Emily Holdstock of Forsters LLP explains the Government's current stance on the continuation of construction works and some of the considerations for developers and contractors where works are affected
““Parties who are in the process of negotiating a building contract now are in the beneficial position of being able to discuss and agree the risk allocation for Covid‑19””
Two weeks after the government introduced social distancing measures across the United Kingdom, it is clear that Covid‑19 will have a far‑reaching effect on the construction industry.
What is the government's current position on construction works?
The government has come under significant criticism for issuing guidance rather than clear direction over whether construction works can safely continue on site.
Mayor of London Sadiq Khan (amongst others) has called on the government to close sites across London, where workers are heavily reliant on public transport to and from the site. In spite of this criticism, as of 7 April 2020, the government's position is that construction works may continue, provided that the works can be carried out safely and in accordance with social distancing measures and guidance from Public Health England.
Ultimately, responsibility for safety on a construction site rests with the person identified as the principal contractor for the purposes of the Construction (Design and Management) Regulations 2015. The Construction Leadership Council has issued a set of "Site Operating Procedures" that detail how a construction site may be run in accordance with PHE guidance.
Developers and contractors should keep an eye on further government advice and keep under continuous review how this affects ongoing construction works.
How is the construction industry interpreting government advice?
Since the government announced its latest lockdown measures, we have seen many house builders and contractors close their construction sites, stating that it is impossible to ensure the health and safety of employees and enforce the government's social distancing measures. Other contractors have chosen to keep sites open, introducing practical measures on site which enable social distancing to be maintained.
In many instances where sites have been closed by contractors, contractors have also cited a lack of available workforce (either due to illness, self-isolation or uncertainty about whether they should turn up to work) and in some cases, a lack of materials on site which would enable them to continue with works on site even if workers turned up.
However, we have also seen instances where an employer has asked its contractor to suspend works or has come to a mutual agreement with its contractor to do so.
Can an employer ask a contractor to close a construction site?
In theory, yes. Every construction project contract is different and the terms of the contract should be carefully reviewed in each case to understand what the consequences of such a suspension might be. In some cases, the contractual consequences of a suspension of works may be different depending on whether it is the employer or the contractor which instigates such a suspension.
An instruction by the employer to suspend works is likely to entitle the contractor to claim an extension of time and loss and expense associated with the period of suspension. If the decision to suspend is taken by the contractor, the contractual consequences may well be different.
What are the key considerations where works are delayed or suspended due to Covid‑19?
Extensions of time and additions to the contract sum
Every construction contract will confirm the date by which the contractor is required to have completed the works and will often include a clause enabling the employer to levy liquidated damages in the event that the works are not completed on time. The contract will also contain a mechanism for the completion date to be extended if certain circumstances arise. Most construction contracts will contain a standard list of events which would give rise to a claim for an extension of time to the extent that the contractor can establish that the event has caused a delay and those events will be negotiated and agreed between the employer and the contractor on a project-by-project basis.
If the progress of the works is delayed due to Covid‑19, it is very likely that the contractor will seek to claim an extension of time for the completion of the works, in order that it is not exposed to liquidated damages for late completion. Whether a contractor will be entitled to an extension of time will depend on the provisions of the contract in question, but to establish a claim the contractor will usually need to:
· Establish that a relevant event has arisen and that the event has given rise to a delay.
· Comply with any contractual processes for the notification of extensions of time.
· Show that it has mitigated any delay.
The contractor may also seek to claim loss and expense associated with the delay. Again, most construction contracts will detail the circumstances in which the contractor can claim such loss and expense and the onus will be on the contractor to illustrate that it is entitled to claim such loss and expense from the employer.
Suspension of works
Where works are suspended, insurers should be notified as soon as possible. The site should also be properly secured. Employers should also check whether they need to notify third parties (e.g. a bank providing finance or a prospective tenant) of the suspension of works and review any third party agreements associated with the works.
Termination of building contracts
Some standard form construction contracts such as the JCT contain provisions which entitle an employer and/or a contractor to terminate a building contract in the event that works have been suspended for a defined period of time.
Employers should review these provisions at the earliest possible opportunity to understand whether a contractor might have a right to terminate the contract, as this could have a significant impact on the employer's ability to deliver the project in the timescales it has agreed in any third party agreement, such as an agreement for lease.
If my construction contract is not yet in place, what should I be thinking about?
Parties who are in the process of negotiating a building contract now are in the beneficial position of being able to discuss and agree the risk allocation for Covid‑19. In many cases, standard forms of building contract are silent on the effects of a pandemic such as Covid-19 and the parties should consider bespoke amendments to effect their agreement on risk allocation.
Matters which the parties should consider amending include:
· the provisions governing extensions of time for completion of the works;
· the provisions allowing increases to the sums payable to the contractor under the contract; and
· the provisions relating to suspension and termination of the contractor's employment under the contract.
What happens next?
It remains to be seen how long the social distancing measures will remain effective and indeed whether the measures might become stricter before they are relaxed. As such, it is likely to be some time before we understand the long-term effects of Covid-19 on the construction sector.
However, it is reasonable to assume that social distancing will remain in place for some time to come and that this is likely to place an enormous strain on the supply chain and on the financial position of those operating in the construction sector. It is in all parties' interests to have open and constructive dialogue during these difficult times to try and find a way through these unprecedented circumstances.