Introduction
The world is currently facing an unprecedented crisis with significant detrimental effect on both health and the economy. Governments worldwide are taking draconian actions not before seen in peacetime, with some countries in total lockdown.
The construction industry will not escape this and, however this is resolved, taking the correct action now will ensure you fully protect your own position under the contract.
This paper examines the risk, liabilities and obligations under the JCT SBC 2016 contract in connection with matters and events arising from the COVID-19 virus. Generally, the principles in this paper also apply to other JCT 2016 contracts, but note, there are minor differences which are not necessarily highlighted.
A word of warning. Many contracts have bespoke amendments. This paper refers only to the unamended contract. If your contract is amended, it is recommended you take expert advice. For that expert advice, the author’s contact details are at the end of this paper.
Collaboration
JCT SBC 2016 is a traditional construction contract with no provisions for collaboration unless the Contract Particulars state at Schedule 8 that Supplemental Provision 1 (Collaborative working) and/or Supplemental Provision 6 (notification and negotiation of disputes) apply.
However, whether those apply or not, there is unlikely to be another time where close collaboration by the Parties is needed more than now. Whilst this paper explores the Parties’ contractual rights, responsibilities and obligations, it is the author’s recommendation that the Parties take particular notice of Supplemental Provision 1 and act in good faith and in a spirit of trust and respect. By doing so will, no doubt, lessen the pain over the coming months.
Force Majeure
Many contracts have a ‘force majeure’ type clause. French for ‘superior force’ and intended to clearly define liability for events for which neither party is liable, those clauses tend to make provision for extension of time, variations, loss and expense and termination.
Different contracts approach this is different ways, some using the term ‘force majeure’ others not. ‘Force majeure’ type clauses in standard contracts are often amended in in a way to place greater risk on the Contractor. Amendments are also common to narrow the definition of ‘force majeure’.
JCT SBC 2016 uses the term ‘force majeure’ and at clause 2.29.15 introduces it as a Relevant Event for an extension of time.
This is, however, not the only clause that may be applicable nor is it the starting point.
Early Warning?
The JCT SBC 2016 does not include an early warning process which those familiar with NEC contracts would recognise, but, if Supplemental Provision 8 applies then the Parties are obliged to notify the other of any matter that appears likely to give rise to a dispute or difference.
Matters arising from the impact of COVID-19 may well fall into that category and so, if this provision applies, notice must be given. Unlike NEC contracts, that notice does not expressly provide for a series of meetings with the aim of reducing or removing the underlying risk, but does require the senior executives of the Parties to negotiate in good faith to resolve the resulting dispute.
This is probably better than nothing and, it is suggested, that such early warning is notified as a matter of good practice irrespective of a contractual obligation.
What happens next depends on whether the Employer wants to take control of the actions required by the impact of COVID-19, or not.
Instructions
One can imagine a number of possible scenarios arising from COVID-19, including the deferment of the giving of possession, the issue of an instruction to postpone the works or an instruction imposing restrictions on how the Contractor carries out the works.
If the Employer wishes to take control, it has a number of options:
If the Contract Particulars say that clause 2.5 applies, the Employer has the right to defer the giving of possession (for the Works or a Section) either for up to 6 weeks or a lesser period stated in the Contract Particulars.
This provision may be used by the Employer to delay the start of the Works or a Section until the impact of COVID-19 is better understood (if 6 weeks is enough time to do that).
Such deferment is a Relevant Event under clause 2.29.3 which empowers the Architect/Contract Administrator to give an extension of time and whilst it is not a Relevant Matter under 4.22, it is dealt with separately at clause 4.20.1 allowing the Contractor to be reimbursed any resultant loss and expense incurred.
If clause 2.5 does not apply, or deferment of greater than 6 weeks (or greater than a lesser amount stated in the Contract Particulars) occurs, then this would probably be a breach of the contract by the Employer if the Employer fails to give possession by the required date.
This may be covered by the Relevant Event at clause 2.29.7 and the Relevant Matter at clause 4.22.5 which empowers the Architect/Contract Administrator to give an extension of time and allow the Contractor to be reimbursed any resultant loss and expense for an impediment caused by the Employer.
That being said, a narrow interpretation of that clause appears to exclude causes which do not result from the Employer’s acts and omissions. Accordingly, if the Employer chose not to give possession, then it might be caught by the above clauses, but if the Employer cannot give possession because, for example, of a full lockdown dictated by the government, then the Contractor’s remedy may only lay in a claim for common law damages.
If the Works are already underway, clause 3.15 empowers the Architect/Contract Administrator to issue an instruction to postpone any of the work to be executed under the Contract.
