We are aware that many Members may be facing issues over sites being closed or contracts being delayed or cancelled due to the coronavirus. This is also likely to happen in domestic situations. Therefore, we have asked Neil Kelly, Partner in our legal advisors, MacRoberts Solicitors, to prepare the following guidance about commercial contracts.
It is difficult to say how badly the construction sector in Scotland and the rest of the UK will be affected by the coronavirus, also known as COVID-19. One thing is certain, however – the effect could be damaging and significant.
It is clear that the construction sector is likely to be one of the worst affected business sectors. It has been predicted that up to a third of the UK population might contract the virus. The need for self-quarantine if you have travelled to an affected area, or if you are displaying symptoms, may not have a severe effect on those who can work from home. Construction work, however, can’t usually be carried out from the kitchen table or another spot at home.
Further, construction projects usually have to rely on a complex supply chain. So, even if one construction business is not particularly hard hit, its subcontractors or suppliers down the supply chain may be adversely affected to a more significant degree thus affecting how and when the construction business can fulfil its obligations.
If a business is affected by the coronavirus, this may cause delay or disruption to construction works to be carried out by it. In such an eventuality, the business might be entitled to an extension of time for carrying out its work thus avoiding a claim for damages for late completion. An extension of time does not automatically mean that there will also be an entitlement to claim additional payment as a result of such delay or disruption. Much will depend upon the terms of the particular contract.
The Contract – delay / programming
Does the contract require you to give notice or early warnings if your works have been or are going to be delayed by the effects of the virus? Many contract forms also contain programming obligations under which it is necessary to submit revised programmes in the event of delay(s). The message here has to be – make sure you submit the necessary notices and revised programmes in accordance with the requirements of the particular contract. Such submissions may be a condition precedent to entitlement which means that you may have no claim if you don’t follow the notice provisions correctly. In addition, following the contract requirements may be the only way you have of avoiding a claim for delay damages either for breach of contract at common law or by way of liquidate damages fixed under the contract.
Claims for additional payment
If a claim is possible under the terms of the contract, here again it will be normal for there to be a contractual requirement that notice of a claim for additional payment is to be made within a specified period of becoming aware of the circumstances giving rise to the claim. Absence of such proper notice may be fatal to a claim. Keep the position under review.
Many Standard Form contracts require particulars of claims when initially made and updates when the full nature and extent of the problem become known.
If the effect of a virus like the coronavirus isn’t stated expressly to be an employer’s risk under the terms of your particular contract, could it fall within the definition of ‘force majeure’?
The legal doctrine of force majeure applies in exceptional and unforeseen circumstances. The phrase ‘force majeure’ has no generally accepted legal meaning. Many consider that it means some ‘Act of God’ but its meaning can be wider than that. So, it is important to carefully check the force majeure clause in your contract to ascertain whether the circumstances experienced constitute force majeure. If such circumstances are recognised in the contract, it may give rise to an entitlement to extension of time and, possibly, additional payment. However, here again, many contracts have onerous notice provisions which need to be followed in order to make a successful claim.
One effect of the coronavirus is that contract draftsmen may revisit the terms of construction contracts to make clearer whether a virus like the coronavirus falls within the force majeure clause.
Amended standard form?
As with all of the above, if you’re operating on an amended Standard Form contract, make sure you check how any bespoke changes may affect the terms under which claims can be made.
The legal doctrine of frustration operates where there are intervening circumstances which make the performance of the contract impossible or radically different than initially expected. Think about whether the direct effect of the virus itself or the effect of Scottish/UK government action has prevented or frustrated you in carrying out your obligations, or otherwise made performance of your obligations under the contract impossible? If you can’t claim the virus is a force majeure, it may be possible to argue that you are not obliged to perform/complete your contract work because that has become impossible or illegal.
Check what you are covered for and, importantly, what you’re not covered for under the insurance cover you have in place. It may be that, if your business has been adversely affected by the virus, your policy will afford you some degree of cover. Check the terms of the policy or speak to your broker. There are now certain business interruption policies that may cover delay and disruption to works caused by the virus itself or government action in response to it. When your policy is up for renewal, check if it gives you the cover you want in these circumstances. If it doesn’t, you may be better to shop around for insurance that more accurately reflects your business needs, even if it has to come at an increased premium.
If you may be covered for the effects of the virus, here too, the policy is likely to require timeous intimation of a possible/actual claim under the insurance policy. Failure to give such notice may adversely affect recovery even if cover is otherwise available under your insurance policy.
A bit of give and take?
The virus is among us, not isolated in some foreign country or continent. Contracts may or may not provide for this eventuality or there could be arguments one way or the other.
Unless we all take a reasonable and enlightened approach in these exceptional circumstances, the effect could be that construction projects are completed even later than they might be or not completed at all; relationships might break down and expensive dispute resolution processes employed.
It is to be hoped that , with some give and take, all those affected by the virus will be able to agree its effect upon them and that any agreements on that are suitably recorded and implemented. For the moment, it is vital to think ahead and to try to take steps seeking to protect your position no matter where you may sit in the construction supply chain.
From a domestic contract perspective, i.e. when carrying out work at someone’s home, if someone has contracted for work to be done and then cancels, the person who cancels might open themselves up to a claim for damages but that isn’t going to help re small contracts either in relation to amount of damages (likely to be very low if accepted at all) and the very poor impact on customer relations. It would be preferable to agree that the work would be carried out a future date.
As a SELECT Member, you have access to a legal helpline (0141 303 1111) provided via MacRoberts, who can provide specialist legal advice in the fields of commercial contracts. Twenty minutes of advice is provided free of charge. More complex queries that require further time can be dealt with for a fee agreed between the Member and MacRoberts. This service is available from 8.30am to 6.00pm, Monday to Friday, excluding public holidays.
As the situation is changing rapidly, we are adding information on a regular basis and we will also be using our social media channels to get the information out as widely as possible. Please follow us on Twitter, Facebook or LinkedIn if you haven’t already done so.