Coronavirus: Practical Steps for Businesses in the Construction Industry
As cases of coronavirus (Covid-19) increase throughout the UK and the world as a whole, the adverse impacts on the construction industry are becoming a reality.
There are many obvious issues which businesses could face such as cash flow issues leading to delayed payments (both making and receiving), potential force majeure events, delay in performance and of course issues surrounding the safety and wellbeing of the work force.
There is plenty of content available regarding force majeure events and whether or not the current pandemic would qualify. The purpose of this article is therefore to focus on practical steps businesses need to consider taking under their construction contracts. Of course, before relying on a force majeure type clause, it is imperative that you ensure that the clause does actually apply, but this is a separate issue not covered in this article.
Giving the right notices, at the right time and to the right people.
Many construction contracts (including the JCT and NEC forms of contract) require certain notices to be given if the relevant remedies are to be available. On occasions these need to be given within a particular time frame.
Examples include making applications for extensions of time or for additional costs under both the NEC and JCT forms of contract. In addition, there is a further layer under the NEC for early warning notices whereby a failure to provide an early warning notice could have a detrimental impact on the remedies (or level of remedies) available.
It is crucial therefore that timely notices are provided. Many businesses are taking a “wait and see approach”. Whilst this may have its merits in terms of not jumping the gun, the risk is that you may miss the boat by failing to give a notice in the required time scale.
Some further practical points to consider when providing notices:
1. How does the notice need to be served? In many contracts, email is not a valid form of notice and therefore you will not be deemed to have served a valid notice by sending an email. Check the ways in which notices can be served and follow that!
2. Where does the notice need to be sent? If the contract stipulates where the notice needs to be sent then this must be followed. If the contract has words akin to “or such other address as notified from time to time” then make sure you check if any updates have been given and ensure the notices is sent to the correct place.
3. Make sure if you are delivering the note via a courier that strict instructions are given to them. There has been an instance in recent times where a courier went to deliver a notice, was told that the person had moved and so they took the notice away with them. The courts then held that the notice was not validly served but they stated that it would have been validly served had it been left at the address. Make sure your courier knows what they are supposed to do!
4. Follow any other requirements in the contract. The courts have even said that if a contract states that a notice is to be served on a particular colour of paper, it will not be a valid notice if sent on a different colour. An anecdotal comment in the context, but something which needs to be followed nevertheless.
With cash flow being a potential issue in the short term for some businesses, proper and due payments under contracts may be an issue. In this regards, some practical considerations from a legal perspective:
1. If you are not being paid what you should be paid then consider using the right to suspend services. This is available to all service providers acting under construction contracts (what constitutes a construction contract is defined by law) but again it is only available once the correct notice is given (including giving the required amount of notice). Be careful when using this remedy as if you invoke the right when you weren’t entitled, or you incorrectly invoke it, you could be in breach of contract yourself.
2. From an employer’s perspective, consider whether the contract allows you to manage the project in a way which could ease cash flow concerns. For example, does the contract entitled you to change the contract programme, or reduce the scope of services temporarily. Consider utilising change control clauses where applicable.
3. In addition, there is a rigorously prescribed payment process in England and Wales – use it! If a contractor has made an inflated payment application, make sure you use the payment notice and pay less notice schemes to ensure your only obligation is to pay what is rightfully due.
4. As a contractor, check to see if there is scope under the contract to re-organise work forces or change timing for ordering materials. If this can be managed in a way to ease financial pressures without breaching the contract then it could be a useful tool. Some contracts will have milestones and final deadlines and some will have strict programmes so this may not always be possible, but check your contract to see what can be done in this regards.
Responsibility for safety of the workforce
Health and safety of the party’s employees when on-site is always of paramount importance. In the context of Covid-19, contractors may want to consider revisiting their health and safety policies to ensure that adequate procedures are in place that can be quickly deployed if the infection is reported locally so that the contractor can minimise the risk of the virus being spread to others on-site. As well as ensuring that these mandatory duties and obligations are implemented, part of this exercise will also involve ensuring that all those on-site are fully informed of the steps to take if they display any symptoms in order to minimise the effect of the virus.
Managing commercial relationships
There is a possibility that Covid-19 will affect (or may have already) a project and its timely performance. In many instances, early discussions can help to alleviate these issues. Whilst social distancing is being implemented, telecommunication and video conferencing tools can be extremely useful to ensure parties remain in contact to mitigate the issues as they arise. In preparation for the discussions, contractors/subcontractors should take proactive steps to ascertain if critical materials or supplies for incorporation in the works are being or are likely to be delayed and maintain an audit trail to prove all possible steps are being taken to mitigate such delays. Parties should also maintain detailed records about their workforce and why they are unable to work (i.e. self-isolation, infected or lockdown due to imposed restrictions).
Parties to a construction contract and the project itself may be insured for various eventualities. It is important that if issues do arise on the project, the terms of the insurance are checked as soon as possible to ascertain whether cover is available.
it is also imperative that you discuss the issue with your insurer as quickly as possible. Any action you take may impact the insurance and cover available. For example, some insurance companies require foresight of any communication with the other party regarding insured issues. Therefore it is imperative that you ascertain the requirements of your insurer as quickly as possible and comply with those requirements to avoid issues with insurance further down the line.
If cash flow does become a real issue to the point where you are not sure you will be able to meet your repayment obligations to the funder then again, check the terms of your funding documents to ascertain your rights and obligations.
As above, it may be that notices are required to be given under those terms and it is important to ensure that these are followed.
It may also be the case that discussions with the funder early result in avoiding issues which may have arisen further down the line. Of course, aside from complying with the terms of your contract with the funder, it is a commercial decision as to how any such discussions are approached.
How can we help?
How parties can address the current outbreak has become an immediate negotiation ‘hot topic’ in the construction industry, with parties trying to agree on how risks around the current outbreak will be allocated. For strategic advice on your construction contracts, please contact the construction team at Herrington Carmichael LLP using the details provided below.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.