By Vijay Bange and Tanya Chadha
The COVID -19 pandemic has already had a massive effect on global economies. Its impact has been unprecedented and there is a degree of uncertainty on almost every facet of daily life.
This article seeks to touch upon issues that may affect those in the UK construction industry specifically, but certain elements will no doubt equally apply across other sectors.
- The doctrine of privity of contract allows parties to agree their own contractual arrangements and bargains as they see fit. The allocation of risk is usually reflected in the price(s) agreed. Good, bad or indifferent, the parties relationship is governed within the parameters of the contract. Whilst some projects may be temporarily on pause, issues such as extensions of time, loss and expense and liquidated damages will continue to run in the background. We have recently seen government intervention, specifically on restriction of movement, on a massive scale to manage the COVID-19 crisis. Such intervention will no doubt impact upon the ability of parties to comply with existing contractual obligations. We all hope that parties will adopt a co-operative and collegiate approach in these challenging and extraordinary times. As a result of the COVID-19 crisis, parties will find themselves in some novel situations and the contract might not provide all of the answers. For that reason, we are of the view that parties should be discussing issues and agreeing a way forward even if that means agreeing something outside the parameters of the contract. That said, whilst such discussions are taking place, those involved in live projects must still comply with the terms of contract so as not to prejudice their position in the future. For example, if contractual notices are required, these must still be served in the prescribed manner and timeously. In tandem with that strict contractual approach, the parties could seek to separately arrive at a more equitable position.
- Some employers, contractors and other members of the supply chain are already looking for the best way out of certain contracts in an attempt to mitigate the long-term effects that this pandemic might have on their business. Some bespoke amendments allow a party to terminate “at will” or on a no fault basis whilst others allow contractual termination only in certain instances. Parties must review the terms of their contracts before taking any drastic steps to ensure that they understand the risks and potential exposure. Given that wrongful or unlawful termination can result in a party being in repudiatory breach of contract, parties should be very careful before seeking to terminate. Understandably, businesses are likely to be focusing on the commercial implications but the legal issues should not be overlooked. Whilst it would be unconscionable for contracting parties to take advantage of the current pandemic, moral stances will have no legal or contractual effect and will ultimately be trumped by contractual rights.
- Force majeure is a principle derived from the French civil law system and it is not therefore a term used in all contracts. The JCT D&B 2016 standard form includes force majeure as a Relevant Event but the term is not defined. NEC3 and NEC4 ECC standard forms refer instead to “Prevention” and the key question is whether the contractor could have prevented the failure to complete the works on time. Bespoke amendments may expressly include, or indeed exclude, pandemics as force majeure events whilst others may specify exactly which diseases are covered. English parties may now consider whether the doctrine of frustration could apply to discharge the parties from further obligations. It is quite possible that we will see an increase in these types of legal arguments but the threshold is high and each case will need to be determined on its own merits and facts.
- There will be instances where contracts are agreed but works have not yet started. The contract will allocate the risk of failing to commence on the agreed date. Will parties in this type of situation rally together with a sense of camaraderie and seek to agree something outside the scope of the contract to share the risk? Anything agreed outside of the contract must be well documented to prevent arguments arising further down the line.
- Parties may need to review their contractual arrangements to assess their obligations and risk exposure. Furthermore, parties might seek to mutually agree amendments to contracts to arrive at an equitable neutral position. Alternatively, notwithstanding the termination provisions, parties may consensually agree to end certain contracts to give greater certainty to the current position. A memorandum of understanding could be put in place to engage in fresh contractual arrangements when things are more stable.
- Restrictions on movement may impact available skilled labour such as to cause significant price increases. The usual position is that a change in prices will not generally be enough to constitute a force majeure or frustration event even where the price increase is huge. Keating on Construction Contracts suggests that “little short of a catastrophe to the currency” would suffice. However, if as a result of COVID-19 prices increase “catastrophically”, whether for materials, labour, or performance generally, the question may arise as to whether this is enough to be a force majeure event.
