Coronavirus, Contracts & Construction in the UK

By Marco Nicolai, Sophie Phillips, Alex Kelly

03-2020

Should I keep my construction site open?

As at 25 March 2020 you can keep your site open in England. The Cabinet Office has confirmed that construction in England can continue on the basis that it can be done safely and in accordance with Government guidance, although the advice in Scotland has been for all sites to close.

Whether you should is a different matter. Many developers have closed their sites already. Advice is constantly being updated and given the difficulty of complying with the guidance, you may have no choice. If you do choose to keep your site open, you should put contingency plans in place now for closing the site:

  1. Can you provide adequate health and safety for staff and provide proper protection in line with the Government's guidance?

  2. Can you isolate parts of the site and close down parts of it now?

  3. Will you be able to mobilise staff to immediately close down the site safely and securely if or when guidance is given?

  4. Can you put appropriate site security in place now in case the site is forced to close?

  5. What will you do in the event the Government forces shut down of all construction sites?
What happens if I shut my site or if the Government implements closure?

This will entirely depend on the wording of the contract and on what you are building and you will need to make sure you understand how risk relating to delay and/or closure is allocated under your contract(s). If you require assistance with this, please contact any of the lawyers listed below.

Contractual Implications: Delay

Contractors may be liable to pay liquidated damages for delay, or face claims for damages for delay by the employer. However, it is possible that the contractor may be entitled to extra time (and potentially monies) under the building contract due to:

  1. Force Majeure

    a. A force majeure provision will usually suspend contractual obligations in the event that a party is unable to complete them due to an act beyond its control; for example, if there is severe flooding and a site becomes inaccessible and works cannot be carried out. It usually gives rise to a right of termination in the event the suspension continues for a certain (contractually agreed) period of time. You will need to make sure you understand when suspension is (or was) triggered and how long the period is before termination rights apply.

    b. Force majeure must be written into a contract; it is not a common law principle. Whether it can be relied upon in relation to the COVID-19 outbreak will depend on how the clause is triggered in the contract. Some force majeure clauses list specific events (flooding, fire, war etc.); some clauses use broad wording such as "an event beyond the reasonable control of the parties"; and some clauses leave force majeure as an undefined occurrence.

    c. Although force majeure is a contractual provision, we do not rule out Government intervention. For example, in China, at the height of the outbreak in Hubei province, the Government issued "force majeure certificates". These allowed contractors to rely on an imagined force majeure clause in their contracts, and enabled them to suspend fulfilling their obligations without contractual penalty. In Europe, the European Construction Industry Federation (FIEC) has called on the European Commission to declare COVID-19 an event of force majeure to assist those seeking to rely on such a provision.

  2. Change in law

    If the Government (or a local or public authority) exercises statutory powers that prevent works this can be seen as ground for giving contractors extensions of time. Factors that can affect this include (1) when the legislation was enacted in relation to the project timeline; (2) whether it is before or after the base date for the contract; and (3) whether it was (or should have been) in the reasonable contemplation of the parties at the time the contract was entered into. We know that the Government has already created:

    a. Health Protection (Coronavirus) Regulations 2020 (SI 2020/129); and
    b. Health Protection (Coronavirus, Business Closure) (England) Regulations 2020 (SI 2020/327)

    amongst other statutory instruments as a direct result of COVID-19 and there will be more to come.

    You will need to keep up to date with the changing legislative landscape for compliance reasons as well as making sure you understand what it means in relation to obligations under your contract.

Contractual Implications: Frustration

A contract is frustrated when the common purpose of the contract is destroyed, and neither party is at fault. The result is that the contract can be terminated and all obligations fall away.

As it stands, frustration is unlikely to be applicable here. The problem is that a common purpose will only be deemed to have been destroyed in exceptional circumstances. Case law, for example, includes the purpose becoming illegal and the object of the contract being destroyed. If construction sites are closed down by Government then it will indeed be 'illegal' to work on a construction site and, depending on the length of the shut-down period, this could be considered to have 'destroyed' the common purpose of the contract but this will depend on the facts at the time.

