Contracting and Coronavirus (1/3)

In a series of three articles, John Denis-Smith will be considering the impact of the Coronavirus, in terms of the standard forms under JCT and NEC contracts and considering the application of common law considerations.

Contracting with Coronavirus: JCT contract terms

John Denis-Smith 39 Essex Chambers

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

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.

The JCT Suite of contracts distinguishes between Relevant Events", defined by Clause 2.29 (of the JCT 2011 Standard Form of Contract), and Relevant Matters, defined by Clause 4.24 (of the same form, to which this Note will refer). Importantly, a Relevant Event may give rise to an entitlement to an extension of time (but not to additional payment), while a Relevant Matter may give rise to additional payment (but not to an extension of time).

Legal restrictions Legal requirements fall within the definition of "Statutory Requirements" (defined more fully in Clause 1.1). Under Clause 2.1, a contractor must comply with those requirements, but Clauses 2.17 and 2.18 would entitle the Contractor to give notice of the discrepancy between the Employer's Requirements and Statutory Requirements, and hence to a Variation under Clause 5.2 which may entitle it to loss and expense under Clause 4.23, and hence could give rise to an entitlement to additional payment in addition to an extension of time.

Changes in law Where the law changes in a way which impacts on the work to be carried out, such a change in the Statutory Requirements after the Base Date (to be identified in the Contract Particulars) which amounts to "the exercise by the United Kingdom Government of any statutory power which directly affects the execution of the Works" would constitute a Relevant Event under Clause 2.29.13.

There is no directly equivalent provision in the definition of Relevant Matters; on its face therefore, changes in law might be considered as entitling a Contractor only to an extension of time and not to additional payment.

However, given that the definition of "Statutory Requirements" in Clause 1.1 includes any statute or other legal instrument "which affects the Works or performance of any obligations under this Contract" or "bye-law of any local authority or statutory undertaker which has any jurisdiction with regard to the Works" and the definition is not itself fixed by reference to a given date, it may be argued that a discrepancy under Clause 2.17 can include a discrepancy arising from a change of law, so that additional payment can be obtained, if notice is given. The same result may apply under Clause 5.1.2: the imposition by the Employer of any obligations or restrictions in respect of limitations of working space, limitations of working hours or changes to the execution or completion of the work in any specific order would amount to a Variation. However, Clause 3.10.1 provides that the Contractor is not obliged to comply with such an instruction and need not do so "to the extent that he notifies a reasonable objection to it to the Architect/Contract Administrator". Moreover, the Employer (or Contractor, where no variation instruction is given) may, depending on the circumstances, contend that such changes are not being imposed by the Employer but by the Government or by force majeure, considered further below.

The impact of Coronavirus More generally, the impact of Coronavirus may fall within the scope of the provisions governing "force majeure."

Clause 2.29.14 of the JCT Contract identifies "force majeure" as a Relevant Event which entitles the contractor to an extension of time and an event which entitles either party to terminate the contract under Clause 8.11.1.

The term "force majeure" is undefined in the JCT terms and does not have any specific legal definition more generally. It has been defined as referring to "all circumstances independent of the will of man, and which it is not in his power to control…thus, war, inundations and epidemics are cases of force majeure; it has even been decided that a strike of workmen constitutes a case of force majeure" (Lebeaupin v Crispin [1920] 2 K.B. 714 at 719). As the other provisions in the JCT form do not refer to epidemics or pandemics, there is a reasonable argument therefore that an epidemic (or, a more widespread pandemic) may give rise to force majeure. However, as Clause 2.29.13 of the JCT terms deal specifically with "the exercise after the Base Date by the United Kingdom Government of any statutory power which directly affects the execution of the Works" as constituting a Relevant Event, such steps would probably not be held to fall within Clause 2.29.13.

Yet some care must be taken. There appears to be no case under the clause in JCT contracts and, in any event, force majeure is not a Relevant Matter and hence gives no entitlement to loss and expense.

Notification Notice must be given of a Relevant Event or Relevant Matter, under Clause 2.27.1 and Clause 4.23 respectively. Notices must be given in writing, under Clause 1.7, and Clause 13.7 requires that notices are submitted separately from other communications. Minutes of a meeting therefore may well not amount to valid notice. However, it is likely that a Court would consider that proper notice is given where sufficient information is given of the alleged event and its potential impact to enable assessment. In Walter Lilly & Company v Mackay [2012] EWHC 1773 (TCC); [2012] BLR 503, Akenhead J held (at [466]) of a notice provision that "there is no reason why this clause should be construed strictly against the Contractor."

Nonetheless, care must be taken by a Contractor in relying on those words. First, notice under Clause 2.27.1 is likely to be seen as a condition precedent, at least to any entitlement to an extension of time at the stage prior to Practical Completion: while Clause 2.28. 5 provides for a review stage following Practical Completion, this will be of little value if the Contract does not reach that stage.

Second, Akenhead J also held in Walter Lilly (at [122]) that "In commercial and practical terms, it is important in my judgement under this construction contract for the notification to be clear and unambiguous". That decision has been followed in a Northern Irish case, Glen Water Ltd v Northern Ireland Water Ltd [2017] NIQB 20; [2018] B.L.R. 141. Keegan J also held (at [56[) that the burden is on the plaintiff to establish that a given document amounted to a proper notification, interpretation of that document involves an objective assessment and "notification should be clear and unambiguous". In that case, the Court relied not only on its view as to the natural meaning of the alleged notification but also on related witness evidence and on the fact that the Contractor did not state, when the Employer's response did not refer to the alleged Compensation Event, that notification had been given of that Event.

