HM Insights

COVID-19 in the construction industry: contract provisions & will liquidated damages be payable?

As the impact of COVID-19 continues to increase organisations are looking at how best to protect their workers and clients, as well as ensuring that their business itself is protected.

It is likely that we shall start to see construction sites closing down temporarily until the outbreak is under control. This may come as an instruction from the employer. Alternatively, organisations may consider stopping works in order to keep their operatives safe.

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Construction contracts – Extension of Time

The health and safety of those working on site, as well as business continuity, will be the principal concerns, however it is also important to ensure that employers and contractors are aware of the impact that these necessary safety measures can have, especially on live contract projects where any stoppage or restriction of work on site could result in completion of works being delayed beyond the contractual completion date.

It is typical in most construction contracts that where works are delayed beyond the completion date due to the contractor having insufficient employees on site, then a contractor will incur liability for liquidated damages. However, where the lack of employees on site is attributable to COVID-19, contractors may be entitled to an Extension of Time. It will all depend on the wording of the contract.

Force majeure (FM) is the concept of unforeseeable circumstances beyond the reasonable control of a party which prevents or delays them from fulfilling a contract.

FM is a creature of contractual law and therefore whether COVID-19 could constitute an FM would depend entirely on the terms of the contract. There will typically be an FM clause which provides for what happens in the case of an FM event.

JCT and SBCC standard forms – Force majeure

For instance, the standard form JCT and SBCC contracts provide that an FM event is a Relevant Event for the purposes of a contractor seeking an Extension of Time. FM is not defined, however it seems reasonable to assume that where there has been government advice to stop work, or where it is reasonably necessary to stop work to protect employees, then COVID-19 could be considered an FM event. It will be for the party seeking to rely on the FM event to prove that the provision applies. In the case of a contract where an FM is defined, this matter will be clearer and whether COVID-19 could be considered an FM event will depend on the wording of the contract.

NEC3 and NEC4 – Compensation Event

While the standard form NEC3 and NEC4 contracts contain no express provision for what ought to occur in the case of an FM event, a Compensation Event can occur where there is an incident which neither party could prevent and which stops the contractor completing the works.

Therefore, in the event that the government orders people to self-isolate, this could be a Compensation Event under NEC. Alternatively, if an employer does not allow access to and use of even part of the site, or a project manager gives an instruction to stop working on site, the contractor may be entitled to a Compensation Event. So if site access is withdrawn, or the project manager stops works because of COVID-19, this could entitle a contractor to an extension to the completion date under the NEC Compensation Event provisions.

In other cases where no such contractual provision applies, contractors could be exposed to liability for liquidated damages. In these circumstances, delays incurred as a result of COVID-19 may not give rise to an Extension of Time and the contractor would be at risk of having to pay liquidated damages for late completion.

Concurrent Delay

While each case should be looked at on its own merits, there is case-law which suggests that the courts will interpret an FM event not to arise where there is another cause of delay.

Therefore, where a contractor is seeking to rely on an FM clause in the contract, and the FM event is not the only causative factor of the delay, the contractor could face difficulty establishing an Extension of Time claim for a Relevant Event or Compensation Event on that basis. It will be important to be able to identify how the delay has arisen and whether it is possible to isolate the delay as being solely caused as a result of the FM event.

Important factors to bear in mind

It is important to follow the contractual notice requirements for notifying the employer (or a main contractor) of a Relevant Event/Compensation Event or an Extension of Time claim. For instance, in the case of NEC3 a contractor requires to notify the employer of an Extension of Time within eight weeks or becoming aware of the event. If such notification is not given in time, then the contractor may lose its entitlement to an Extension of Time due to the impact of COVID-19. It is also important to be aware of any amendments to the standard form wording. It may be that the provisions discussed above are deleted from a standard form contract. In these cases, the risk would be with the contractor.

Get in touch

The terms of the contract are paramount, as a contractor's right to an Extension of Time will be entirely dependent on what the contract says.

If you have any concerns about whether you could be exposed to liquidated damages because of COVID-19 you should seek legal advice as soon as possible in order to understand the extent of the risk, and to understand what your options could be to limit this risk.

Please contact a member of our construction team for advice or assistance.

Miranda Cannibal - [email protected] - 0141 227 9436

Laura McCorquodale - [email protected] - 0131 247 2535

Useful links 

Coronavirus advice for construction

CONSTRUCTION & ENGINEERING

DISPUTE RESOLUTION