Time and money claims in the construction industry

The coronavirus pandemic is an event without precedent in recent decades. The human and economic impact of the coronavirus (or COVID-19) continues to grow rapidly in scale around the globe. Its full cost and effects are yet unknowable. It is therefore unsurprising that, within the UK construction industry, this event has not been met with a unanimous response.

Many clients and contractors across the country have taken the decision to close down sites – while others continue to progress with their works. This difference of approaches sits in the context of a broader debate as to whether building works can and should continue in the face of the nationwide lockdown, and social distancing guidelines. Further, the widely-reported, apparent divergence in guidance given by the UK and Scottish Governments on whether building works should continue has contributed to a perceived lack of clarity on how the construction industry should respond to the pandemic.

It should be noted that the Coronavirus Bill received Royal Assent on 25 March 2020. The resulting Coronavirus Act 2020 (the “2020 Act”) enables the UK government and devolved administrations to utilise emergency powers in response to the 2020 COVID-19 pandemic. It is possible that measures implemented under the 2020 Act will, in the coming days or weeks, resolve some of the uncertainty which has recently engulfed the construction industry.

However, whatever measures are implemented by the UK governments, there will likely be significant commercial implications for live construction projects affected by the COVID-19 pandemic. Crucially, live projects are likely now to be delayed and ultimately to cost more to complete, whether as a result of works being suspended entirely, or from the disruptive effects of the pandemic on projects which may continue. Employers and contractors on such projects must therefore turn to their contracts, to determine which party bears the risk for these effects of the pandemic, and what contractual relief may be available.

Contractual claims for time and money

The question of how the risk for the time and cost impacts of the COVID-19 pandemic is allocated between employer and contractor will depend on a number of factors – not least the particular terms of the parties’ contract, and the facts of the given case.

The following paragraphs consider how the time and cost risks of the COVID-19 pandemic may be dealt with in contracts based on the SBCC/JCT standard forms.

The SBCC/JCT: Force Majeure and exercises of statutory power

Assuming the list of Relevant Events (“REs”), usually set out in clause 2.26, have not been amended, the employer bears the risk of delay to the project if the contractor can establish that the delay was caused by a RE. In that scenario, the contractor is entitled to an extension of time commensurate with the delay caused by the RE.

There are a number of REs which contractors may look to for protection from Covid-19 related delays and costs but the 2 most likely to be called upon are: ‘force majeure’, and, potentially, government exercised statutory powers.

Force majeure

At present, the contractor’s best prospect of establishing a RE in relation to COVID-19 may be to argue that the pandemic is a force majeure. A force majeure will entitle a contractor to an extension of time and relief from liquidated damages – but not to recover loss and expense (a force majeure is not a Relevant Matter).

‘Force majeure’ is a contractual concept: it has no fixed meaning in Scots or English common law. However, it is usually understood as referring to some extraordinary event beyond the parties’ control, which prevents or hinders performance of their contractual obligations. Whilst many contracts define ‘force majeure’, the SBCC/JCT contracts leave the term undefined. This leaves scope for argument as to whether the facts and circumstances surrounding COVID-19, and its impact on a particular project, amount to force majeure.

Against the argument is the fact that SBCC/JCT contracts already contain provisions for the allocation of risk of events beyond the parties’ control (including some of the other REs), which events might otherwise constitute a force majeure. This suggests that scope of the ‘force majeure’ RE should be interpreted narrowly. In favour of the argument, it could be said that the nature of the pandemic and its unprecedented effects are the extraordinary sort of event from which the RE should give relief. The impact of the pandemic on, for example, the availability of labour, plant and materials, and on the organisation or continuity of works due to social distancing, may indeed delay, hinder or prevent performance.

Further requirements: notices and proving causation

Entitlement to an extension of time does not follow automatically on the occurrence of a force majeure. There are additional hurdles that a contractor must clear, namely:

• The contractor must give notice to the employer as soon as it becomes reasonably apparent that the progress of the works is being, or is likely to be, delayed.
• The delay must, in fact, be caused by the force majeure event. The contractor must establish precisely how the pandemic delayed or is likely to delay its works, and in what respect.
• The contractor must be able to show it has used ‘best endeavours’ to prevent delay in the progress of the Works, howsoever caused.

Provided the contractor has complied with all of these requirements, it will be entitled to a fair and reasonable extension of time, resulting in an adjustment to the Completion Date.

Government exercised statutory powers

This is another possible ground on which a contractor may argue that it is entitled to an extension of time. The exercise of a statutory power by the UK or Scottish Government is an RE (usually provided at clause 2.26.13). The relevant provision states that the RE arises on:

“ the exercise after the Base Date of the United Kingdom Government or any Local or Public Authority of any statutory power that is not occasioned by a default of the Contractor or any Contractor’s Person but which directly affects the execution of the Works”

Although they have not yet done so, it is possible that the UK or Scottish Government will exercise powers under the 2020 Act, to order the closure of all construction sites. Delay flowing from the exercise of such statutory power will form the basis of a valid claim for an extension of time.

Any claim for an extension of time based on this RE, as with all REs, will be subject to compliance with the contractual notice regime, proof of causation and the obligation to mitigate.

Practical tips

• Employers and contractors should review their contractors for any amendments which might affect how claims for force majeure and changes in law are defined, or otherwise dealt with.
• Contractors should ensure that all notices are issued on time, in the right format and by the right method. Where there is uncertainty about whether an event has yet truly arisen, it may be best to err on side of caution and issue notices in any case.
• Both parties should ensure that the contractual procedures for assessing entitlements in respect of claims for relief are properly followed.
• Remember the importance of proving causation: keep detailed records and evidence of all delays and disruption on the project, and any evidence to show how these are linked to the COVID-19 virus.
• Contractors must keep in mind their obligation to mitigate delays and additional costs, howsoever they are caused.
• Instructions given in relation to COVID-19 should be carefully recorded.