COVID-19 - Time and cost claims under construction contracts in the UK

Introduction

On 10 May the UK Government announced a roadmap to ease the restrictions in place as a result of coronavirus, and on 11 May the Government published its COVID-19 recovery strategy .

On 11 May 2020, the Government issued industry-specific guidance on working safely during coronavirus, including guidance aimed at the construction industry.

Further measures are expected to be enacted over the coming weeks and months.

Of particular relevance to the construction industry, the Government’s guidance in relation to work has changed in emphasis. From Wednesday 13 May, the guidance has been that:

• sectors of the economy that are allowed to be open should be open – with construction being one of the sectors mentioned by name;
• workers should continue to work from home wherever possible; but
• all workers who cannot work from home should travel to work if their workplace is open;
• as soon as practicable, workplaces should follow new “COVID-19 Secure” guidelines which the Government intends to publish this week following consultation with relevant sectors, industry bodies, and health officials;
• these may include measures intended to reduce the risk of transmission in the workplace by limiting the number of people that any individual will come into contact with, e.g. by changing shift patterns and introducing rotas to keep smaller, contained teams.

Different guidance has been issued in Scotland and Wales.

The Government’s guidance on working safely provides recommendations for managing risk/achieving safe working on a construction site¹, and emphasises that:

• employers should continue to comply with their existing health and safety obligations to protect works and others, including protecting people at higher risk;
• risk assessments should be carried out in all cases, which address the risks of COVID-19 and identifies possible improvements;
• social distancing guidelines should be followed where possible, and in other cases all mitigating actions possible should be taken (e.g. extra cleaning, screens and barriers, back-to-back working, fixed teams and partnering); and
• provides other practical suggestions relating to arrival times, moving around the site, signage, cleaning, handling materials and PPE, among other things.

Despite heralding a slight easing of the COVID-19 restrictions, the reality is that COVID-19 and the measures in place to control it will cause continuing delays and practical difficulties on construction sites, and may make some work impossible to perform safely. However, it should be anticipated that any construction companies will now need to do more to justify any continuing delays resulting from COVID-19.

In this note, we consider the options that may be available to a party to a construction contract who is seeking to claim an extension of time and/or cost arising out of the current COVID-19 situation and the fast-changing guidance.

Common contract clauses

The starting point will always be the construction contract, and there is no “one-size fits all” approach.

However, there are some common clauses that are often used, and may provide a valuable entitlement where they are included in the contract.

These include:

• Force majeure clauses – these commonly provide for time, but not money;
• Change in law clauses – these may provide for time and money, but will usually require a “direct” impact on the Works; and/or
• The exercise of a statutory power – this is slightly wider than a change in law, and it may be sufficient that there is a direct impact on the execution of the Works, and not necessarily on the Works themselves² .

At the same time, contractors will be expected to mitigate the impact of any COVID-19 effects by taking reasonable steps to minimise or prevent delay.

Contractors will also need to be able to explain and prove how the relevant event caused the delay and/or cost. This will not be straightforward, particularly where delays are caused by delays in the supply chain, or result from a number of overlapping events.

What is clear, particularly following the Government’s recent change in emphasis, is that COVID-19 and the related government laws and guidance will not on their own justify stopping all work on site (although in some cases this may be unavoidable). Instead, it will be necessary in every case to consider whether, how and to what extent it might be possible to proceed with work on site, and carefully document the decisions taken with reasons.

By way of illustration, the following may all be treated differently and may give rise to different entitlements:

• Delays caused by members of the workforce self-isolating;
• Delays caused by supply chain absences;
• Delays caused by the introduction of social distancing measures (e.g. the 2 metre rule, additional hand-washing facilities, and cohorting³ );
• Delays caused because it is not possible to continue work on site, having assessed and managed the risks to the workforce as a result of the threat posed by coronavirus;
• Delays caused by the interaction of reduced numbers on site and other health and safety obligations;
• Delays caused by confusion arising out of the status or effect of government guidance.

Force majeure

If the contract includes a force majeure clause and defines what is meant by “force majeure”, that definition will be effective and it should be clear whether it includes pandemic.

