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Recovering from COVID-19 – Lessons Learnt for the UK Construction Industry13 May 2020

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As we would all have seen from the latest releases by the UK government, those working in the construction and manufacturing industry are to return to sites and factories if they cannot work from home. In fact, from the outset of the pandemic, it has been repeatedly said that construction is an industry that is vital to the country’s economic recovery, and just last month, the construction minister, Nadhim Zahawi has indicated that the government is looking to identify infrastructure projects that could be accelerated or brought forward as part of the economic recovery plan¹ – all positive news for the construction industry. Indeed, despite all the doom and gloom we are used to seeing in the recent headlines, experience from past downturns tell us that the construction industry will bounce back. With this in mind, this note looks at some lessons learnt from the last two months as the industry gradually returns to normality, or as we all now know, the “new normal”.

"Despite the purpose of force majeure (or similar) provisions, an affected party can face significant challenges when seeking to rely on such provisions to provide relief for a situation like the pandemic."

Force Majeure is not the best solution

Right from the outset of the pandemic, “force majeure” or similar concepts have been considered and analysed by the legal profession and academics in the greatest detail. Despite the significant volume of material on the subject, the conclusion is often that – it all depends on what the contract says, and relief may or may not be available. In this regard, a clear lesson learnt is that, despite the purpose of force majeure (or similar) provisions, an affected party can face significant challenges when seeking to rely on such provisions to provide relief for a situation like the pandemic, where the extent and the nature of its impact are unprecedented.

In summary, the problems with force majeure (or similar) provisions are that, first of all, there may not be such provisions in the relevant contract, and even if there are:

  • “force majeure” may not have been defined – a notorious example is the standard form JCT contract – which gives rise to an immediate uncertainty as to whether the pandemic is in fact a force majeure or not;
  • even if pandemics are defined as a force majeure, some contracts may expressly stipulate unforeseeability of the event as a requirement, which means that at what point did the pandemic become a foreseeable event will have to be determined;
  • relief due to a force majeure (or similar concepts) will usually only be granted if the event actually impacts on the completion of the works. So, for construction projects where works have only just started and/or which are not due to be completed in the near future, demonstrating that the pandemic will actually delay completion of the works, and for how long, may not be straightforward, as contractors are typically required to at least use reasonable endeavours to mitigate the impact of any force majeure; and
  • if the above are not enough challenges in invoking the force majeure (or similar) provisions, many parties will in any event find that the typical risk allocation for a force majeure (or similar) event unsatisfactory or unfair. For example, many building contracts, including standard form contracts, will allow an extension of time to be granted to the contractor, but not the increase in cost – hence, contractors faced with significantly higher material prices due to shortages brought on by the pandemic will be left out of pocket.

All in all, force majeure (or similar) provisions, even if they are in the contract, are unlikely to provide a satisfactory solution to contractual parties who are affected by the pandemic.

"The willingness to act collaboratively to overcome hurdles and eliminate conflicts will go a long way to preserving work, employee and other commercial relations, the long-term viability of the projects, and, ultimately, the health of the construction industry."

Being pragmatic and collaborative is the key

In light of the above, another lesson learnt is that, construction contracts alone are unlikely to provide answers to all eventualities. When faced with a crisis, the nature and impact of which are unprecedented, parties can either insist on their respective contractual entitlements to their maximum benefit, which will most likely lead to conflict, disagreement and finally the crystallisation of a formal dispute; or they could seek to act pragmatically, reasonably and wherever possible, work together to find the best way forward.

In this regard, on 30 April 2020, the Construction Leadership Council (CLC) announced its endorsement to the Conflict Avoidance Pledge (the “Pledge”) developed by the Royal Institution of Chartered Surveyors (RICS).² Under the Pledge, clients and contractors commit to implementing conflict avoidance measures in their contracts and on site, thereby reducing the financial cost of disputes and helping projects to deliver on time and within budget. According to the CLC, the Pledge (which has been signed up by the Institute of Civil Engineers, Royal Institute of British Architects, Transport for London and Network Rail etc.) has already delivered measurable results for those organisations that have used it.

Separately, in a recent industry survey conducted by a London based international cost consultancy firm,³ it was revealed that, generally, relations between clients, main contractors and trade contractors are holding up (for now at least) and a high degree of collaboration has been seen amongst the parties to try to work through any immediate challenges. In some cases, clients are actually willing to offer help on cashflow or other mitigation measures but without committing to absorb the costs for delay in the long run.

No doubt, there will still be a sense of an ‘at arm’s length’ approach being taken by all parties. However, the willingness to act collaboratively to overcome hurdles and eliminate conflicts, rather than an immediate response of shifting blame and losses causing inevitable disputes, will go a long way to preserving work, employee and other commercial relations, the long-term viability of the projects, and, ultimately, the health of the construction industry.

