In this blog post, past Steering Committee member, Bill Bordill FRICS, FCIArb, FICCP, examines some key words and phrases and answers questions related to contractual issues arising from COVID-19. This blog has been extracted from our fourth Construction Clinic session, which took place in April of 2020. The entire webinar may be viewed on-demand on YouTube.

Question 1

Question: Is regulation issued by government considered a change in law?

Answer: Well, the simple answer to that is: it depends. It depends on the jurisdiction, the contract, the timing of the change in regulations, and the nature of the change. Without that specific information, I cannot answer the question. However, generally a change in regulation issued by government would represent a change in law so long as compliance was mandatory.

Question 2

Question: Does the PM qualify for compensation as a result of COVID-19?

Answer: Unfortunately, again, it depends. That’s a common answer to questions like this. In this case, it depends on the contract and the consequences of COVID-19.

Now, this is quite an important issue, because most people talk about COVID-19 giving them entitlement to make a claim, and that’s not the case. It’s the effects or the consequences, of COVID-19 which may be covered by the contract. Just the fact that there is an illness out there doesn’t necessarily mean that you’ve got an entitlement to make a claim. COVID-19 itself doesn’t excuse time or cost extra money; it’s the consequences. i.e. the contract may provide relief for the consequences of a COVID-19 related event.

For those of you who are interested in FIDIC, there is a guide that has come out that provides quite in-depth answers to these two questions that have just been posed. It doesn’t give a specific answer, because (like me) it needs more information, but it does give you a guide to work out what the answer might be according to your particular circumstances.

I understand that “It depends” isn’t a satisfactory answer for anyone, so I’m going to talk through some key words and phrases.

The first word is “pandemic: a disease spread across multiple continents worldwide”. It’s a simple place to start.

The second phrase is “COVID-19: COronaVIrus Disease 2019, a pneumonia disease of unknown cause, declared as a public health emergency and international concern”. That year is critical, thinking about when people have to get their Notices in under contract and the time restraints on Notices which are frequently conditions precedent [see below in this blog] . “Unknown cause” is also critical, and “international concern” (emphasis added).

So, we first heard about it in 2019 which means that in most cases, Notices should have already been issued some time ago [by the time of recording in April 2020].

I’ll just summarise a timetable from the World Health Organization (WHO) here. WHO first noted that it was a pneumonia-related incident affecting the world on 31 December 2019. They reiterated that it was affecting the world on 30 January 2020 and on 11 February 2020, it was named COVID-19.

So, between November 2019 and February 2020, COVID-19 went from a very serious illness in China to an international concern with a name. On 23 March, the UK went into lockdown, behind several other countries. On 31 March, the UK government issued a note encouraging construction to go back to work and they issued safer operating procedures. A Contractor who at that time unilaterally withdrew from site may be in a difficult position.

The next phrase I want to talk about is condition precedent: a clause in a contract that if you don’t comply implicitly with the clause, you will lose rights that you otherwise would have had. How do you know if a clause is a condition precedent? It needs to satisfy a three-point test.

  1. Is there a definite time limit?
  2. Is there strict, unequivocal language?
  3. Is it clear to understand? Are there clear consequences of failing to meet the time limit?

That will determine if the notice provisions, or any other provisions, in the contract are conditions precedent. Go back to your contract and note whether you think that notice provision is a condition precedent clause, and how does that fit in to the COVID-19 timetable?

The next phrase is force majeure, which has been covered in previous Construction Clinics. Force majeure really considers a temporary suspension of work. This is a term from French civil law with no true legal definition. So we have to consider previous cases and what is in the contract.

FIDIC 1999 gave examples of force majeure, but in the revised 2017 books, they dispensed with force majeure. They now use the term exceptional circumstances. In practice, they probably amount to the same thing. What we are talking about is a legal or physical restraint that was unforeseen.

In terms of COVID-19, we’re helped a bit by a case from 1920: Lebeaupin v Crispin (Lebeaupin v Richard Crispin & Co [1920] 2 K.B. 714 (18 June 1920)) which references an epidemic. A pandemic is a level up from an epidemic. So, it seems logical that a pandemic should be classed as force majeure if you have a force majeure provision in your contract and if that contract has not been amended.

I think it’s also helpful to our cause that most jurisdictions are now calling for social distancing of at least 2m. It will be very difficult on construction sites and the entry and exit points and welfare facilities. Combined with Lebeaupin v Crispin, I think this tips the scales well in favour of this becoming a force majeure event.

However, we should all be aware of not withdrawing labour from site; that, effectively, is a strike or a lockout. Different provisions may cover that.

Frustration is another key word to keep in mind that we should be considering at the moment. Frustration brings about termination. Whilst COVID-19 may be frustrating all of us personally, it may not legally frustrate our contracts. To be frustrated, a contract must be physically and commercially impossible to deliver.

COVID-19 puts restrictions on labour, may make materials more difficult to obtain, etc. Those are inconveniences, not impossibilities. It has to be a situation where you absolutely could not carry on—closing of the site by another party, or something like that.

Some businesses that have been interrupted will have business interruption insurance. In this case, remember your claim will be against the actions of others, not COVID-19. So, it’s likely that someone else has closed the site and you’re making a claim as a consequence of that site closure.

Let’s take a summary look at FIDIC, JCT, and NEC:

With FIDIC, you are likely to get time and money, whether you are working with 1999 or 2017.

Under the NEC, you are possibly likely to get time and money. Clause 60.1(19) sets out three tests. The third reads, “. . .an event so unlikely that no other Contractor would have allowed for it.” This is a matter of timing. It’s a bit sticky (but not impossible) for NEC if the contract was priced, for example, in February, when the world was aware of the pandemic. It is something to bear in mind when framing your arguments.

Under JCT, you are possibly entitled to time only, because it would possibly be covered under Clause 2.26 (Relevant Event) but not under Clause 4.21 (Relevant Matter). To get both time and money, it needs to be both a Relevant Event and a Relevant Matter. Obviously, it depends on the particular circumstances of your contract, which takes me back to the start of this blog.

My final piece of advice: don’t rely on your contract. Meet with the other party, get talking to them, and try to come up with some agreement on a way forward. Take away the uncertainty of what may or may not be an entitlement under the contract, because it’s unclear how all of this is going to shape up in the future. If you can reach an agreement to mutual satisfaction now, that is the best position you can get yourself into. COVID-19 is being experienced by all of us and it is unlikely to be regarded as either parties’ fault. A sensible and equitable solution is for both parties to a contract to share the risk and therefore share the consequences.

The questions covered in this blog were answered by Bill Bordill, FRICS, FCIArb, FICCP

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