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Covid-19: What to do when contracting in a time of pandemic - housing

Posted: 26/03/2020


It will come as no surprise that we are getting more and more enquiries from clients and housing associations in respect of the impact of coronavirus (Covid-19) on projects, and how best to resolve any issues under contracts. Considering how this will impact on projects is becoming more paramount, both at the contract drafting/negotiation stage, and in relation to ongoing projects.

Developers and contractors are increasingly approaching employers for extensions of time and also for additional monies. These are exceptional times which call for pragmatism from everyone involved, and this could mean employers need to look beyond the strict contractual terms in order to reach a position that will also work for all parties.

Our general view is that legally, as things currently stand (although this is obviously changing on an almost daily basis), under the standard provisions of the JCT suite of contracts (which are used in the vast majority of projects in the sector), where works are delayed as a result of the coronavirus it may well entitle contractors to additional time (and therefore relief from liquidated damages) dependent on the status of the scheme, but is unlikely to give an entitlement to additional money (unless the delay comes from delays in receipt of permissions or approvals for Development Control Requirement purposes). This is not certain though and will depend on the specific facts of the project in question.

We explore briefly below some of the key provisions that may be relevant here, and under which contractors may seek relief (the clause references are to the JCT Design and Build Contract 2016). These general positions and concepts are likely to be equally applicable to both building contracts and agreements for lease/development agreements. However, we strongly recommend you seek specific advice on a scheme-by-scheme basis to ensure the analysis fits particular circumstances and whether the general positions outlined are applicable and correct.

The main provisions that are likely to be relied upon are:

  1. Exercise of statutory power (clause 2.26.12) - this Relevant Event could come into play where the Government/local authorities place restrictions on access to sites/movement of labour/materials (e.g. if the Government legislates to close construction sites). At the moment (even amid the current “shutdown”) essential travel to work is still permitted where workers cannot work from home. As of today and from the majority of onsite activity reports we have seen, this is not having a significant direct impact on building sites as yet. This may well change imminently in light of the clarifications around social distancing and leaving the home (issued by the Government on 23 March). For the latest guidance regarding site activity, please see the article setting out the British Property Federation’s current position in this regard. However, there may be labour shortage issues resulting from the school closures which could mean workers are forced to stay at home and look after their children. Likewise, social distancing may soon be specifically extended to construction sites.

  2. Delay in permission/approval (clause 2.26.13) - statutory bodies and their personnel are being impacted by the virus (including measures to manage its spread/impact) and this means it’s quite possible that this will result in them being delayed in granting approvals/permissions which would entitle the contractor to relief under this clause.

    To the extent that the delay relates to Development Control Requirements, this event would potentially also entitle the Contractor to additional payment (clause 4.21.4).
  1. Force majeure (clause 2.26.14) - force majeure is not defined within English law, and the JCT contract does not provide a definition (it is generally taken to mean certain events that are beyond a party’s control and not within a parties knowledge at the time of contacting but it is not therefore clear which events will be caught). For this reason, when acting for employers we would usually look to strike out the force majeure Relevant Event and we, in fact, do so in our precedent JCT amends (or generally at least provide a narrow definition to give more clarity for employers). Clearly, it’s arguable that coronavirus could constitute force majeure, especially in live contracts (albeit, it is more questionable for new ones).

In addition to the events listed above, it’s possible that other events may become relevant as a result of coronavirus, for example: deferment of possession (clause 2.26.3), impediment/prevention by the employer (clause 2.26.6), civil commotion (2.26.10), strike or lock-out (2.26.11). We are not able to cover all of these events in this article, so please get in touch if you would like further guidance on these points. However, a contractor’s statutory right of suspension under the construction act is not exercisable where a housing association employer is still offering access and making payments (assuming the same are validly due and payable).

Note: This is different from the JCT clause 8.11 right of suspension and termination which could potentially also be relevant following, amongst other, things, prolonged i) force majeure ii) delay as a result of the government exercising its statutory powers to, say (possibly), shut down or prevent access to sites and/or iii) delay in being able to obtain approvals relating to Development Control Requirements - see further below in this regard.

Termination

A significant consequence of works being suspended for a sustained period of time due to events such as force majeure or exercise of statutory power (beyond two months unless an alternative period is stated in the Contract Particulars), is that it may give rise to a right to terminate the contract (clause 8.11). The way things are developing, a two month suspension looks more than possible), so it’s important to consider whether an extended period should apply in relation to coronavirus - we can assist and advise you what is appropriate in this regard, and what we are seeing developers and contactors accept.

Drafting solutions

As noted above, it is not 100% certain how the effects of coronavirus will be dealt with under the standard JCT and the specific facts of each project will be relevant to this. However, the above gives an indication of some of the factors to consider.

Practically we are seeing a range of solutions being proposed, from sharing the pain and granting extensions of time, to mandatory variations and provisional sums. Ultimately what is right for you will depend on the facts and your view on risk and the extent you are willing to manage the evolving situation. 

However, we have already advised and acted across a significant number of live and upcoming projects considering the potential impact of Covid-19 (including the time and cost consequences of the same) and can guide you through the most practical and appropriate solutions to put in place. 

What next?

We are offering a review service for live and imminent projects and can happily discuss how this works if you wish to get in touch.

Equally, we have developed a range of drafting solutions to address and apportion risk relating to Covid-19 for new projects to align with differing and preferred risk apportionment and profiles. Again, please contact the team should you wish to discuss this or explore the various options.

Ultimately, we have already successfully implemented a range drafting solutions for a number of clients with coronavirus-related issues, and can assist and respond rapidly and practically to issues you are facing.

Advice on risk and drafting solutions:

Peter Massey; Tim Kittow; James Hallas

Immediate claims advice:

Richard Cooke; Peter Stockill


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Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority.

Penningtons Manches Cooper LLP