18 May Legal update- to COVID-19 and beyond
Sarah Evans, Senior Associate Construction, Real Estate and Disputes Construction Engineering & Projects, CharlesRussell Speechlys details the latest legal advice for the industry in light of the COVID-19 pandemic.
Since the Government-imposed lockdown due to the Covid-19 crisis on 23 March 2020, we have experienced unprecedented times.
We are now at the stage of a significant remobilisation and return to on-site working but what has happened so far and what are the greater implications likely to be? We take a look below at some of the key questions and legal headlines.
I’ve heard a lot about force majeure. What is it and will it apply to my contracts?
There is no settled definition of force majeure under English law. Force majeure is generally understood to cover circumstances which are not within a contracting party’s control and authority suggests it is likely to cover pandemics.
Whether it will apply to a particular contract depends on the precise wording of the contract itself.
The unamended standard JCT contracts do not define it or give examples although often parties will add in their own amendments at the time of negotiating the contract.
What is the position regarding the time and money implications of Covid-19?
Again, this will depend on the precise wording of the contract in question.
In terms of loss and expense, in the unamended JCT contract the contractor takes the entire risk of loss and expense due to the impact of Covid-19 on the progress of the works.
Under standard NEC forms of contract, the position is potentially more favourable for the contractor. Under the NEC 3/ NEC 4 contracts a contractor is entitled to both an extension of time and compensation if an event occurs which stops the whole of the works being completed by the date for planned Completion shown on the Accepted Programme, or being completed at all.
The contractor will need to demonstrate that an experienced contractor would have considered the Covid-19 outbreak at the Contract Date to have had such a small chance of occurring that it would have been unreasonable for the contractor to have allowed for it. A relatively straightforward conclusion for earlier contracts, but much harder to show for contracts entered into more recently.
Again, standard form contracts are often amended by parties at the time of contracting so the precise terms of existing contracts should be checked to confirm the position in each case.
Covid-19 looks as if it will be here to stay for a while. How do we deal with its implications going forwards?
On 7 May 2020 as more contractors returned to site, the Cabinet Office published guidance on how parties to commercial contracts should behave in performing and enforcing contracts impacted by Covid-19. It was essentially a call to “play nicely” or as the Cabinet Office strongly encouraged, acting “responsibly and fairly.”
Why? The guidance set out the following reasons:
- to maintain contractual performance required to support the immediate response to Covid-19, protect public health, jobs and the economy;
- to ensure cash flow is maintained, including paying the workforce and individuals throughout the supply chain;
- where continued contractual performance is not possible or essential, to ensure those contracts, supply chains and markets can be preserved, avoiding destructive disputes and insolvencies; and
- to ensure that contractual and economic activity can be preserved and be ready to continue in a sustainable way once the current emergency is over.
There is also concern that a “plethora of disputes” can be destructive to good contract outcomes.
What is this likely to mean?
We can get an insight through some of the practical guidance published by the CLC Covid-19 Task Force.
In the first instance, many parties may try to resolve the challenges faced in ongoing projects commercially. This may involve:
- considering whether extensions of time can be granted and additional costs shared;
- changes to existing services and supply timings and levels;
- mutually agreeing to temporarily suspend works if necessary and to waive any termination triggers;
- adjusting valuations to help contractors and supply chains, with employers taking other forms of security.
This does not mean that contracts should be ignored; parties should check their rights and obligations under existing contracts carefully to see where they currently stand on exposure to risk and how these need to be adapted going forwards.
There is clearly the hope that many potential disputes and challenges will be capable of compromise through the outcome of “without prejudice” commercial negotiations. But what if that is not possible? Some of the alternatives for resolving matters swiftly and cost effectively include:
- Where the parties all agree, early mediation can be an effective means of exploring options for settlement, particularly where a more creative solution is required and an ongoing relationship is important. The current use of “remote” mediations, with mediators moving between parties in separate virtual Zoom rooms are proving just as effective as in-person mediations;
- Adjudication, where expressly available under the contract or available to “construction contracts” under the Construction Act, remains a swift process particularly for cash flow remedies. The decision of the adjudicator, is usually provided within 28 days of the Referral Notice but this can be extended.
How are adjudicators and the courts approaching Covid-19?
The headline is very much business as usual.
In terms of adjudications, whilst some parties have tried to argue that they cannot comply with strict timetables during lockdown, postponements have been resisted. Suitable workarounds, such as extensions to the timetable, the electronic transmission of papers and recordings of site visits for parties that cannot attend can be implemented to keep matters on track. The courts will only stop adjudications in very exceptional circumstances.
Similarly, the courts will take into account the impact of the Covid-19 pandemic in granting parties more time to comply with deadlines in litigation. But they will apply specific principles and will require everyone to go the extra mile in overcoming difficulties. Remote hearings will be used where appropriate to ensure hearing dates are not lost or only suffer the minimum delay.
Can you still adjudicate where one of the parties is insolvent?
The current position is that adjudication by a company in liquidation is generally only possible in very limited circumstances. Where it is allowed, the courts will impose stringent conditions including the requirement to provide security and the need to determine the final net position between the parties.
However, this position could change when the Supreme Court gives further guidance on the relationship between insolvency and adjudication in an anticipated decision.
For details on some of these issues and other topical articles, please see the Summer Edition of Infra.Law https://www.charlesrussellspeechlys.com/globalassets/pdfs/infra.law—summer-2020.pdf
You can contact Sarah on email or by phone: +44 (0)1483 252 695