COVID-19: NAVIGATING YOUR CONSTRUCTION CONTRACT POST-PANDEMIC
Construction disputes are likely to increase in number due to COVID-19 related issues. Caitlin Love sets the foundations to keep construction contracts standing.
In brief: Construction contracts totalling circa €17.9 billion have been halted in Ireland since the outbreak of COVID-19. Despite the restrictions having eased within the construction sector we have yet to witness the full impact of the pandemic within the industry. Employer/Contractor disputes due to the resulting delays and costs will inevitably develop. In any arising disputes, ultimately the type of contract entered into by the parties, and the wording of the relevant provisions within the contract, will be significant factors in determining where liability rests for the contractual consequences of the pandemic.
CONSTRUCTION SECTOR GROUND TO A HALT IN IRELAND
Part 3 of the Health (Preservation and Protection and other Emergency Measures in the Public Interest) Act 2020 granted the Minister for Health powers to introduce emergency measures in an effort to slow down the spread of COVID-19 in Ireland. Those powers were utilised at the end of March when the Government implemented the ‘stay at home’ restrictions for all workers except those engaged in ‘essential services’.
The construction sector (save for limited works involving health related projects, critical roads or infrastructure, or emergency services) did not fall within the meaning of essential services and as such, construction projects came to an abrupt halt. The repercussions of the restrictions on the industry was assessed by Construction Information Services, who identified that 1,137 active construction projects, valued in the region of €17.9 billion, had been suspended in the Republic of Ireland as a result of the restrictions, which was unprecedented within the sector.
As of 18th May 2020, a minor ease in restrictions permitted construction workers to attend work, which in turn allowed construction projects to resume. However, the impact of the seven week delay, along with the time it will take for projects to get back up and running and the fact that social distancing measures will result in jobs taking longer than they ordinarily would have, means parties operating within the construction sector are far from being out of the woods in terms of incurring delays and additional expenses.
FORCE MAJEURE CLAUSES AND OTHER RELEVANT CLAUSES IN CONTRACTS
Where there is delay and additional cost in a contract which is not the result of either party’s actions, the question arises as to which party is liable to pick up the tab? Depending on the type of contract, the answer can usually be found within the contractual terms and there are a number of generic contractual provisions that may apply.
A force majeure clause is one example of a boilerplate clause that might dictate liability and such clauses were the focus of our recent article COVID-19: A Force Majeure Event Under the Irish Legal System?
In addition to the force majeure clause, construction contracts might include a ‘change in law’ clause which could be deemed to operate in these circumstances. As implied by their name, such provisions operate when there is a change in law, which can include the implementation of new directives, orders or even guidance by a Government or regulatory authority. Depending on the wording of the specific clause, this could be construed to include the stay at home restrictions imposed by the Irish Government.
PRECEDENT CONSTRUCTION CONTRACTS AND RELEVANT CLAUSES
As many parties to larger construction contracts opt to utilise industry precedent contractual terms, we have set out below a brief analysis of specific clauses which are contained in some of the most common standard form construction contracts, which includes the force majeure/change in law clause where applicable.
The standard form RIAI construction contract is often the contract of choice for contractors and developers in respect of privately funded developments. The standard conditions are negotiated between the parties and amended appropriately by way of a schedule of amendments.
One of the key clauses in the RIAI precedent contract is clause 4, concerning variations arising from changes in the law and provides that where the cost of the project is increased or decreased due to a change in the law, subject to adequate notice being given, the assigned architect will certify that the contract sum will be amended in line with this price variation. Clause 4, being quite broad in nature and covering the “exercise by the Government of powers vested in it”, appears to deal with the restrictions imposed by the Irish Government and therefore it seems that any price variation which occurs as a result will be incorporated into the original contract sum.
Clause 30 deals with delay and extension of time and provides an exhaustive list of reasons whereby the works may be delayed and, in such circumstances, the architect will make a fair and reasonable extension of time for the completion of the works. Subsection (a) of clause 30 refers to force majeure although no specific definition of this concept is outlined in the RIAI general conditions. Presumably the general interpretation of force majeure clauses will apply, meaning that unless an emergency outbreak or pandemic is specifically envisaged in the wording of the force majeure clause, it may be more difficult to rely on this remedy to obtain relief. Nevertheless, the very vague force majeure provision contained in clause 30 of the RIAI contract appears to be open to interpretation to some extent.
Subsection (h) refers to circumstances in which “the contractor or any nominated sub-contractor or nominated supplier has been unable for reasons beyond the control of the contractor (or of the sub-contractor or supplier as the case may be) to secure such labour and materials as may be essential to the proper execution of the works”. The foregoing subsection appears to be the most relevant going forward where, although construction sites are no longer closed, the supply of materials and labour may still cause an issue. Clause 30 will provide some relief to contractors who find themselves in this situation by providing them with an extension of time for the completion of works.
