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COVID-19: Managing Your Risks25 Mar 2020

“We live in uncertain times” is a phrase that is often overused.

However, it has never been truer than during the Coronavirus / COVID-19 pandemic currently sweeping the globe.  Moreover, it is certainly true of the construction industry, where uncertainty is part of the industry’s fabric.

Safety of life can never be compromised under any circumstances. The plans being implemented as a result of government advice and regulation are both necessary and unavoidable. Some have argued they do not go far enough. Whatever the outcome, the result will cause significant consequences for many construction projects.

We are almost certain to see project delays, disruption and unavailability of project resources during this period.  These are likely to continue for some time after the pandemic ends, but sadly, there are no firm timescales of how long this will last. Some reliable forecasters are claiming it could continue for many months.

We have seen some excellent commentary from the legal profession on COVID-19 in recent days. Force Majeure, Impossibility and Frustration have been discussed in detail. Subject to the specific contract, this may result in contract suspension or contract termination.

The commercial implications of the effects of this pandemic will be far-reaching. If the proposed government support does not reach those most in need, it may result in significant losses and potential insolvencies.

The Contracts

In many circumstances, a delay event, whether caused by COVID-19 or otherwise, will be considered a neutral event. This means it is not the fault of either party. For example, under the JCT Standard Form, Force Majeure is a Relevant Event which entitles the Contractor to an extension of time. Whereas it is not a Relevant Matter giving the Contractor entitlement to Loss and Expense.

The reason for this is so the Contractor can be relieved of any obligations to pay liquidated damages for the delay for which he is not culpable. Equally, the Employer can be relieved of any obligations for loss and expense resulting from a delay that was not of his making.

Under the NEC3/4 form of contract, an event that is neither the fault of the Contractor or the Employer is dealt with under clause 60.1 (19):

An event which:

  • Stops the Contractor completing the works or
  • Stops the Contractor completing the works by the date shown on the Accepted Programme,

and which

  • neither Party could prevent,
  • an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it and
  • is not one of the other compensation events stated in this contract.

Compensation events under NEC3/4 do not distinguish between programme delays and their financial consequences. Therefore any losses incurred by the Contractor resulting from the delay event will be recoverable. As such, they should be valued under clause 63 for assessing compensation events. The valuation should use Defined Cost in accordance with the relevant contract option.

Much of the government advice and legislation for COVID-19 is being undertaken urgently, with little time to consider the consequences. Nevertheless, the contract mechanisms must be adhered to. Where the contract requires notices, instructions or communications, parties are not relieved of their obligations. They must continue to administer the contract accordingly.

Records & Documents Needed

In any event, detailed records will be required to establish how and when the delays occurred and the Defined Cost arising from the compensation event.

A multitude of scenarios may transpire from any project delays, disruption and unavailability of project resources. As a result, there will need to be consideration of the records required in the following situations:

  • Suspension
  • Termination
  • Disruption
  • Resequencing of the works
  • Variation to the works resulting from delays and or disruption
  • Delay in the delivery of materials

In the case of Force Majeure, under the JCT Standard Form Contract, if a suspension lasts for more than the period stated in the contract particulars (the default period being 2 months), either party may terminate the contract.

Where this occurs, the Contractor is to prepare an account of:

  • The total value of the work executed
  • Any sums ascertained in respect of direct loss and/or expense
  • Removal costs
  • Costs of materials and goods
  • Any direct loss and/or damage caused by the termination.

To achieve this and avoid disputes arising, records must be created at the time the delay or suspension has taken place. They must evidence the condition and state of the site, together with documentary evidence demonstrating any losses incurred.

Photographic and/or visual evidence together with detailed progress reports, daily record sheets, site diaries, plant records and material deliveries will all be helpful. The key is to build a picture of the condition of the site at the time the delay, suspension or termination took place, and the subsequent effect.

Take Note of Contract Obligations

Other direct losses may relate to orders placed for materials, goods and other project resources that cannot be cancelled. With this in mind, obligations to mitigate delay, disruption and or losses arising should be noted.

However, what if the contract is not terminated and the delay from suspension results in a delay requiring an extension of time? In this case, there is still a contractual requirement to demonstrate the event has caused a critical delay to the completion date or in the case of NEC3/4, a delay to the accepted programme. It is crucial to demonstrate any financial losses incurred which give rise to a compensation event.

Conclusions

We must not lose sight of the importance of preventing harm and loss of life. World communities are rightly working together to overcome Covid-19, through social distancing and other measures. An almost inevitable consequence is that many site closures will happen.

To prevent further pain and discord in the future, it is crucial to record what we know now and collate the relevant information whilst it’s fresh in our minds. This may go some way in dealing with the outcome in the most amicable way possible.

If we can assist you in any way, please don’t hesitate to get in touch.

 

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