What do the COVID-19 social distancing measures implemented by the Government mean for the construction industry? Over the last few weeks we have seen large contractors such as Vinci and Laing O'Rourke sending office workers to work from home but many construction sites appear to remain operational, as the Government has permitted construction professionals to continue working on site so long as they maintain two meters of social distancing. There is clearly a high risk that COVID-19 could spread on construction sites as these measures will be difficult, if not impossible, to implement or enforce. Pressure continues to mount on the Government with regard to this controversial allowance.
In this briefing note, we explore the grounds for suspension and termination under the JCT form of building contract and consider the position in relation to future projects.
While there is no English common law right to suspend performance of a construction contract in the event that another party is failing to perform its obligations, there are of course express contractual terms to allow for suspension.
A force majeure event, as discussed in our previous briefing note, could suspend performance of some or all of the contractual obligations of any party affected by the event. Should the Government be pushed to exercise statutory powers to, for example, force the shutdown of construction sites, this act also has the effect of "suspending" performance of the works. Clause 8.11 of the un-amended JCT Standard Building Contract 2016 provides for termination by either party by reason of force majeure or if works are stopped by reason of statutory power. In short, a force majeure is an unforeseen event or circumstance that prevents either party from fulfilling the contract. It is undefined and so it is a question of fact, whether the particular circumstance amounts to a force majeure.
Under the JCT, the right to terminate will arise if the carrying out of the whole or substantially the whole of the uncompleted works is suspended for the period set out in the contract particulars, which is two months in an un-amended contract. If the period is suspended due to a force majeure event, either party is entitled to notify the other that, unless the suspension ceases within seven days of receipt of the notice, the contractor's employment may be terminated on the service of a second notice (which is given upon the expiry of the first notice period).
The right to terminate will not, however, arise if there are two separate one month suspensions as a result of shutdowns. The shutdown needs to be continuous. At this stage, it is unclear if the Government's strategy to mitigate the COVID-19 outbreak is to relax the rules following the three-week lockdown currently in place and subsequently reinforce them again.
In light of the mitigation steps taken in other seriously affected countries, it is entirely possible that there could be a significant disruption to construction work that lasts well over two months. Parties to a construction contract could therefore engage in commercial discussions now to agree an extension to the qualifying period of suspension in order to avoid a termination trigger.
However, as referred to above, there is always a risk whenever terminating building contracts that the grounds specified would later be found by the courts to be inadequate grounds for termination. Given the lack of clarity from the courts regarding the status of a pandemic as a force majeure event, contracting parties should be aware of the risk that would follow if a contract is later found to have been wrongly terminated. In those circumstances, the terminating party could be found to have caused a repudiatory breach of contract, which may result in a liability to pay the counterparty damages.
Similarly, as difficult as working conditions may be, contractors should beware downing tools and walking off site, as they may be later found to have caused a repudiatory breach which could give rise to a claim in damages against them. A better way to deal with this situation would be to engage in an open commercial discussion to negotiate a consensual shutdown of the site.
In financial terms, if termination occurs, the contractor will need to provide the employer with a financial account as soon as reasonably practicable, and no later than two months from the date of termination. This account needs to include:
- The value of the works carried out up to the date of termination; deductions should not be applied for anticipated breaches that would arise from the termination itself. In practical terms, for example, an employer cannot deduct sums for failing to rectify any defects unless those issues were present pre-termination.
- The costs for materials and goods that the contractor paid for or is legally bound to pay;
- The reasonable cost of removal of temporary buildings, plant, tools and equipment from site.
The contractor cannot claim for losses caused by the termination. However, under clause 4.20 of the unamended JCT, a contractor can claim for sums ascertained in respect of direct loss and/or expenses unrelated to the termination.
There will likely be many parties who were at the brink of finalising construction contracts just before the Government's COVID-19 mitigation measures were implemented. Understandably, many of those negotiations will grind to a halt, with parties waiting for the storm to pass. However, other parties will continue to negotiate.
Where negotiations are continuing, it may be worth considering whether express provisions should be included in the contract to allocate COVID-19 related risks. Clearly, if the Government decides to shut down construction sites, it would be sensible to include express terms covering suspension in order to control the cost impact for a finite period of delay, without triggering a contractor's right to terminate the contract.
Practically, parties will also need to agree terms by which suitable arrangements are in place to properly secure the construction site if it is closed whilst complying with health, safety and monitoring requirements.
Parties ought to also consider the timing involved to remobilise on site once restrictions are lifted and the cost involved in remobilising. In addition, parties may want to exclude additional entitlements such as delay damages, breach of contract, loss of profit and so on, to avoid parties financially benefiting from these issues any further.
Should the decision be made to force the shutdown of construction sites, this will inevitably lead to cash flow and supply chain issues. Accordingly, contractual suspension and termination will need to be carefully considered, for both live and future projects.
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