COVID-19: Construction Contracts
20 March 2020
The recent outbreak of COVID-19 is causing delays and increased costs to construction projects due to the lack of availability of materials and labour and from employee absence or the necessity to self-isolate.
Parties to construction contracts should now review their construction contracts to review what contractual provisions may be relied on if a delay is incurred or suspension of work to projects will be required. This briefing focuses on the employer – contractor relationship, however the principles also apply to relationships with sub-contractors and suppliers.
We briefly examine the issues of delay, suspension, force majeure, frustration and the duty to cooperate under the standard forms of contract issued by the Royal Institute of the Architects of Ireland (RIAI) and the suite of GCC Public Works Contracts (PWC). These forms are the forms most commonly used in Ireland for construction projects. Parties should take careful note of any amendments or changes which have been agreed to the standard forms in bespoke, negotiated contracts.
Delay and Suspension
RIAI Construction Contracts
Under the RIAI Construction Contract if the Architect forms the opinion that works will be delayed for any of a number of specified reasons (specifically excluding contractor default) the Architect shall, as soon as it is possible, make a fair and reasonable extension of time for completion of the works. The first reason set out in the relevant clause is by reason of force majeure. Force majeure is not defined in the RIAI contract however it is more than likely that the term would cover a pandemic. On the occurrence of any event that will delay completion the contractor must immediately give notice in writing to the Architect however the contractor is also under a duty to use best endeavours to prevent delay and to proceed with the works. It should be noted that the requirement to provide notice is not a condition precedent to entitlement in the standard form, but a failure to comply with the clear contractual provision may have some impact on the extent of any contractor claim for additional time. The standard clause is commonly amended in bespoke forms to provide that the furnishing of notice is a condition precedent to entitlement.
There is a clear requirement on a contractor to immediately notify the Architect of the delay and to use best endeavours to prevent the delay and continue with the works. The Architect will determine if the circumstances causing the delay warrant the granting of an extension of the time for completion.
The PWC contracts provide that the Employer’s Representative has the authority to suspend all or part of the works and require the contractor to protect, store and secure the affected works items against deterioration, loss and damage and maintain existing insurance policies.
The contracts also provide that if a contractor becomes aware that work is being or is likely to be delayed it shall as soon as practicable provide notice to the Employer’s Representative of the delay and its cause. The contractor is also required to provide a further update of information and likely impact of the event within a specified period. The obligations to provide notice arise under conditions 9.3 and/or 10.3 of the PWC contract. It should be noted that the notice requirements are condition precedent and a failure to provide the required contractual notice will lead to a loss of entitlement.
Where completion will be delayed due to an event listed in Schedule 1 K of the contract as comprising a Delay Event an extension of time shall be granted provided the delay is not due to the fault of the contractor, the contractor has made all reasonable efforts to avoid and minimise the delay and the contract does not provide otherwise. Delay Events include:
- a direction by the Employer’s Representative to suspend work;
- the issuance of a Change Order;
- direction of a public authority causing delay (for example a public authority imposes a regional quarantine or orders the closure of a construction site); or
- failure of the Employer’s Representative to respond to a request for a required instruction.
Force majeure is not expressly provided for as a Delay Event under the PWC…
As stated where the contractor does not provide notice in accordance with the PWC contract it shall not be entitled to an extension of time. It should be noted that under Clause 10.3 of the contracts, the requirement is to provide initial notice within 20 days of the Contractor becoming aware of the event likely to give rise to a claim for time or money, followed by a further, more detailed notice within a further period of 20 days. If the cause of the delay has a continuing effect, as may be possible with COVID-19, the contractor is required to update the information at monthly intervals. There is a requirement on the contractor to keep detailed contemporary records to substantiate any aspect of the event.
Force Majeure and Frustration
Force majeure applies to all circumstances beyond the control of the parties to a contract such as war, terrorism and epidemics. The cause must not have been reasonably foreseen when the parties entered into the contract, cannot be reasonably avoided and is not attributable to either party. While Courts tend to construe the concept very narrowly COVID-19 would generally meet this definition although caution must be exercised in relying on this as it will not apply if the project is simply more expensive or more difficult.
A contract may be frustrated where an intervening event or change of circumstances of such a fundamental nature as to render the contract inoperable occurs and prematurely terminates the contract. Whether a contract is frustrated is a question of the degree of the effect of the intervening event. Where frustration occurs both parties are automatically discharged from their contractual obligations. If the impact of COVID-19 is such that it prevents either party from performing their obligations under the construction contract the contract may be determined with the result that the parties are no longer bound to perform the contract.
Co-operations and problem solving
The PWC contract expressly provides that employers and contractors shall support reciprocal co-operation, including minimising the effects of suspension, delay, compensation events and their effects. It should be noted this is an obligation on both the employer and the contractor. While the RIAI contract does not have an express obligation to co-operate it is an implied term in all construction contracts that one party shall not prevent the other party from complying with its contractual obligations. As such it would be prudent to begin consultations for any contingency plans that may be put in place in light of COVID-19 and the overall impact this outbreak will have on current projects.
Precautionary Steps to Take
Check with your insurance broker the extent of cover available if works are suspended due to force majeure:
- If a contractor – begin consultations with your employer, sub-contractor and suppliers as to what contingency plans are to be put in place.
- If a contractor – provide notice in the required form under the relevant contract to the employer, sub-contractor or supplier that the outbreak of COVID-19 is likely to cause delay to the progress of the works – and that its effects are likely to be ongoing for some time.
- Pay attention to contractual processes and deadlines.
- Consider if current works should be suspended and plan how to put this into effect having regard to obligations in respect of site and Works security.
- Consider the implications of COVID-19 from a health and safety law compliance, an employment law and HR perspective, i.e. sickness and benefit payments, payments to staff during self-isolation periods, temporary lay-off of staff and communicate the policy to your employees.
Take this opportunity to review the construction contracts you currently have in place and identify the relevant provisions as referenced above. Contingency plans should be prepared, and dialogue opened with the relevant parties on each project. If a delay is caused due to the outbreak of COVID-19 a contractor has a clear obligation to notify the Architect or Employer’s Representative of the delay. Under both forms of contract a contractor must use best endeavours to prevent the delay and to proceed with the works. Where a construction contract is currently under negotiation or tender, consideration should be given to the likely impact of COVID-19 and provided for in the contract.