How Coronavirus impacts your construction project?

How Coronavirus impacts your construction project?
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Coronavirus: infectious disease outbreaks and construction projects

Construction projects are likely to be affected by the novel coronavirus outbreak. The nature and scale of any impact cannot be predicted accurately at this point, but labour and supply chain issues are increasingly foreseeable. What happens if it impacts your project?

It depends on the contract

If a construction contract lacks an express term allocating the risk of infectious disease outbreaks, such as COVID-19, parties will need to rely on other provisions, such as extension of time and loss and expense clauses, to understand who bears the risk. To illustrate, we have looked at how these clauses might operate under the commonly used JCT DB 2016 standard form. Other forms, including NEC, FIDIC and PFI contracts, will take different approaches.

Is the contractor entitled to an extension of time?

A contractor may be entitled to an extension of time, and to avoid paying liquidated damages, if an excusable delay event occurs causing critical delay to the project. The list of excusable delay events (referred to as "Relevant Events") is set out at clause 2.26 and includes two which may apply during an infectious disease outbreak:

  • the exercise after the Base Date by the United Kingdom Government or any Local or Public Authority of any statutory power that is not occasioned by the default of the Contractor or any Contractor's Person but which directly affects the execution of the Works, and 
  • force majeure.

Under clause 8.11 of the standard form, either of these Relevant Events may also ultimately entitle the employer or contractor to terminate the contract if the whole or substantially the whole of the uncompleted works are suspended for more than two months (unless otherwise amended). Termination is a high risk option and the commercial implications must be considered very carefully.

Statutory powers

The government has broad statutory powers under public health legislation and the Civil Contingencies Act 2004 which it can activate when an event or situation threatens serious damage to human welfare. It may prohibit travel at specified times or to/from specified places, requisition property or prohibit specified activities. Any such measures could have significant impact on a construction project and qualify as a Relevant Event, but a mere government recommendation may not.

Force majeure

This Relevant Event is useful if a delay event cannot be linked to the exercise of a statutory power. Conceptually, force majeure refers to exceptional and uncontrollable events outside of the parties' control, but the term is not defined either in the JCT or under English law.

There is a 1920 case that is likely to be useful, citing: "this term is used with reference to all circumstances independent of the will of man, and which it is not in his power to control … thus, … epidemics are cases of force majeure" (Lebeaupin v Crispin).

This case also suggests that force majeure covers more than just instances of uncontrollable natural forces in operation. Administrative interference, such as an embargo, may also be covered. Given the World Health Organisation says we are in "uncharted territory", delays caused by disease related waves of absences or supply chain issues caused by a foreign government could trigger this clause.

Causation

We would expect an adjudicator, arbitrator or judge to focus carefully on causation in the event of an extension of time claim in these circumstances. A claimant would need to prove that the Relevant Event actually caused the delay alleged. A contractor would face difficulties if the employer establishes the contractor was already causing delay, or the delay was only indirectly caused by the Relevant Event.

Is the employer required to pay compensation?

Under the standard form, a contractor is not entitled to recover loss and expense, such as prolongation compensation, simply because it obtains an extension of time. Instead, a contractor must separately establish a "Relevant Matter". The list of Relevant Matters is at clause 4.21 of the standard form, but an infectious disease outbreak does not fit in to any of these categories. This means that an employer is unlikely to be required to pay compensation under the unamended JCT contract, but a contractor should carefully check other provisions (such as fluctuations) or insurances (such as business interruption) in case recovery is possible through other routes. There is a clear risk of knock-on insolvency caused by disease related business disruption.

What should I do now?

The UK government is keen to reduce the spread of the novel coronavirus whilst ensuring the country continues to run as normally as possible. We hope this allows parties to complete projects as planned whilst protecting vulnerable individuals.

If you think your project is exposed to risks arising from the outbreak of an infectious disease, check the contract and consider:

  • Notification – a contractor is usually obliged to provide notices "as soon as it becomes reasonably apparent" that the progress is being or is likely to be delayed and follow up with more information. There may be a strict deadline that, if missed, bars the contractor from any entitlement.
  • Mitigation – the contractor is usually required to constantly use best endeavours to prevent delay, even if the delay event is not its fault. An employer might want to instruct resequencing, additional manpower or reduction in scope.
  • Evidence – extension of time claims are often heavily contested through adjudication. The short timetable favours the party with the best organised records. Careful evidence of causes of delay, mitigation attempts and decision making always helps.

Every contract is different and much will depend on the specific wording used. Contact Jonathan Hutt or your usual Taylor Wessing contact to discuss this further.

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