2020-03-19
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Coronavirus: the impact on the construction industry

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Posted by Michael Hiscock on 19 March 2020

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

In these uncertain times, we are aware that parties operating within the construction industry at all levels need reassurance on how to manage the problems they are likely to face in the near future. 

The most common contracts are the JCT suite and the NEC3 suites, so we have set out below some initial thoughts and guidance to help those of you operating these contracts. We have referred to ‘employer’ and ‘contractor’ generically as those terms apply in any part of the supply chain.

Safety and security

The safety and security of personnel, as well as the site itself, are of paramount importance. Employers have an ongoing duty of care to employees to assess the working environment and take appropriate measures, which may include a mixture of virtual meetings and physical site inspections (where critical to do so and while the UK is not legally locked down).  That dovetails with health and safety on site. According to CDM regulations, the principal contractor is responsible for managing the site, but clients must ensure that resource is in place and information provided. While the building contract is live, the site is usually insured and controlled by the main contractor, so a skeleton staff may be required to preserve the safety and security for workers and the general public alike.

Taking specific measures against the spread of the infection will be important not only in relation to safety of individuals but could be crucial to the productivity and viability of sites, particularly where projects are close to practical completion.  Making sure that anyone with symptoms is either isolated from or removed from the site will help to prevent the virus spreading to other workers and site-based staff.  Limiting travel of people between sites will also help to ensure that some sites remain viable even if others have to close.  Hygiene facilities including soap/handwash and hand drying should be readily available and the importance of following good hand hygiene should be reiterated regularly on ‘toolbox talks’ and site posters/information boards.  Consider risks such as shared tools and canteen equipment and ensure cleaning regimes are appropriate.

Can you fall back on legal rights? 

It is worth remembering that there is no general legal right to cancel a contract once it is signed and effective unless there is an express contractual right to do so or one of the common law grounds such as frustration of contract applies.  For the purposes of this article, frustration will be hard to argue because it is a much higher threshold than simply suffering financial hardship to deliver their project.  However, all the circumstances must be reviewed in the context of any particular project.

JCT position 

The JCT suite refers to force majeure which is undefined by the JCT authors, relying on the general understanding of the meaning of force majeure as an ‘act of God’ or other unusual and unforeseeable event out of everyone’s control.  JCT will treat this as a cost neutral event so an extension of time is available, but the contractor has to cover its own costs of such an event. However, if the project is suspended for force majeure for two, continuous months, the contractor can serve notice to terminate and pass an incomplete site back to the employer.  THE JCT also acknowledges that materials must be used “as far as procurable”. Depending upon what happens next for the industry, other grounds to consider may be civil commotion, change in law, employer impediment, and employer instructions to postpone work.  However, the JCT is very clear that the contractor must use best endeavours to prevent delay and mitigate the situation so, although the full effect of Coronavirus is not yet known, it would be reasonable to ask a contractor what steps they have taken to resource and complete the job using alternative provision. 

It is also worth remembering that a substantial change in conditions would entitle extra time and money for a contractor so, if instructions were given to restrict site access or limit working hours, or work in a different order, or other change of condition of work, then this is a Change for the purposes of the JCT, creating a claim for time and money which must be assessed in the normal way.

Financial hardship

The contractual (or statutory) payment mechanism continues to apply so the Construction Act requirements for an adequate payment mechanism is unaffected. Payers still need to issue notices at the right time and payees should continue to apply for payment. Ensure that the notices will be issued, and responded to, by a number of contacts in case the usual individuals administering the contracts are ill or otherwise unavailable.  If there is any possibility of insolvency (which we all hope can be avoided but must be recognised as a possibility) then, prior to the start of the contract, the JCT does provide options for performance bonds and parent company guarantees.  Parties can also consider altering the payment schedule by mutual consent to vary the contract. 

NEC3/4

The NEC3/4 contracts deal with time and money collectively through compensation events.  Relevant points to consider include instructions to change Works Information, change in law (if the optional clause is selected), instructions to stop - or not to start - work, failure to reply to communications (if staff are isolating and unavailable) or the NEC3/4 equivalent of force majeure, which is ‘an event which stops the Contractor from completing the works, which neither party could prevent and which an experienced Contractor had judged was such a small risk to be unreasonable to allow for it’.  Again, the legal principles of mitigation apply so the claim for compensation events must be tested in the normal way and, in the NEC3/4 suite, there is an additional complication of claiming the compensation event within the required period of time or the claim is barred.  Whether parties would agree to waive this may depend on the circumstances but, in the current climate, parties are already likely to be aware of the circumstances already and therefore the clock would be ticking. 

Overall, we know what a difficult time this is for all businesses. Our Construction team is here to help all parties within the construction industry so that everyone has the right information and tools available to consider their own particular circumstances for their project and their business.  We would be happy to give you more detail on any of these issues so please do not hesitate to contact us.  As always, the particular circumstances and terms of the contract should be assessed on an individual basis.

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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