Closing construction sites on account of coronavirus — what next for contracts?
Like everyone else, the construction industry is finding its way through the coronavirus pandemic.
In Scotland, the latest guidance from the Scottish Government is now crystal clear. Alas, the contractual consequence of making the decision to shut down in light of that advice is not.
Effect of government advice
The guidance, which my colleague Sarah Stuart blogged about recently in essence seeks to shut down all construction sites unless they are linked in some way to specified essential services. Even then, those sites must comply with social distancing advice.
It’s a simple clear message, but it is important to point out the above is simply government advice. It is not legally binding. To complicate matters however, the rules on social distancing underpinning the guidance are.
The result leaves employers and contractors with a big question mark over what the contractual impact of deciding to shutdown a construction site is. For instance, if it is possible to observe social distancing rules on site, would a contractor’s decision to shut down work on a non-essential site amount to a breach of contract? On the converse side, would an instruction to suspend the works from an employer expose them to a claim for loss and expense from their contractor?
What to do?
The unprecedented nature of current events has encouraged a collegiate approach as much as possible. Sensibly, parties should be talking to each other to see whether they are able to agree, not just what is to happen by way of shutdown, but also what the effect of that is on the contract to avoid disputes later.
The over-riding interest in all this is to ensure health and safety, but that does not mean parties should ignore commercial interests.
Needless to say, current events mean most are reaching for their contracts to try and work out where they stand and who might pay for costs/losses incurred. Every case will turn on what individual contracts actually say; however, whether you are an employer or a contractor there are some issues you’ll want to consider.
The closure of construction sites will result in many projects being delayed beyond any agreed completion dates. Whilst this would normally mean contractors facing claims for damages, or even liquidated damages (where a pre-determined sum has been agreed), contractors will want to avoid that potential if at all possible.
At the time of writing this, no-one knows how long sites are to be shutdown, but it may be possible to agree in principle what the effect of the shutdown is going to have on the completion date.
Check whether the contract provides for any mechanism to extend the time for completion.
Some contracts may make provision for this, for example, in circumstances of force majeure. This may be defined in the contract, but if not, usually means unforeseeable matters causing delay which are the fault of neither party.
Unless the contract was entered into during the lockdown, the impact of COVID-19 would appear likely to qualify.
Loss and expense
Just because a contractor is entitled to more time to complete does not mean that they are automatically entitled to recover the loss and expense occasioned by the delay. If the contract makes no provision for loss and expense, the general rule would be that a party which prevents or hinders the other from completing the project may be responsible for losses incurred by the other in consequence.
But what is the position where the circumstances that have prevented performance are the fault of neither party, as with the current events? In the absence of that being spelled out in the contract, that can be more uncertain to say.
In short — unless either party can identify a breach of contract by the other, or identify a specific contractual entitlement, it is unlikely that either would be able to recover losses caused by these events from the other.
Many construction contracts will make provision for notices to be given in order to preserve potential claims like extension of time and loss and expense.
Compliance with these notice requirements can even be a condition precedent to payment. Or failing to respond within a certain time may imply agreement. Make sure to check the provisions for any notices and follow any requirements for their form, content, and where and how they are to be sent, to avoid any arguments later about their validity.
Consider polices taken out for the project. Are there any policy conditions (such as security) that are affected by a closed site? Who bears the cost of insuring that site while it lies empty?
A recent survey by the Construction Industry Coronavirus Forum reported that for 80% of responding contractors in Scotland, cashflow had dried up. That makes for grim reading. If you’ve had to close your site, you’ve not only lost your main source of income, but your contractors have also lost theirs.
It is likely a lot of businesses will struggle to meet their payment obligations and/or struggle in the absence of cash coming in. Review any third party agreements such as lease and finance arrangements, as well as consider help such as the government’s job retention scheme.
If there are potential claims arising out of current events, set up a system now to maintain records of impact on labour, supplies, ongoing costs and so forth.
Although no-one can say for certain when this will all end, it is still important to manage expectations.
While the current situation is all new, the fact most businesses will be in the same boat should encourage all to work together to ensure the ability to return to site as soon as the lockdown restrictions are lifted.
Watch this space for more blog posts and Zoom briefings from me, partner Sarah Stuart and senior associate Karen Cameron, and webinars too, all focusing on the impact of COVID-19 on construction.