Thu 12 Nov 2020

Covid-19's impact on construction contracts going forwards - a drafter's perspective

The practical implications of Covid-19 for the construction industry, and the impact of lockdown on live projects, has been considered by my colleague Sandra Cassels in her article "Wh… next for Covid-19's impact on construction contracts". 

As we all adapt our lives to the new normal, from a drafter's perspective, this is the time to look at the contracts that we are drafting now to ensure that we adapt them too.

At the beginning of 2020 very few contracts in Scotland were drafted to specifically take into consideration the impact of a worldwide pandemic. In the months since March, we have seen considerable debate in our industry on the impact of Covid-19 on construction contracts. In this period parties have sought to apportion responsibility for delays and additional costs caused by something that was, at the time their contracts were drafted, essentially an unknown. Although we still live in very uncertain times Covid-19 is no longer an unknown and construction contracts can and should now be drafted to provide certainty for the parties.

Not all construction contracts will deal with Covid-19 in the same way. Individual contracts should reflect the parties' agreement on how they choose to deal with Covid-19 implications for their specific project.  It's useful to consider the following key questions:-

What Covid-19 implications do I need my contract to deal with?

Drafting Covid-19 risk allocation provisions is not necessarily as straightforward as simply deciding whether to allow for time or time and money although this is clearly an essential element of any Covid-19 clause. Covid-19 now needs to be part of discussions between the parties when setting the programme and the price. Never has it been more important for parties to be upfront and realistic with each other on this, and for contracts to clearly reflect what has been agreed in principle between the parties. Current government guidance sets restrictions which directly affect progress on site and which have an impact on programme and costs incurred. In addition to these restrictions, parties need to consider other Covid-19 implications such as delays in the supply chain, potential increases in the costs of materials, and delays caused by local breakouts, and more importantly how these are to be dealt with in their contract.

This month the Scottish Government has published Scotland's Strategic Framework. At the time of drafting the Framework envisages that even if projects are situated in a Level 4 area, the strictest protection level, construction sites will still operate, as they have been identified as permitted workplaces. This is obviously a relief for us in the construction industry, but while the Government is clearly not envisaging a national or local lockdown equivalent to the lockdown in March at present, circumstances may change rapidly if infection levels lead to further waves or require a different approach from that currently being pursued.

While existing Covid-19 restrictions will now be factored into the programme and the contract sum, changes to the current government guidance linked to Covid-19 and future health emergencies may result in delays to projects and these should be dealt with in the construction contract. Careful drafting is needed to establish the details of specific Covid-19 "trigger events" agreed by the parties.

What should the consequences be of a "trigger event"?

In the event of an occurrence of a specified Covid-19 "trigger event" parties will want their contract to set out from the start what, if any, adjustments can be made to the required completion date or the agreed contract sum. This certainty in the contract will avoid potentially costly and time consuming disagreements or disputes further down the line.

Not all Covid-19 "trigger events" need to be dealt with in the same manner. Parties may choose to allocate the risk of say a tightening up of restrictions affecting work on site which results in delays, to allow for an extension of time but not to permit a claim for loss and expense/compensation. In this case the drafting would need to reflect the parties' agreement that in these particular circumstances it is agreed that the Employer bears the time risk with the Contractor bearing their resultant costs. On the other hand, where parties agree that an adjustment to the contract sum is allowed in certain circumstances, it is likely that the Employer will seek to mitigate their risk with additional drafting. They may want to consider drafting that permits compensation claims for specific categories of costs only or that allocates a proportion of the risk so that Contractors are entitled to claim a fixed percentage of costs. The parties should discuss the allocation of risk and ensure that their contract documents what they have agreed.

If construction contracts do not already (i) specify that claims for extensions of time and/or claims for loss and expense may only be permitted where the trigger event is not caused by the acts or negligence of the Contractor or (ii) require the Contractor to mitigate any delays and costs, then Employers should certainly consider including such drafting. It may seem fair to allow for an extension of time where a site is closed because of an outbreak of the virus on site which has resulted in the workforce being quarantined but if policies requiring Covid-19 compliant working conditions are not enforced by the Contractor or there is a lack of hand washing/hand sanitising facilities on site and the Contractor has failed to respond to the situation quickly enough the point is not so clear cut.

Do I need to consider any other clauses in my contract?

As noted above Covid-19 related provisions are not solely restricted to considering time and/or money

claims. Parties may also want to consider including rights of suspension and/or termination for Covid-19 events which would have a significant negative impact on a project.

Many suspension clauses in construction contracts (if included at all) are exercisable solely by the Contractor in the event that the Employer is in breach of its payment obligations. Parties to a contract post March 2020 may want to consider including a right to suspend works on the grounds of a specified Covid-19 related event and where the event occurs for a prolonged period, for example 6 months, a right to terminate.  This right to suspend would generally be sought by the Employer but the parties could agree that either party may terminate if works were not restarted within the specified period.

The commercial consequences of exercising a right to suspend which could lead to termination are considerable to say the least, accordingly the right to suspend is likely only to be required where the Covid-19 disruption event is significant  i.e. in the event of a national lockdown which would see the construction industry close for a significant period of time. The advantage to this type of drafting is that it gives the parties an option within the four corners of the contract and they can decide in advance, when tensions are not high, how suspension would work and critically what costs would be payable on suspension, when works were started up again or in the event of termination.

As ever the process of drafting Covid-19 related provisions starts with a lot of questions which leads to discussion and then once a position is finalised it can be documented, negotiated if necessary, and agreed. If you would like to discuss drafting Covid-19 provisions further please contact Morton Fraser's construction team to discuss your requirements.

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