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Fri April 03 2020

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Coronavirus and the JCT construction contract

19 Mar What happens if the Covid-19 pandemic means that UK construction sites have to shut down? Claims consultant Arbicon offers some free advice.

Image by Arek Socha from Pixabay
Image by Arek Socha from Pixabay

The effect of coronavirus and construction project shutdown is going to be devastating for the construction industry as margins are always tight and the flow of cash is paramount.  If the cash does not flow down the payment chain and none can be earned the contractor’s cash flow will grind to a halt and create insolvent positions, which will be more acute if the contractor has numerous projects all shut down. 

The JCT contract suites do not mention what happens in the event of the coronavirus (Covid-19) or anything like it shutting down the World.  so, what commercial problems will construction contracts face and how can the contract deal with this unprecedented situation?

The problems caused are lack of progress, supplies and labour shortages, site closures and ultimately cash flow difficulties that could lead to bankruptcy.  The unpredictable problem is not knowing how long the crisis will last.

The obvious impact of coronavirus is construction site closure or project delay, if the paying party the contractor is engaged with will not accept delay, closure or suspension of all work by agreement then what can the contractor do?

The JCT contract forms are similar throughout and contain ‘Extension of Time’ and suspension provisions.  Using the JCT Design & Build 2016 Contract as an example, clause 2.24 demands that a delay notice be submitted and in that delay notice a ‘Relevant Event’ must be cited and ‘if practicable’, or soon afterwards, provide an estimate of any suspected delay.  Clause 2.26 provides definition of ‘Relevant Events’.  The applicable ones are likely to be:

2.26.12 – “the exercise after the Base Date by the UK government of any statutory power which directly affects the execution of the Works”.

2.26.14 – force majeure


What is likely to happen?

In the first case, the government might force construction sites to close using statutory powers if there is a “lock down”, in the absence of an agreement to suspend the works this event is relevant and if very clear will entitle the contractor to an ‘Extension of Time’. 

In the second case, the concept of “force majeure”, varies by civil jurisdiction. In English law, force majeure is not defined, either in statute or under case law, and notably, the JCT does not provide any contractual definition of force majeure either.

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Typically, an event of force majeure is an event that is beyond either party's control, not attributable to either party, and could not reasonably have been foreseen, avoided or overcome.

Will the coronavirus amount to force majeure? There are no reported cases of the scope of the force majeure term being tested in respect of a JCT contract. As such without the JCT providing a contractual definition and without legal precedent, the full scope of the force majeure provisions and how this applies to the coronavirus crisis may require determination by future case law.

However, guidance may be identified in the case of McCardie J in Lebeaupin v Crispin [1920] 2 KB 714 which suggests that an epidemic may constitute a force majeure event:

"Force majeure. This term is used with reference to all circumstances independent of the will of man, and which it is not in his power to control... epidemics are cases of force majeure…"

As such it certainly appears reasonable for contractors to turn to the force majeure relevant event in respect of the effect of the Coronavirus. 

Other Instances

Suspension of construction works: If the works are suspended by agreement or otherwise, just be aware that JCT contracts contain rights to terminate by either party if the period of suspension is prolonged.  In the JCT Design & Build 2016 contract, clause 8.11 allows termination on 7 days notice after the expiry of the “relevant period of suspension”, which can be found in the articles section under 8.11.1.1 to 8.11.1.6, which if left blank is two months by default.  If left blank, either party can terminate the contract on 7 days notice after two months has expired for both instances of Government intervention/shutdown and force majeure (should the coronavirus be accepted as such). 

Walk out:  Despite the world closing down, contractors must be careful not to just walk off site. An argument could be raised by the paying party that repudiatory breach has occurred.  Termination with damages could then be claimed. It is thus very advisable to arrange any shut down with the other party or serve them with the appropriate notice.

Solutions

Where an ‘Extension of Time’ is granted after the coronavirus crisis is over, the contractor will not suffer any liquidated damages, however, any costs incurred due to the disruption and delay will not be recoverable by the contractor as the government lock down or force majeure events are cost neutral, it was nobody’s fault.  In the case of termination, the contractor must vacate the site and submit a final account to include the value of works carried out, any relevant losses and expenses, costs of demobilisation and any materials and goods ordered and legally bound to pay.  The employer makes an assessment and a payment, if applicable, within 28 days of receipt of the accounts from the contractor.  A formal settlement agreement is recommended here to avoid dispute. 

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