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Negotiating contracts in the shadow of COVID-19

  • Market Insight 21 July 2020 21 July 2020
  • Coronavirus

We are all, of course, now only too well aware of the sheer scale of the disruption that COVID-19 has brought to every facet of business and industry - not to mention the personal tragedies that lie behind the daily roll call of grim statistics from around the world.

Negotiating contracts in the shadow of COVID-19

It is disruption on a truly historic scale. Larry Summers – a former US Treasury Secretary – has described it as more important than 9/11 or the 2008 financial crash, and a "hinge in history", on a par with the assassination of Franz Ferdinand in 1914 – meaning that it's a pivotal event whose true significance lies in what follows it.

Whatever the impact on a global scale, there's no doubt about the unprecedented obstacles that the virus has thrown up for the UK construction industry in just a few short months. The need for lockdown and social distancing has impacted almost every facet of the construction process – be it supply chain manufacturing, the transportation of goods, materials and workers, or the conduct of on-site operations.

Who could have foreseen that it would be so difficult to stay 2 - or even "1 plus" - metres apart, and what disruption this would cause? And who can say how long the disruption will continue, and through how many waves of the virus, until - we hope - a vaccine brings some relief from its grip.

But even then, will things just snap back to the "old normal", given the loss of contracts, businesses and jobs that will have ensued? This is unlikely, to say the least.

Contract negotiation for the foreseeable future will need to take account of this new normal, and focus on the immediate task of doing what it can to mitigate COVID-19 risk in the context of existing standard forms and procurement structures. The goal will be to achieve a clear, comprehensive, coherent approach to the allocation and mitigation of specific risks, whether you are employer or contractor.

No government or higher authority is going to do this for you. In a business context, English law has always prized the ability of contracting parties to determine their fate by the deals they do – even where those deals are manifestly bad. That is unlikely to change any time soon – even in times of national crisis.

And the thing about bad deals is that they are usually bad for both parties, and best avoided, whichever side you're on. A lot of time, cost and argument is wasted as a result of poorly prepared, unbalanced contracts, and this will only be exacerbated by the effects of COVID-19.

In this briefing, therefore, we will look at how you can address some of the specific risks thrown up by the virus, taking account of experience over recent months.

Force Majeure

Back in March, when the effects of the pandemic really started to be felt in the construction industry, employers and contractors immediately began to consider whether the pandemic would amount to a force majeure event under their construction contracts.

Under English law contracts, parties need to turn to the relevant clause of the contract to determine whether the force majeure provisions are applicable. The precise wording will vary from contract to contract but generally a force majeure clause will require the occurrence of an event which:

  • is outside the control of either party;
  • was unforeseeable at the time of entering into the contract; and
  • which prevents or hinders a party from complying with their contractual obligations.

At the start of the outbreak, it was fairly easy to satisfy these conditions - COVID-19 was certainly an event outside of the control of either party, neither party to a contract (or, indeed, the whole world) could have foreseen the effects of the pandemic and, with widespread site closures and new site working practices, the pandemic has certainly hindered or prevented parties from complying with their contractual obligations.

However, parties who are in the process of negotiating a contract now should carefully consider whether COVID-19 will satisfy any force majeure requirements going forward.  Whilst it is quite likely that the pandemic may still prevent or hinder a party from complying with its contractual obligations, the first two parameters of the test aren't so clear cut.

It is arguable, that the effects of COVID-19 on site operations are now within the control of the contractor, particularly in light of the guidance and procedures that have been published to manage site operations whilst adhering to social distancing guidelines, such as the Construction Leadership Council's Site Operating Procedures.

Furthermore, with the entire world still reeling from the effects of the pandemic in all aspects of life, and the likelihood that we will continue to do so for the foreseeable future, it would be difficult to argue that COVID-19, and any future waves, would now satisfy a force majeure foreseeability test.

Parties should also consider whether the contract contains an exhaustive or non-exhaustive list of events that could amount to force majeure. Most contracts will include some example force majeure events, but where they are stated to be exhaustive, only those events listed will be considered to be force majeure events.

Prior to this year, employers, contractors and legal advisers rarely stopped to consider whether pandemics or epidemics were listed as specific force majeure events, particularly on UK projects.  Going forward, it will be essential for both parties to carefully consider whether COVID-19 itself, or any other pandemic or epidemic, should be expressly included within the list of force majeure events and carved out from any other elements of the force majeure test.  

Finally, even if COVID-19 does pass any force majeure test – what contractual relief will be available? Generally a party will be relieved from any failure to comply with its contractual obligations which will usually entitle a contractor to an extension of time to complete the works, but it doesn’t always follow that the Contractor will be entitled to recover any costs associated with force majeure – often each party will be required to bear its own costs.

Given the wide scale implications of the pandemic, and the significant effects it has had on costs and programming, going forward contractors, in particular, should take care to consider whether the force majeure provisions provide sufficient protection in the event of future waves or restrictions on site operations.

Change in Law

Another important provision to consider when negotiating construction contracts at the moment is the change in law clause.  

The general position in any construction contract is that the contractor is obliged to comply with all applicable legislation. In certain circumstances, however, the contractor may be entitled to claim an extension of time or additional money as a result of a change in legislation.

As with force majeure, any entitlement to relief from a change in law will be determined by the contract itself and it will vary from contract to contract.

If a change in law mechanism has been drafted into the contract, it will generally define what is meant by a change in law. It is likely to capture changes in legislation or the judgment of any relevant courts but may not necessarily cover government advice or guidance. Much of the government advice issued to the construction industry over the last few months relating to continuing operations on site has amounted to government guidance only and hasn’t necessarily carried the weight of law.

Going forward in any contract negotiation, parties should consider whether the change in law definition is sufficiently wide to capture any COVID-19 related guidance or advice issued by the government.

Even where a change in law has occurred, some contracts (particularly PFI or PF2 contracts) may not grant relief for all general changes in law. Often they are limited to discriminatory changes - where the change applies to the particular project or contractor in question, but not to other projects or contractors – or to specific changes in law - those that apply only to the type of asset being constructed or services being delivered, but not to other assets or services. Much of the COVID-19 related guidance and advice is applicable across the industry and so may not satisfy these narrow definitions.

Parties should also consider the implications of when any change in law comes into effect and whether the change in law provision contains a foreseeability test – many contracts will only grant relief for changes in law that were not reasonably foreseeable at the date of entering into the contract. There is no way of assessing what future legislation, guidance or regulations may be enacted or issued to deal with the ongoing effects of the pandemic and arguably it is foreseeable that further changes will occur.

Finally, consideration should be given to any relief available for a change in law – whether the contractor will be entitled to an extension of time, additional money or both? Some contracts may even limit any entitlement so that it only applies where the contractor is delayed or incurs cost as a result of a change to the completed works arising from the change in law. Arguably most COVID-19 related changes are to the way in which the works are to be carried out, rather than a change to the completed works themselves, and so relief may not be available.

Parties will need to carefully consider whether any future changes are captured by their existing change in law provisions or whether they should actually be addressed separately. Most employers and contractors in the UK will no doubt be familiar with negotiating separate Brexit related change in law provisions as stand-alone entitlements. Going forwards you should expect to see more COVID-19 specific change in law provisions.

This article was written by Robert Meakin and Catherine Johnston

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