Contracting and Coronavirus (2/3)

Contracting and Coronavirus (2/3)


CategoryNews, Articles Author John Denis-Smith Date

This article, the second in a series of three articles, considers the effect of Coronavirus on the contract regimes applicable to NEC forms of contract. Other articles cover JCT terms, and the possible impact of the common law principle of frustration.

Contracting with Coronavirus: the NEC contract terms

John Denis-Smith
39 Essex Chambers

The Background
The legal background to contracts may well change. At present, the Government has enacted the Health Protection (Coronavirus) Regulations 2020 SI 2010/129. Those Regulations empower the detention and isolation of persons. There may be further regulations, even apart from the Government acting directly to suspend construction operations within which it has been directly engaged and, in any event, in practice, the virus may have a significant impact on existing and future contracts.

Legal Restrictions
Clause 91.3 of NEC4 empowers the Employer to terminate if the Project Manager has given notification that the Contractor has defaulted by having substantially broken a health or safety regulation. Logically therefore, the Contractor is not obliged to comply with the Contract if that would entail breaching a health or safety regulation.

Changes in law
Option X2: Changes in the law provides that changes in the law may give rise to a Compensation Event. However, failing agreement to such a provision, if performance of the Scope works becomes legally impossible, Clause 17.2 of NEC 4 provides that if either party becomes aware that the Scope includes an illegal or impossible requirement it must give notification to the other.

Clause 18.1 of NEC 4 provides that, where the Contractor has notified the Project Manager that the Works Information requires him to do anything which is illegal or impossible, if the Project Manager agrees, he shall give an instruction to change the Works Information appropriately. This assumes however that the works are indeed illegal, or impossible to perform, as opposed to difficult. If one assumes that there are only advisory statements by the Government concerning steps to be taken, this may be insufficient as a ground of relief.

The impact of Coronavirus
The law might not be changed so as to make performance impossible but supply chains, including labour, may be seriously disrupted in practice.

There is, unfortunately, no authority on the subject of the impact of epidemics or pandemics in relation to NEC terms.  One must therefore consider the language of the NEC contract itself.

NEC 4 Clause 19.1 provides that, if an event occurs in circumstances described in language very similar to Clause 60.1(19) which either stops the Contractor from completing the works of from doing so by the date shown on the Accepted Programme, the Project Manager gives an instruction to the Contractor stating how he is to deal with the event. The clause both envisages that the event “stops” completion, rather than delays or disrupts progress of the works and that the circumstances are such that Clause 60.1(19) would apply.

Clause 60.1(1) defines a Compensation Event, which entitles the Contractor to both additional payment and an extension of time, as an event which

  1. stops the Contractor completing the whole of the works or stops the Contractor completing the whole of the works by the date for planned Completion shown on the Accepted Programme; and which
  2. neither Party could prevent; and which
  3. an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable to have allowed for it and is not one of the other compensation events stated in the contract.

One can see that, for construction contracts entered into under NEC4 going forward, the prospect of Coronavirus – and its effects – constituting a Compensation Event becomes problematic. The existence of Coronavirus itself cannot be said to be something that it would have been unreasonable for any Contractor to consider. However, a different question arises as to whether specific events which occur because of Coronavirus would be unreasonable to consider as potentially occurring. To claim a Compensation Event has arisen, a Contractor may have to formulate a claim focussed on the specific type of virus-related impact in order to meet the test. On the other hand, given the similarity of wording used in Clause 19 and the termination provision in Clause 91.7, which one would have thought could apply to delays caused by Coronavirus related measures, even in respect of contracts not yet entered into, Tribunals may be somewhat more sympathetic to treating specific events arising out of the Coronavirus as giving rise to a Compensation Event.

Notification
Under NEC 4 Clause 61.3, if the Contractor fails to notify the Project Manager of the occurrence, or anticipated occurrence, of a Compensation Event within 8 weeks of the Contractor “becoming aware that the event has happened” then the Contractor loses the entitlement to claim any additional time and costs for the completion of the works which may be attributable to the occurrence of the Compensation Event. NEC 3 Clause 61.3 was somewhat differently worded: the period in which notification must be given under Clause 61.3 runs from the date of the Contractor “becoming aware of the event”.

In either case, Clause 61.3 assumes that the event occurs during the course of the project: it would be prudent to assume that each effect of the Coronavirus (for example, specific impacts on specific supplies of labour or materials) should be the subject of separate notification.

Given that the Courts are now willing to interpret notification provisions as conditions precedent to the right to additional time or payment, it is likely that a Contractor would have to give notice in accordance with Clause 61.3.

While the Court’s approach towards construing alleged notices flexibly has been referred to above in respect of JCT contracts, particular caution is required under NEC, given the provision’s apparent status as a condition precedent. Where, where notification is held to be a condition precedent, the Court in Glen Water held that this was a reason for being more demanding as to the content of a notice, in order for notification to be considered to have been properly given.

TERMINATION
Clause 91.7 empowers the Employer to terminate the contract where circumstances of the type identified in Clause 19.1 and 60.1(19) apply and the event stops the Contractor completing the works or stops the Contractor completing the works by the date shown on the Accepted Programme and is forecast to delay Completion by more than 13 weeks.

As with all forms of termination, Clause 90.1 provides that the Employer must notify the Project Manager and the other Party giving details of his reason for terminating and that the Project Manager must issue a termination certificate to both Parties promptly “if the reason complies with this contract.” In those circumstances, the Termination Table under Clause 90.2 and defined elements “A1” and “A2” under Clauses 93.1 and 93.2 provide for payment essentially for work done and for the cost of removal of equipment from site, but not for payment of lost profit on further work.

CAUSATION
However, causation must always be established. This may appear obvious but the outcome can turn on whether the Contractor was in reality able and willing to perform. Whether that is the case turns on the wording of the provision Court of Appeal recently held, in a shipping case, that a party could not rely upon a form of force majeure clause where it was not in fact intending to or able to perform (Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102; [2019] 4 All ER 1145).

CONCLUSION
The NEC terms focus on a form of foreseeability test: what would the Contractor reasonably have considered and chosen (reasonably) to put out of consideration, at the time of contracting. That is an understandable approach in a “steady state” world in which risks can be identified and, at least in theory, “baked in” to a contract bid. The coronavirus, and its potential impact, poses a different potential scenario, in which a risk can be identified but which is difficult to take into effect, except perhaps by drafting revisions.

Look out for tomorrow’s article on Frustration and the NEC and JCT contracts


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