By Steve Nichol and Tanya Chadha
In an industry of seemingly ever-tighter margins across the board, it is perhaps unsurprising that the construction industry has fought to continue through the current coronavirus crisis as much as it has. However, many in the industry have stopped work and shut down sites and, despite the current and perhaps somewhat over-optimistic view from the government that work can continue whilst still complying with social distancing rules, it seems inevitable that all non-essential work will stop very soon.
As work grinds to a halt, it is increasingly clear that in the vast majority of projects, contracts will not provide a straightforward answer to most of the questions that will arise from the shutdown. There will be many grey areas and a significant risk of extensive disputes. To avoid this, or at least limit the scope of those disputes, parties need to be communicating these issues and discussing approaches and solutions now.
For example, the contract may indicate that a government-mandated shutdown is a force majeure or an event of frustration or prevention that would entitle the contractor to some form of relief. That may assist parties in some circumstances, but it does not clarify the position where progress has been affected due to government “recommendations” – and to date the UK government has preferred recommendations to mandatory restrictions.
When the country in due course starts to come out of the current shutdown period, it is unlikely that there will be a single moment where the entire country gets back to work; rather, in the same way that we have seen a staged shutdown, it is likely that we will see a staged and sequential lifting of restrictions (as is currently the case in China). It seems probable that the government will shift back from mandatory to recommended restrictions as part of the process, which will only add to the uncertainty.
Moreover, even when restrictions are lifted, it is inevitable that contractors will not be able to resume 100% production overnight. In addition to the usual time required to remobilise, supply chains will be seriously disrupted – particularly international supply chains, where restrictions in other countries may still be in place; labour and resources will have demobilised and dispersed; and it seems likely that many subcontractors and suppliers may have fallen into insolvency before restrictions are lifted.
Alongside this, deals continue to be completed, with more and more projects looking to start once the current crisis is over. This period of increased demand will stretch the already limited resources in the industry beyond their limit.
Most contracts will not provide clear answers to the questions these scenarios will raise. Employers will, in many cases, point out that supply chain and resourcing issues are the contractor’s problem. Contractors, in turn, will say that these issues derive from an event or events for which they are entitled to relief. Both sides are likely to find support for their positions in the contract.
The traditional approach in the industry has long been that the contractor deals with these practical issues as they arise and then makes a claim at the end of the project. This approach is bound to end in a serious dispute that puts both parties to significant cost and effort.
However, despite the fact that many of us are working from home at the moment, there is an immediate opportunity to discuss these issues between the parties, to resolve problems that have already arisen and to plan solutions for future problems before they arise. Those kinds of discussions are to be encouraged, and when engaging in such discussions it will be important for the parties to keep the following points in mind:
- The current situation is not the fault of any party.
- The contract is obviously crucial, and parties will need to protect their contractual positions, but it is unlikely to have answers to all of the problems created by this situation.
- The parties are ultimately likely to have to share the pain of this event in one form or another; neither party should be expecting to be able to avoid all liability associated with this event.
- Parties may be able to get some relief from the government, and that should factor into commercial discussions and deals.
- In planning for the future, parties should keep prominently in mind the health and safety of all those involved in the project.
It is to be hoped that, with a sensible, co-operative and pragmatic outlook, parties will be able to avoid many of the disputes that might otherwise arise from this situation.
If you have any questions about this post, please contact Steve Nichol, Tanya Chadha or the Duane Morris attorney with whom you are regularly in contact.