If there is no definition in the contract, the meaning of “force majeure” will be derived from the wider context of the clause and the contract. This phrase has no generally accepted meaning in English law.

It is possible this will be tested this year, in the context of coronavirus. In the meantime, the precise meaning and effect of the term is uncertain but it seems likely that it will, in most cases, include the coronavirus pandemic.

Clearly, it may be difficult (though not impossible) to argue that works have suffered a force majeure event when the UK Government has been issuing clear guidance for construction sites to stay open⁴ .

Anyone seeking to claim time as a result of force majeure should consider and document precisely how the fact of coronavirus has delayed the works. If it is possible to safely continue some activities either off site or on site, with appropriate adjustments, this should be done.

The starting point for the appropriate adjustments should be:

• The Construction Leadership Council’s Site Operating Procedures; and
• Any guidance for the construction industry issued by the Government this week.

However, it will also be necessary for companies to consider their obligations to their employees under the Health and Safety at Work etc Act 1974, in light of the social distancing guidance and guidance issued by Public Health England.

Claiming an extension of time on the basis of force majeure has potential drawbacks:

• If works are suspended for a period of time due to force majeure, many contracts provide for either party to terminate the contract;
• Force majeure clauses commonly give rise to an entitlement to time but not to money.

If an alternative claim can be made on the grounds of a change in law, this may be more advantageous.

Equally, if it is possible to continue some activities either off site or on site, this may avoid a situation where the works as a whole are suspended and satisfy the contractor’s obligation to mitigate.

Change in law

The Government has passed legislation, issued Regulations, and issued guidance on the behaviours expected of individuals and businesses.

Some of this has legal effect; however, it is necessary to distinguish between mandatory law and guidance, and to understand what activities the law did and did not prevent:

• The Coronavirus Act 2020 has the force of law and would clearly be a change in law. However, while it contained broad powers for the Secretary of State to issue directions, unless and until a direction is issued in relation to construction sites, it is difficult to see how these powers alone could result in any delay.
• In England, the Health Protection (Coronavirus, Restrictions) England Regulations 2020 have the force of law and would be a change in law. These contained mandatory rules for certain businesses (but not construction sites) and restrictions on movement for individuals. Importantly, individuals were permitted to travel to work, where it was not reasonably possible for that individual to work from home. In consequence, construction workers were permitted to travel to work. While there may be cases where the Regulations delayed activities on site (e.g. through disruptions to the supply chain), they do not have an automatic direct effect on the works. In any claim based on the Regulations, it will be necessary to explain clearly how the Regulations caused delay;
• The position is different in Scotland, where the Health Protection (Coronavirus) (Restrictions) (Scotland) Regulations 2020 would be a change in law and have (since 21 April 2020) contained a mandatory requirement for anyone carrying on a business or providing a service (including construction sites) to take all reasonable measures to adopt certain social distancing measures.
• Alongside the Regulations, the Government has issued guidance, including:
  — the Government Guidance for Employees, Employers and Businesses on Coronavirus, which was last updated on 7 April 2020. This said that it was good practice (but not mandatory) for employers to provide sufficient hand-washing facilities, ensure vulnerable employees followed social distancing guidance, and support extremely vulnerable employees to stay at home; and business should encourage employees to work at home wherever possible, and follow social distancing guidelines (including the 2 metre rule) wherever possible; and
  — Sector guidance for the construction industry, published on 7 April and last updated on 4 May. The current guidance is that construction can continue if done in accordance with social distancing guidelines wherever possible, and where that is not possible but a particular activity needs to continue for the site to continue to operate, where all possible mitigating actions are taken. Further, the 2 metre rule should be maintained as much as possible, contact between workers should be minimised, and cohorting and hand washing should be implemented;
  — The guidance on working safely, published on 11 May 2020 discussed above, which is expressly stated to be non-statutory guidance.
  
• The Guidance does not, in our view, have legal force, and is unlikely to constitute a change in law on its own. There are, however, competing views on this and until/unless the position is clarified, contractors should consider whether to pursue claims on the grounds of Guidance (while being mindful that it is not the strongest argument). In any claim based on the Guidance, it will be necessary to identify which piece(s) of guidance were relevant, and how that guidance caused delay.

