Subcontractors should beware of sneaky contractual clauses that force them to carry the bulk of all covid risk
The resurgence of covid-19 and the ever-growing number of areas in the UK subject to lockdowns has, again, raised the spectre of disruption to construction works. Such disruption takes varied forms. Sites may be wholly or partially closed because of workers testing positive, government-ordered lockdowns that include construction, or interruption to site deliveries.
It may come as no surprise that covid-related risks are being shunted along the supply chain. This is in spite of exhortations from the UK government and all the devolved governments, which all should be working together and sharing risk in these unprecedented times. Clearly, this message hasn’t got through to some clients and contractors.
Some clauses simply state that the contractor has no liability to the subcontractor for covid risks. Other clauses do not specifically mention covid but amount to the same thing, such as the following clause:
“… the subcontractor shall have no right or remedy pursuant to any provision of this subcontract, whether by adjustment to the subcontract sum or by adjustment to the completion date(s) or otherwise or in damages at common law or in tort [delict in Scotland] or pursuant to any other theory of law to the extent that any matter listed in Schedule 1 (Notifiable Diseases) and/or Schedule 2 (Causative Agents) of the Health Protection (Notification) Regulations 2010 has any effect, whether direct or indirect, on the works or on the progress of the works.”
If you have survived a careful reading of the above, here is another example. You, the subcontractor, are informed at bid stage that if you are unwilling to take on “the risk of covid” – whatever this may involve – your tender/offer will not be considered. Your subcontract then tells you that: “For the full period of the subcontract works – subcontractor takes on the risk of maintaining productivity assuming 2m social distancing in place.”
This clause continues as follows:
“In relation to pandemics (current and future) in the event of any future lockdowns, implemented by government instruction, which lead to the site shutting down,
“a. Weeks 1-8 subcontractor is responsible for all costs but an extension of time will be granted for each day the site is closed;
“b. Week 9+ reasonable costs are recoverable under the subcontract where the subcontractor has used best endeavours to mitigate delays and an extension of time will be granted for each day the site is closed.” [emphasis added]
Analysis of first clause
In England, the Health Protection (Notification) Regulations 2010 have been updated to include SARS-CoV-2 (covid-19). Similar regulations exist in the devolved jurisdictions such as Part 2 of the Public Health etc (Scotland) Act 2008.
Your price is expected to include ‘the risk of covid’. Pricing for covid risk would require the services of a clairvoyant
So, what is the first clause above actually saying? I would analyse it to be saying the following:
- In general you are to assume all the covid-related risks impacting upon your subcontract works (even though you are unlikely to be in a position to avoid/manage them or insure against them).
- This is so, irrespective of whether the impact on the main contract works is “direct” or “indirect” (“indirect” could, for example, refer to the precautionary shutting-down of a site because workers have been taken ill with covid-19 on another – unrelated – site some five miles down the road).
- Through no fault of your own you could be liable to pick up some or all of the main contractor’s liquidated damages if it has not been given an extension of time by the client (or if it has not been given the extension applied for).
Analysis of second clause
Your price is expected to include “the risk of covid”. The immediate question is: what does this mean? Since it is so open-ended, pricing for covid risk would require the services of a clairvoyant. You then take on the risk of maintaining productivity even though social distancing is in force. So if, without fault on your part, you can’t social distance (and have to cease work until you can), then you will be in breach of contract when your productivity suffers. For such a clause to work there would have to be some benchmark to measure the requisite productivity.
Risks should always be allocated to those best able to manage them – but here the supply chain is the insurer of both first and last resort
The costs over an eight-week period of lockdown could be phenomenal – cancelled deliveries, storage costs, salaries and overheads, and more. In this context a subcontractor would want the right to terminate the contract.
From week nine onwards reasonable costs can be recovered provided you have used “best endeavours” to reduce delays. This requires you to do everything you reasonably can – which could, ironically, include incurring extra costs in order to reduce delays. Plenty of scope for argument there. It would have been better if the clause had specified the steps required to be taken.
Apart from the myriad disputes these clauses are likely to engender, they import risks that, for the most part, a subcontractor will not be able to manage. For the sake of efficiency and fairness, risks should always be allocated to those best able to manage them – but here the supply chain is the insurer of both first and last resort. Therefore if you are the subcontractor you should seek to either negotiate them out of your contract or, at least, seek to define with more precision the risks you are being asked to take on. If you are likely to be saddled with ongoing costs in the event of disruption to your works, make sure that you have a right of termination in these circumstances. Best of all, make clear that your price does not take account of covid risks whatever they might be.
Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors’ Group.