Other provisions Clause 2.3 of the JCT terms provides that materials and goods to be supplied by the Contractor shall "so far as procurable, be of the kind and standards described in the Contract Bills". In the event of impact by the Coronavirus on the supply chain preventing the Contractor from accessing such materials, the question then arises whether the Contractor is entitled to an extension of time or additional cost arising from the changes it has to make to procure materials.

Under a predecessor JCT form, the JCT 1998 edition, Private With Quantities form of building contract, Clause 25.4.10 provided that the inability to secure essential labour and materials for reasons beyond the Contractor's control and which it could not reasonably have foreseen at the base date (as defined in the Contract) constituted a relevant event. However, there is no equivalent provision under later JCT forms and, in the 2011 edition, Clause 3.2.1 provides that the Contractor shall not substitute any materials or goods without the Architect/Contract Administrator's consent, "which shall not be unreasonably delayed or withheld". Provision for such consent is not the same as provision for an instruction by the Architect/Contract Administrator, and would not on its face give rise to an entitlement to a variation which would potentially entitle the Contractor to an extension of time and/or additional payment.

Instead, the safer approach for a Contractor is probably to identify as soon as possible any effect preventing procurement of materials and to seek to rely upon delay in giving consent as amounting to unreasonable delay or unreasonable refusal, which would be a breach of contract entitling the Contractor to an extension of time and additional payment.

TERMINATION Clause 8.11.1 of the JCT 2011 and 2016 editions both provide that the Contractor may terminate the Contractor's engagement where the carrying out of the whole or substantially the whole of the uncompleted Works is suspended for the relevant continuous period of the length stated in the Contract Particulars by reason of, respectively, force majeure and the exercise by the United Kingdom Government of any statutory power which directly affects the execution of the Works.

In such circumstances, Clause 8.12.2 provides that the Contractor becomes entitled to payment for works done, any loss and expense already suffered, costs of removal from site and materials for which it has already become legally obliged to make payment, but (as Clause 8.12.4 provides) not any direct loss and/or damage caused to the Contractor by the Termination itself.

By contrast, Clause 8.11 does not in terms provide for a right of termination where the imposition of delay to completion results from Variations ordered by the Employer. Such delay caused by instructions under Clause 5.1.2 would entitle the Contractor to terminate under Clause where the result is that "the carrying out of the whole or substantially the whole of the uncompleted Works is suspended for a continuous period of the length stated in the Contract Particulars". Under Clause 8.12.2 and Clause 8.12.4, the Contractor in such circumstances does have a right to recover direct loss and/or damage caused to the Contractor by the Termination itself, which opens the way to obtain loss of profit on works not carried out or completed. Thus the distinction between delay by reason of "force majeure" or "action by the Government" on the one hand and delay caused by changes imposed by the Employer may have significant consequences.

CAUSATION AND DRAFTING However, causation must always be established. This may appear obvious but the outcome may turn on whether the Contractor was in reality able and willing to perform. Whether that is the case depends 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).

It is currently less than clear whether, on unamended JCT terms, a Contractor is entitled to an extension of time in the case of "concurrent delay" ("a period of project overrun which is caused by two or more effective causes of delay which are of approximately equal causative potency"). The Court of Appeal in North Midland Building Ltd v Cyden Homes Ltd [2018] EWCA Civ 1744; [2018] B.L.R. 565; 180 Con. L.R. 1 noted the potentially different approaches in various authorities but left that matter undecided. It is at present unclear whether the Coronavirus as such can be treated as a dominant cause of delay which prevents such concurrency arising if, but for the virus, the Contractor was not in fact ready to carry out given work. One suspects that the Courts would be likely instead to focus on specific delays caused by specific problems arising from the impact of the virus.

The same result may be achieved by drafting however. North Midland Building Ltd v Cyden Homes Ltd concerned a contract on the amended terms of the JCT Design and Building Contract 2005 form, of which Clause stated that, in assessing an extension of time, "any delay caused by a Relevant Event which is concurrent with another delay for which the Contractor is responsible shall not be taken into account". The Court of Appeal (upholding the first instance decision) held that the clause was unambiguous and that, where a delay was due to the Contractor, even if there was an equally effective cause of that delay for which the Employer was responsible, liability for the concurrent delay rested with the Contractor so that it would not be taken into account in calculating any extension of time.

CONCLUSION It seems likely that the Coronavirus and its impact on construction projects may be considerable. The provisions of the JCT contract form does not necessarily afford complete relief: the impact of the virus under the JCT form may give rise to an entitlement to an extension of time but not money, save under Clause 8.12.2 where termination occurs under Clause 8.11.1. Clause 5 and Clause 8.9 may, however, provide an alternative possible form of recovery of cost, including lost profits, in the event of termination and both Employers and Contractors will no doubt consider which route favours it and argue accordingly. Parties are likely to address the impact of pandemic or epidemic by way of amendments to the forms and there may be considerable dispute before the position becomes clear.

Look out for tomorrow's article on NEC terms and Coronavirus