Delayed or cancelled projects, insolvent subcontractors, and huge extra costs for restarting work – lockdown could lead to a morass of legal wrangles across construction
At the time of writing it seems that the majority of construction sites have closed. This is likely to be due to concerns over ensuring the safety of the workforce but other factors, such as inability to source critical supplies, will have played their part. Other sites will have remained wholly or partly open, hopefully in line with the latest guidance from the Construction Leadership Council (CLC), the business department’s sounding board.
In general terms the CLC’s advice (echoing advice from Public Health England) is that sites should remain open provided social distancing rules are being applied; if any activity is incompatible with those rules, those managing the sites should consider whether it needs to continue for a site to stay operational. This preference for sites remaining open seems to be driven by the government’s desire not to weaken further the already parlous state of construction company balance sheets.
The Scottish government has insisted that all sites close, unless a particular activity supports one or more of 13 essential services (such as health, energy, transport, food and water). The Welsh government has gone further by introducing specific legal obligations on distancing. The Health Protection (Coronavirus) (Wales) Regulations 2020 impose a legal duty on those managing workplaces to take all “reasonable measures” to maintain social distancing. This duty will be enforced by the police and local authority personnel such as environmental health officers.
As thoughts turn to ending the lockdown (or having a phased reduction), many firms are anxious over payment and possible liability for disruption and/or delay to their works. The CLC recently issued advice imploring the industry to improve its behaviour so that outstanding payments are promptly discharged and claims or counterclaims arising from the lockdown are avoided. It remains to be seen whether this kind of exhortation alone will have any impact.
Force majeure-type clauses will not exist in most contracts, which are either bespoke contracts or amended standard contracts. In practice most firms will be left high and dry
In relation to disruption and/or delay disputes the term “force majeure” has been bandied about as the get-out-of-jail card. The JCT contracts include it as a “relevant event” giving rise to an extension of time but it is not defined. The term does not have a settled meaning in English law. The reference to it in JCT contracts may not help at all.
In British Electrical & Associated Industries (Cardiff) Ltd vs Patley Pressings Ltd (1953) a contract for the supply of steel was subject to “force majeure conditions”. Those words were held to be too uncertain to enable enforcement of the relevant clause.
The better approach is in NEC4 clause 60.1 (19). An event stopping completion of the whole of the works (or stopping the whole of the works by the date for planned completion shown on the accepted programme) qualifies as a “compensation event”. Such an event could not have been preventable and would have been considered by the contractor at the contract date to be highly unlikely.
The real difficulty is that force majeure-type clauses will not exist in most contracts, which are either bespoke contracts or amended standard contracts. In practice most firms will be left high and dry. Firms on projects in Wales could shield themselves by relying on the Welsh regulations referred to earlier (where they have had to cease work because it was not possible to adopt reasonable measures to protect their workforces).
Regulations could be drafted to suspend indefinitely claims and counterclaims directly due to the lockdown and even require the immediate settlement of debts
On payment the Cabinet Office has advised that contracting authorities consider using project bank accounts (PBAs) and the early release of cash retentions (unless there are apparent defects that are not minimal). It has not considered how this can be enforced along the supply chain and seems unaware of the government policy that PBAs must be used unless there are compelling reasons not to do so. Recent advice published by the Scottish government goes further: public bodies should consider direct payments to subcontractors in the event of failure of a tier 1 contractor to discharge payments.
There is a possible option in the event that we and other sectors become bogged down in disputes that will hinder the recovery process. The government could consider using the Civil Contingencies Act 2004. A senior minister can introduce regulations where an emergency is about to occur, is occurring or has occurred to mitigate or control an aspect or effect of the emergency where the need to do so is urgent. In principle such regulations could be drafted to suspend indefinitely claims and counterclaims directly due to the lockdown and even require the immediate settlement of debts incurred prior to and during the lockdown. Much will depend on the extent to which the economy is convulsed by contract disputes arising out of the lockdown.
Most firms will now want to focus on their exit strategies from the current nightmare. The landscape they will face will be littered with prematurely terminated contracts, huge storage costs, payers on the brink of insolvency and significant remobilisation costs. Drawing all this together in order to recalibrate business priorities will be a daunting prospect, especially for SMEs.
But, even now, firms are still bidding for future work. When signing off contracts they will now need to consider protecting themselves in the event of continued interruption to supplies or inability to resource work as a result of employees having been laid off.
Rudi Klein is a barrister and CEO of the Specialist Engineering Contractors’ Group