Time and money claims under the NEC ECC: COVID-19

The outbreak of the coronavirus (COVID-19) pandemic has engendered a range of different strategic responses from governments around the world. Public health will now be at the forefront of concerns in those affected countries.

The virus has, however, also made a substantial secondary impact on business and the economy. Within the construction sector, parties engaged on live projects will understandably be concerned by the time and cost overruns likely to result from the pandemic, and will need to consider their strategies and responses.

As ever, parties’ starting points should be their contracts. In an earlier blog, we considered how the time and cost risks of COVID-19 might be allocated in contracts based on the SBCC/JCT form. In this article, we look at how those risks might be dealt with in another form of contract commonly used on projects in Scotland: the NEC Engineering and Construction Contract (‘NEC ECC’).

Introduction

In our earlier blog, we considered two relevant parts of the SBCC/JCT form of contract: those dealing with force majeure events, and those dealing with exercises of statutory power by the Scottish and UK Governments. Where, under the SBCC/JCT forms of contract, one of these events arises, the contractor may be entitled to an extension of time and relief from delay damages. It is arguable that these clauses may provide relief to contractors from delays caused by the COVID-19 pandemic.

Is the position different under the NEC ECC contract – and if so, how?

The NEC – unpreventable events and change in law

Under the NEC forms of construction contract, the employer carries the risk of delays and increases to the prices of the works, which result from specified events called compensation events (“CEs”). A list of CEs is usually set out in clause 60.1. Where a CE arises, the contractor may be entitled to an extension of time and additional payment.

So far as the COVID-19 pandemic is concerned, the relevant CEs are likely to be those ordinarily found at clause 60.1(19) and, where selected for use in the parties’ contract, optional clause X2.

Clause 60.1(19) – unpreventable events

In our last blog, we said that the best argument the contractor might have under the SBCC/JCT form of contract is to say that the pandemic was a force majeure. Force majeure, while not a term with any fixed legal meaning, is typically understood to refer to some extraordinary event beyond the parties’ control, which prevents or hinders performance of their contractual obligations.

The NEC forms of contract do not use the term ‘force majeure’; but it is considered that clause 60.1(19) is, in substance, a ‘force majeure’ clause. It provides that the following is a CE:

“(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.”

Similar to the JCT, NEC does not identify particular types of event which may fall within the scope of its ‘force majeure’ clause, but excludes other CEs which might otherwise have qualified. Proving that a relevant CE has arisen is therefore a matter of showing that the particular features of the event meet the criteria set out within clause 60.1(19).

Notably clause 60.1(19) requires not just that the contractor establish that the event was one beyond the control of the parties - but also that an experienced contractor would not reasonably have allowed for it at the time of the contract. This requires that the event must have been, to some extent, unforeseeable.

In line with our commentary on the SBCC/JCT force majeure clause, it is suggested that the COVID-19 pandemic and its effects may in principle constitute a CE in terms of clause 60.1(19), being an event which neither party could prevent, and which an experienced contractor would judged to have been unlikely to occur.

The event in question must also at least stop the contractor from completing works by the dates shown on the Accepted Programme. It would therefore remain for the contractor to show that the pandemic had actually delayed completion of the works. The contractor might be able to do so by demonstrating the impact of the pandemic on, for example, the availability of labour, plant and materials – or on its ability to continue and organise works on site. Whether the contractor is able to make that connection between the pandemic and any delays will of course depends on the facts of each case, and should be carefully analysed by both parties.

Option X2 – change in law

Optional clause X2.1 introduces an additional CE to the list provided at clause 60.1 in the core clauses. Clause X2 provides:

“A change in law of the country in which the site is located is a compensation event if it occurs after the Contract Date [i.e. when the contract came into existence]. The Project Manager may notify the Contractor of a compensation event for a change in the law and instruct him to submit quotations. If the effect of a compensation event which is a change in the law is to reduce the total Defined Cost, the Prices are reduced.”

At the time of writing there have been no changes in law arising from the COVID-19 pandemic in Scotland, which would have impacted the timing and cost of construction works. However, this position may change, following the enactment of the Coronavirus Act 2020, and the emergency powers that it granted to the Scottish Government.

Notices and causation

The occurrence of a CE does not guarantee the contractor entitlement to an extension of time or additional payment. To obtain entitlement in respect of a CE, contractors must:

• comply with the contractual requirements for notifying CEs; and,
• prove the impact of the relevant CE on the planned date for Completion, and Defined Costs i.e. prove causation.

The NEC forms of contract contain prescriptive regimes for the service of early warning and CE notices, and the assessment and implementation of CEs. Those regimes are beyond the scope of this article.

However, the key point is that the contractor must notify the Project Manager of an event which has happened or which it expects to happen as a CE, within 8 weeks of becoming aware of the event. This sets in train the process for quotation, assessment and implementation of the CE.

As stated, the contractor must be able to show the link between the event giving rise to the CE, and the relief sought. Clause 63 makes clear that the contractor’s entitlements to extensions of time and additional payment will measured by the effect of the CE in question on its Defined Cost and the date of planned Completion.

The NEC ECC contract also provides that a contractor’s entitlement in respect of a CE will be assessed on the assumption that the contractor reacted competently and promptly to the event. Thus, the contractor may not be given relief for delays or cost arising from the COVID-19 pandemic, which it might reasonably have mitigated.

Provided that a contractor, after a relevant CE has arisen, is able to satisfy these requirements, it may then be entitled to an extension of time and relief from delay damages, as well as additional payment (in the form an increase to the Prices).

Practical tips

• Parties should review their contracts for any amendments the provisions dealing with CEs, and also check how their particular selection of main option and secondary clauses will affect any claims.
• Contractors should that all notices are issued on time, in the right format and by the right method. Where there is uncertainty about whether a CE has arisen, err on side of caution and issue notices.
• Both parties should ensure that the contractual CE regime is properly followed.
• 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 arising from a CE.
• Instructions given in relation to COVID-19 should be carefully recorded.