In addition, there may be more nuanced arguments available that the changes in law, combined with the government and Public Health England guidance, have had a direct effect on the Works.

This may include the following:

• The changes in the law, as elaborated upon and amplified by government guidance on social distancing, may have led to a change in what is considered good industry practice (for example, as evidenced in the Construction Leadership Council’s Site Operating Procedures⁵ ). If so, the change in law may have had a direct effect on the Works, even where the Legislation and Regulations did not contain mandatory rules relating to construction sites;
• The behaviours required by the Health & Safety at Work etc Act 1974 may have changed as a result of the recent changes in law, and government guidance. This may amount to a change in law having a direct effect on the Works;
• The changes in law may have affected other parts of the supply chain, and as such had a direct effect on the Works.

These arguments could improve the prospects of claiming time and cost in the right cases. In our view, these points are at least arguable and may be worth exploring.

Exercise of a statutory power

The exercise of a statutory power is wider than a change in law provision, but may suffer from similar draw-backs as a claim based on force majeure.

The Government has an inherent power to publish non-statutory guidance. Much of the COVID-19 guidance is non-statutory, and explains how existing processes should be applied.

The Government also has the power to publish statutory guidance. The intention of statutory guidance is usually to explain how a statutory power should be exercised, and has legal effect in that it can be taken into account by a court when considering how a statutory power has been exercised.

In general, it is our view that the COVID-19 guidance is non-statutory, and is not an exercise of statutory power. There are, however, competing views on this and until/unless the position is clarified, contractors should consider whether to pursue claims on the grounds of Guidance (while being mindful that it is not the strongest argument). In any claim based on the Guidance, it will be necessary to identify which piece(s) of guidance were relevant, and how that guidance caused delay.

Contractual entitlements - protective steps

The government has issued non-statutory guidance, which is supported by the Construction Leadership Council, aimed at reducing long-running and costly disputes arising out of the consequences of COVID-19.

While it is plainly right the construction companies consider a commercial pragmatic approach to disputes, that should not avoid the need to serve timely contract notices claiming and/or assessing claims for time and cost in the meantime, particularly where the relevant contract contains time limits for the service of such notices.

In order to protect their position, there are a number of steps that any party experiencing delay as a result of the current situation should consider.

These include:

• Considering and identifying all possible grounds for claiming an extension of time or cost;
• Complying with all contractual notice periods, and submit all particulars required (which may include some substantiation and estimates of the impact on the programme). This may be a condition precedent to entitlement, but even where it is not, prompt and thorough compliance is likely to assist in substantiating a claim, should that be necessary;
• Submitting detailed claims that address how the relevant force majeure event, change in law or exercise of statutory power has directly impacted the work. Claims will be stronger if it is clear that there has been a careful application of the relevant law and guidance, rather than a blanket suspension of work;
• Considering whether it is necessary to serve further notices on additional or alternative grounds, as the guidance and legal position changes;
• Updating any particulars and estimates of the impact on the programme, as appropriate;
• Pressing their counter-parties for a decision in principle on entitlement.
• Considering and recording on a regular basis:
  — whether the guidance, including guidance issued by industry bodies, has changed;
  — the outcome of all risk assessments addressing COVID-19;
  — if any activities on site have stopped, whether it would be possible to re-commence some or all activities, while taking all reasonable measures to maintain social distancing and comply with the obligations under the Health and Safety at Work etc Act 1974;
  — if so, whether the reasonable measures implemented will themselves result in delay;
  — in either case, why/how the existing law, regulations and guidance informed that decision;
  — whether there are any other steps it could take to minimise and prevent further delay;
  —i f there is a cost to any of those steps and measures, whether it is reasonable to incur that cost; and
  — whether there are any off site works which could be progressed in any event.
  
• Giving thought to documenting the delays now, so that contemporaneous evidence is available if required;
• Monitoring any periods of suspension, to avoid triggering any automatic no-fault termination provisions; and
• Seeking to agree practical and pragmatic steps to minimise delay with their counter-parties.