Briefly, clause 36 is concerned with variations in respect of wages and prices. It is often deleted from the contract by way of the schedule of amendments. However, if this is not the case, the contractor may be able to rely on this clause to base a claim in respect of an increase in the contract price.
PUBLIC WORKS CONTRACT (PWC) – CF1-CF5
The PWC CF1-CF5 are materially the same and contain two types of clauses that could assist parties dealing with pandemic related issues. The first being the ‘delay event’ clause, which ultimately allows for an extension of time under the contract, and the second being the ‘compensation event’ clause, which operates to adjust the contract sum. What constitutes ‘delay events’ and ‘compensation events’ are defined in part 1K of the schedule to the PWC CF1-CF5.
A delay event includes “delay to the works caused by the order or other act of a court or other public authority exercising authority under Law…” The definition of ‘law’ in the Public Works contract differs from that contained in the RIAI contract in that it is significantly narrower and only covers “enactments and statutory instruments, each as defined by the Interpretation Act 2005, and regulations, directives and decision of the European Union having direct effect in Ireland” thereby presenting a difficulty relying on this delay event in the current circumstances.
A compensation event, on the other hand, will only be deemed to apply if the employer’s representative presents the contractor with a change order, suspends work on site, fails to deal with an impossibility under clause 4.5.4 or where the employer refuses to permit access to the site or a part of it by the contractor under clause 7.1. Therefore, for a compensation event to apply, some type of action is required on the part of the employer or the employer’s representative.
An interesting point to note in respect of the PWC is that no force majeure clause is contained in the contract. The decision to exclude a force majeure clause ultimately means that there is no mechanism for dealing with such events and results in an increase in the possibility of the contract being frustrated.
The view of the Department of Public Expenditure and Reform was made known by Minister Donohoe on 14 April when it confirmed:
“The Public Works Contracts do not provide an entitlement to the Contractor to recover costs associated with a delay arising from site closure in the current circumstances. While this does not entitle the contractor to any payment, it is recognised that as sites remain closed, contractors incur liabilities and have ongoing fixed costs associated with securing the site, maintaining insurance on the works and making lease payments on certain items of plant, machinery and site welfare infrastructure. The Government has agreed an ex gratia payment to contractors engaged under the conditions of the standard Public Works Contracts to cover agreed reasonable non-pay fixed costs incurred for the period that the Public Health Measures extend.”
Clause 13.7 is concerned with a change in the law which occurs after the date on which the contract is executed. It appears to largely follow the approach in clause 4 of the RIAI contract in that, where the change in law results in a variation to the price of the contractor performing their obligations under the contract, same will be incorporated into the contract sum.
The 2017 Edition of the FIDIC suite of construction contracts replaced the previous ‘Clause 19 – Force Majeure’ with the new Clause 18 which refers to ‘Exceptional Events’. This term is defined as an event which occurs which is beyond the control of the affected party, which could not have been reasonably foreseen at the time the contract was entered into nor could it have been avoided once it occurred, and the event cannot be the fault of the other party. Subject to adequate notice being given, the contractor may be awarded an extension of time or recovery of costs, and furthermore if the event persists, an option to terminate the contract entirely may come into play.
(D) JOINT CONTRACTS TRIBUNAL (JCT)
The JCT construction contract may provide relief to contractors by way of clause 2.29 which defines a ‘Relevant Event’ as including a force majeure event (which is undefined) and also a legislative enactment which directly affects the execution of the contractor’s performance of the works.
(E) NEC ENGINEERING AND CONSTRUCTION CONTRACT
There are a number of clauses contained in the NEC Contract which may prove useful to contractors in circumstances where an event has prevented the party from executing the works in the timeline agreed at the outset and that event could not have been prevented or reasonably foreseen at the time the contract was entered into. The relevant clauses include clause 19.1 and clause 60.1(9) and provide remedies in the form of extensions of timeframes and variations to the contract price. Clause 16 (Early Warning) and Clause 61.3 impose obligations on the contractor in terms of notice requirements and it is important that same are adhered to and that notice is given as soon as possible.
Often a collaborative approach between the parties to the affected contract, working together with a view to achieving an amicable agreement for both sides so as to allow the project to continue, can be the most effective (and cheapest) strategy to adopt. Should this fail however, the parties’ options will be determined by their contract. Whilst we have focused on some of the standard precedent contract wording, it is important to note that a significant amount of construction work in Ireland is carried out pursuant to bespoke contracts. Although these bespoke contracts are largely influenced by the precedent RIAI contract, the contract usually ends up being heavily amended and as such, unique to that particular construction project. Therefore, it is necessary to review the individual contract in detail in order to determine where liability lies in respect of delays and variations in respect of contract prices and what, if any, pre-conditions arise for the Contractor as those pre-conditions ought to be strictly adhered to.