Pandemic-specific clauses will be required

As sites reopen and projects resume, new construction contracts reflecting the post-pandemic world will be entered into, and in fact, existing contracts may also need to be adjusted to reflect the “new normal”. In this regard, another lesson learnt is that, with much of the post-pandemic impact lasting beyond the current lockdown, COVID-19-specific provisions need be included into new and existing construction contracts to ensure that the relevant issues are properly dealt with as works restart. Based on what the construction industry has experienced so far, and in the past, some of the issues likely to be relevant for contract negotiation and drafting are set out below:

"COVID-19-specific provisions need be included into new and existing construction contracts to ensure that the relevant issues are properly dealt with as works restart."

  • Health & Safety: This will of course remain of utmost importance at all sites. While the government has produced some general and sector specific guidance about dealing with COVID-19, such as “Working safely during coronavirus (COVID-19)”⁴ issued by the Department for Business, Energy & Industrial Strategy (the “BEIS Guidelines”) and the Site Operating Procedures issued by the Construction Leadership Council, it is important to remember that they are not intended to supersede any existing legal obligations under the Health and Safety at Work etc Act 1974 and related regulations. Site operators and employers remain responsible for ensuring they carry out adequate risk assessments to identify and mitigate, so far as reasonably practicable, all potential risks onsite – including those relating to COVID-19;
  • Site Management: As we have seen during the start of the pandemic, many construction firms in England have shut down their sites despite the absence of any legal requirement to do so. This suggests that site management is not just an issue to be considered in light of compliance with legal requirements; rather, employee/workers morale and potential reputational implications are also important considerations when deciding on any health & safety measures or precautions to be taken. As the industry adapts itself to the “new normal”, a client may wish to have enhanced audit rights, regular inspections and consultations to ensure that best practice is being followed. For a contractor, it may wish to have flexibility to suspend or re-sequence or delay part of the works, in order to manage potential post-pandemic issues, such as availability of appropriate personnel and materials, staff sickness and changes in the relevant legal requirements and industry guidelines etc. Finding solutions to these issues will no doubt require willingness on both parties to agree on a fair and appropriate risk allocation between themselves;
  • Materials and Supplies Shortages: Shortage in materials or supplies and the (lack of) availability of appropriate subcontractors or suitable personnel have all been highlighted as potentially the biggest challenges for the construction industry to achieve a full bounce back. In this regard, a fine balance will need to be achieved between allowing clients some form of veto rights over the use of specific suppliers or subcontractors where there are genuine concerns over covenant strengths or reliability, and the flexibility required by the contractors to make decisions about their own supply chains and subcontractors so to maintain competitiveness at a commercial level;
  • Performance Security: The provision of performance security, such as bonds and guarantees, will continue to be an important means of protecting contractual parties, especially during an economic downturn when there is an upward trend of contractor or subcontractor insolvencies or defaults. In the post-pandemic world, where parties may seek to restructure the payment terms or where clients are more likely to be required to make upfront payments to secure purchases of materials, the use of advance payment bonds and off-site material bonds should also be considered; and
  • Step-in Rights: Collateral warranties, third party rights and direct agreements from consultants, subcontractors and suppliers are not new concepts within construction contracts. In dealing with turbulent times, clients, funders and owners would be well advised to ensure that effective step-in rights are provided in such documents. This will ensure that key members of the construction and professional team can be directly retained, and thereby ensuring continuity of the project in the event that the relationship with the main contactor falls away.

"Site management is not just an issue to be considered in light of compliance with legal requirements; rather, employee/workers morale and potential reputational implications are also important considerations."

Conclusions

As the construction industry, like many other industries, prepares itself for the gradual lift of lockdown restrictions, we must consider and remember the lessons learnt when we finally return to the “new normal”. Part of that will require contractual parties to consider the entitlements and rights they each have under the contract, and assess whether they are best served by enforcing such contractual terms against each other, or whether resources are best utilised by working together towards a pragmatic solution for the benefit of parties, the projects and ultimately the industry, and in due course, entering into contractual arrangements that are balanced and reflective of the challenges of the post-pandemic world.

 

[1] See Nadhim Zahawi’s speech at the National Federation of Builders online Large Contractors Forum on 22 April 2020.

[2] For further details on the Pledge, please see https://www.rics.org/uk/products/dispute-resolution-service/conflict-avoidance-pledge/.

[3] https://www.building.co.uk/news/alinea-warns-on-productivity-levels-of-sites/5105854.article.

[4] Please see https://assets.publishing.service.gov.uk/media/5eb961bfe90e070834b6675f/working-safely-during-covid-19-construction-outdoors-update-11-may.pdf which specifically applies to construction and other outdoor work.

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