- If the shortage of labour is caused by a force majeure event but as a matter of contract the contractor bears the risk for all labour, who will be liable? We are likely to see innovative arguments presented when it comes to deciding which contractual clause takes precedence in a conflict situation.
- The Health and Safety at Work Act 1974 imposes a duty on employers “to ensure, so far as is reasonably practicable, the health, safety and welfare at work of all his employees”. Absent any mandatory site closures, some sites may remain open. Self-employed workers or those on zero hour contracts may be willing to work. Where will lines be drawn between protecting the workforce and mitigating the financial effects on businesses? Who will be responsible if there is a spread of infections amongst those at site? An employer may be liable if it fails to provide a safe working environment, for example, failing to comply with the safe distancing requirements. Those directly employing the labour must ensure that they have adequate insurance cover. There may be a question mark as to insurance cover in the event that workers attend site in direct contravention of government guidance. Even if there is insurance cover, employers should be mindful of potential arguments as to shared liability.
- The inevitable debt and debtor issues that arise may cause cash flow difficulties throughout the supply chain. During these uncertain times, the supply chain might find it more difficult to recover sums that are due or outstanding, even if these are agreed or certified sums. Parties may decide to proactively manage these issues and revisit agreements for payment on a temporary basis. It is important to seek advice as to what tax and other relief might be temporarily available to mitigate the risk of insolvency.
- Consideration may also be given to any debt insurance policies in place.
- Contractors in overseas jurisdictions may need to ensure certainty of actual payment as local tribunals may not be keen to see cash leave the jurisdiction. Will there be an increase in the number of overseas contractors seeking to rely on international trade treaty argument which may ultimately result in bilateral investment treaty arbitrations?
- Save for specific government grant / loan support, for anyone struggling with the financial implications of COVID-19, the first port of call may be insurance cover that is already in place. Those in the supply chain (employer downwards) and consultants would be well advised to review any insurance policies in place to ascertain what policy cover is available in the circumstances. The extent of any business interruption cover will be of particular importance. However, understanding the exclusions and exceptions to policy coverage will be equally useful. Those at employer level will no doubt be reviewing the position with funders or end users. In time, Employers may review any security given by way of bonds to see whether a call can be made in the event of non-performance or insolvency issues in the supply chain. Once normal business resumes, will we see more calls on bonds?
- Adjudications were intended to be fast and somewhat furious. That notwithstanding, over time adjudications have inherited the complexities of litigation with directions, extended timetables, lengthy pleadings, detailed witness evidence, numerous expert reports and often a hearing. It will be interesting to see how adjudicators will deal with the challenging environment that the COVID-19 outbreak presents. Parties may struggle to prepare their submissions and collate all of the evidence. Adjudication already presents a challenging timeframe and in the current environment that will only become more difficult. Adjudicators will need to ensure that there is a fair and just process. Adjudicators pushed by parties to make a decision may choose to resign if they consider that a decision is not possible. There may be a jurisdictional challenge. If an adjudicator makes a decision where one party has not been afforded a fair opportunity as a consequence of the limitations caused by COVID-19, how will this be handled on enforcement? Parties have the right to adjudicate at any time so we will there be a rise in ambush adjudications?
- Whether its adjudication, TCC or arbitration proceedings, complying with the timetable may be difficult. We have already seen a “COVID-19 Direction” handed down in one case extending the parties’ ability to agree a 28 day extension to 56 days. Co-operative parties may agree to a stay of proceedings to avoid wasted costs. Alternatively, parties may use telephone or video conferencing hearings where available. Where limitation is a potential issue, this should be dealt with properly now. The crucial consideration for parties will be to act sensibly to mitigate the effects of wasted costs. Any point scoring or positioning to take advantage from this global health crisis cannot be helpful.
- It will be interesting to see how the judiciary responds to the COVID-19 crisis. Going forward, might courts and tribunals consider public policy grounds to circumvent the otherwise strict contractual provisions that may exist? Will we see parties to disputes seeking to rely on equitable grounds to achieve a fair and reasonable position in this no-fault scenario?