Any such instruction is a Relevant Event under clause 2.29.2.1 and a Relevant Matter under clause 4.22.2.1 which empowers the Architect/Contract Administrator to give an extension of time and allow the Contractor to be reimbursed any resultant loss and expense.
As an alternative, rather than stopping the works, the Architect/Contract Administrator is empowered under clause 3.14 to issue instructions requiring a Variation.
A Variation is defined at clause 5.1 and, at clause 5.1.2 includes the imposition by the Employer of any obligations or restrictions in respect of access to the site, limitation of working space, limitation of working hours or the execution or completion of the work in any specific order.
Any such instruction is a Relevant Event under clause 2.29.1 and a Relevant Matter under clause 4.22.1 which empowers the Architect/Contract Administrator to give an extension of time and allow the Contractor to be reimbursed any resultant loss and expense.
In summary, therefore, if the Employer wishes to take control, any deferment of possession, postponement or instruction to change how the Works are undertaken will be at the Employer’s risk. For the first two, the Contractor is entitled to additional time and associated loss and expense, for the last category, as it is a Variation, the Contractor is also entitled to the additional cost in carrying out the Work.
If the Employer does not take control, what are the Contractor’s options?
Exercise of Statutory Power
The Relevant Event at clause 2.29.13 empowers the Architect/Contract Administrator to give an extension of time if, after the Base Date (defined in the Contract Particulars), the government (or local government) exercises a statutory power which directly affects the execution of the Works.
The government has enacted the Coronavirus Act 2020, but has not yet (at the date of the writing of this paper) included construction sites. If in the future the government issues directions under the Act to close construction sites, then the Contractor would likely have a claim for an extension of time under clause 2.19.13.
If that time comes, both the Architect/Contract Administrator and the Contractor would need to give careful thoughts to their actions and communications. The Architect/Contract Administrator must be careful that any instruction to close the site is not an instruction requiring a Variation and the Contractor would need to ensure that the closing of the site is not treated as a breach of contract.
As an alternative to closure, the government may impose other restrictions. On 7 April 2020 the Welsh Government added Regulation 6A to The Health Protection (Coronavirus Restrictions) (Wales) Regulations 2020. This places restrictions requiring any person responsible for work being carried out at premises to take all reasonable steps to ensure a distance of 2 metres is maintained between any persons.
This would apply to construction sites and is now law, so would fall under 2.29.13, albeit with a potential dilution in the use of the words ‘all reasonable steps’. This does mean that in some circumstances and depending upon the particular circumstances, the restriction may not apply.
It should be noted that there is no corresponding Relevant Matter and so the Contractor would have no claim for loss and expense.
Force Majeure
Back to where we started. Clause 2.29.15 empowers the Architect/Contract Administrator to give an extension of time for a force majeure event, but it may not be that straightforward.
There is very little English case law authority on force majeure and none relating to force majeure under JCT. This paper does not intend to delve into the detail of the law, but in summary:
- It is generally an event that is not within the control of the Parties
- The Contractor must be ‘ready and able’ to carry out the work, if another matter is causing delay to completion then a force majeure remedy may not be available
- It is insufficient for the works to be more difficult or more expensive, the works must be physically or legally impossible
- Under English law, foreseeability is irrelevant. An event may still be considered a force majeure event even if it is foreseeable.
- Case law suggests that a flu pandemic was force majeure, so it is likely that COVID-19 will also be considered as a force majeure event.
Accordingly, whilst there may be a claim, it may well be difficult to formulate and prove. Entitlement under each project will, very much, turn on its facts and it would be wise to obtain expert advice.
It should be noted that under there is no corresponding Relevant Matter and so the Contractor would have no claim for loss and expense.
Procedure
This paper is not intended to be a detailed summary of the relevant procedure, but briefly, for an extension of time, the Contractor is required to forthwith give notice to the Architect/Contract Administrator when it is reasonably apparent that the progress of the Works will be or is likely to be delayed (clause 2.27.1).
That notice must identify the material circumstances of the delay, the cause of the delay and shall identify the Relevant Event. As soon as practicable after the issue of the notice (or in the notice if practicable), the Contractor must give details of the effect of the event and an estimate of the expected delay (clause 2.27.2). The Contractor must also give notice of any material change in that estimate (clause 2.27.3).
Following receipt of the notice, the Architect/Contract Administrator must notify the Contractor within 12 weeks of the amount of extension of time given (or that no extension of time is given) (clause 2.28.3).
The above notification is not considered to be a condition precedent to an extension of time award, not least that, at clause 2.28.5 the Architect/Contract Administrator is required to make a final extension of time assessment within 12 weeks of practical completion regardless of whether any notices of delay or any other information is given by the Contractor.
