties to risk assess the site two methodology to protect workers on both sides who would be carrying out and monitoring the tests on completion and subsequent performance tests.

As a result, both parties have implemented a solution which will result in the overall satisfactory completion of the project, minimum disruption to supply chains, third party supply contracts not being breached and the liquidated damages mechanism being applied in a fair manner with regards to all the circumstances. Once the parties had understood the respective positions under the contract, they were able to assess the situation enabling them to work cooperatively to the benefit of both parties.

*This article first appeared in the 2020 Summer edition of Operations Engineer.

About the author

Michael Hiscock

Partner - Head of Construction

Michael is a specialist in construction and engineering procurement, advising on a wide variety of works contracts.

Michael Hiscock

Michael is a specialist in construction and engineering procurement, advising on a wide variety of works contracts.

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