This is, however, not a get out of jail free card for the Contractor. Firstly, an assessment made contemporaneously following the correct issue of a timely notice and following any mitigating actions by the Parties in full knowledge of the delay would likely be more accurate than one assessed in isolation, much later. Secondly, a failure to issue a notice deprives the Employer or the Architect/Contract Administrator the opportunity to take immediate action and, possibly, collaborate with the Contractor to avoid or reduce the delaying effect. The Architect/Contract Administrator may take that loss of opportunity into account when making an assessment.
Finally, on extension of time, clause 2.18.6 (amongst other things) imposes obligations upon the Contractor to use its best endeavours to prevent the delay and do all that is reasonably required to proceed with the Works. In fact, the Contract makes an entitlement to an extension of time dependent upon the Contractor taking those actions.
But the phrases ‘best endeavours’ and ‘reasonably required’ are not all that clear and can be open to interpretation. Presently, the current interpretation is along the lines of:
- Best endeavours is a higher standard than reasonable endeavours
- Best endeavours may involve the Contractor incurring cost, but not substantial cost
- Any actions taken do not need to go as far as changing the Contract or the specification
- If the cause of the extension of time is one which is also a Relevant Matter then any cost incurred may well be recoverable as loss and expense
- It is for the Architect/Contract Administrator to prove that the Contractor has failed to mitigate
The key takeaway is that each case will turn on its particular facts and expert advice should probably be sought on how a Contractor should proceed or should have proceeded.
Turning to loss and expense, similar notice requirements apply.
Clause 4.21.1 requires the Contractor to notify the Architect/Contract Administrator when it becomes reasonably apparent that loss and expense is likely to be incurred by a Relevant Matter or a deferment of possession. Clause 4.21.2 goes on to require the Contractor to provide an initial assessment (with supporting information) either with the notice or as soon as practicable thereafter. Clause 4.21.3 requires the information to be updated monthly.
Clause 4.21.4 requires the Architect/Contract Administrator or the Quantity Surveyor to notify the Contractor of the ascertained amount of loss and expense within 28 days of the initial assessment and within 14 days of subsequent updates.
Timely notification and assessment by the Contractor is a condition precedent to entitlement; clause 4.20.1 makes that clear.
The Relevant Matters are listed at clause 4.22; some of them mirror the Relevant Events for extension of time, but generally they are of a much narrower scope and, as mentioned earlier, do not include force majeure.
Termination
It may be necessary to terminate the Contractor’s employment under the contract as a consequence of the effects of COVID-19. This could be for a variety of reasons including that the project is no longer financially viable.
Termination can arise either from:
- An instruction by the Architect/Contract Administrator requiring a Variation or instructing the postponement of work or an impediment, prevention or default of the Employer and that instruction or impediment delays the carrying out of the whole or substantially the whole of the Works for continuous period longer than that stated in the Contract Particulars.
- A force majeure event which delays the carrying out of the whole or substantially the whole of the Works for continuous period longer than that stated in the Contract Particulars.
In the first case, the Contractor has the right to terminate, in the second case, either Party has the right to terminate.
The termination procedure in the Contract must be followed strictly.
In either case, the amount due to the Contractor after termination is the same, being the amounts calculated at clause 8.12.
Current procurement
As mentioned above, force majeure is independent of foreseeability. This means that the Architect/Contract Administrator may have to give an extension of time for delays caused by COVID-19 even for contracts entered into now. For that reason, it is of vital importance that the proposed parties to a contract negotiate and agree on current an ongoing liability and include those agreements clearly in amendments to the contract. The author is able to advise on this if necessary.
Summary and Recommendations
- Depending on the Supplemental Provisions, the Parties may be required to act collaboratively and give early warning to each other of any matter in dispute,
- The Contractor is obliged to issue timely notices in connection with delay and loss and expense. A failure to give either notice will have consequences.
- If the Employer decides to take control, then any of its or the Architect/Contract Administrators actions or instructions may give rise to an extension of time, loss and expense and/or a Variation
- If the Employer does not take control, the Contractor may have rights to be given an extension of time for changes in the law or, under certain circumstances, force majeure,
- Depending on the circumstances, either Party may terminate the Contractor’s employment under the Contract.
It is vitally important that:
- The Parties collaborate to ensure the best outcome with the minimum cost and disruption,
- The Contractor complies with the contract strictly and issues the relevant communications at the correct time to ensure its position is properly protected and to give the Architect/Contract Administrator the opportunity to properly address the issues arising from COVID-19.
Author:
Steven C Evans BSc(Hons) LLB(Hons) FCIArb FAMINZ(Arb) FFAVE(Master) FRICS FCInstCES FCIOB FICE PRI
For more information contact Steven at:
Steven C Evans Limited