Moreover, if there is a force majeure clause, or a change in law clause, these will trump the application of frustration and the contractual provisions will apply instead; frustration only applies if the parties have failed to contractually allocate the risk.

Practical implications

  1. Long stop date

    Is there a long stop date in relation to the project under e.g. an Agreement for Lease? If so, what is the implication of this and is it possible to extend it?

  2. How is risk for delay allocated and what is the situation in practice? 

    Different buildings face different pressures, for example:

    a. Student accommodation has a very strict practical completion date and the building may not be needed for at least a year if the works cannot be completed on time;

    b. Hotel owners may be more willing to accept a delay to works at present due to the fact that hotels are closed and there is likely to be a period of ramping up once they are open for business again;

    c. Office blocks are likely to be rented out before the build has completed but landlord developers will need to check whether tenants can still afford to rent the same amount of office space.

  3. Timing in general

    At present we do not know how long this will last. The situation in China is beginning to improve after three or four months, but at present nothing is definite and contingency plans for all situations are advisable.
What is the guidance so far?

General Government Guidance

The General Guidance as of 23 March 2020 consists of three measures:

  1. To stay at home other than:

    a. to buy food / essentials

    b. to exercise once per day

    c. to go to work only if absolutely necessary and unable to work from home

  2. All non-essential shops and public spaces to close

  3. Stopping public gatherings of more than two people other than:

    a. where the group consists of people from the same household

    b. where the gathering is essential for work purposes (but the note adds: workers should be trying to minimise all meetings and other gatherings in the workplace)

Interpretations of the Guidance

The Government has not given specific, formal guidance on whether construction sites can stay open.

*this will be updated if/when the Government does issue specific guidance

However, individual Government ministers have offered their interpretations of the rules in relation to construction sites.

  • Communities and Housing Secretary, Robert Jenrick: "if you are working on site, you can continue to do so. But follow Public Health England guidance on social distancing"

  • Cabinet Minister, Michael Gove: "There are different types of construction. If you're entering a home where there are already citizens, a family, you should not be doing that. But construction that takes place in the open air on new sites, that is appropriate"

Public Health England Guidelines

The general guidance requires:

  • staying at least 2 metres (6ft) away from other people

  • more frequent handwashing of 20 seconds

The Guidance to Employers recommends:

  • cleaning and disinfecting surfaces and objects that are touched regularly

  • providing hand sanitiser and tissues for staff

Conclusion

Without giving specific advice, the result of Government advice and interpretation of that advice is that construction sites can continue to operate, if:

  • work is absolutely necessary (for example, to weather-proof the building, or to secure a site)

  • work does not involve entering anybody's home

  • workers are able to work whilst remaining at a distance of 2 metres from one another

  • site owners implement strict hygiene practices (the Construction Leadership Council (CLC) have produced the following note on Site Operating Practices to comply with social distancing measures: CLC Guidance. Please note that the CLC will be publishing updated versions of this note in line with any further updates for the Government).

Needless to say, it can be impossible for construction works to continue whilst complying with the guidance on social distancing and hygiene practice. Construction work necessarily involves working close to one another and the joint handling of tools and objects. This is without taking into account the exposure workers face on their commutes onto site and on entering the sites through security systems such as fingerprint turnstiles.

Pressure is mounting on the Government to close all construction sites. This page will be updated in response to any such development.

Who, on a construction project, is responsible for compliance with Government guidance?

Construction is one of the most heavily regulated industries. The Health and Safety at Work etc. Act 1974 Act from which The Construction (Design and Management) Regulations 2015 (CDM Regulations 2015) emanates is aimed at protecting employees and others who may be affected by work activities and it potentially imposes criminal liability on parties in the event it is breached. It is fundamental that in the next few days and weeks parties are fully aware of their duties and responsibilities; in particular, the rules governing health & safety obligations on a construction site which sit: (1) in the relevant contracts and (2) in the CDM Regulations 2015.

The CDM Regulations 2015 impose obligations in relation to health & safety on-site, irrespective of what a contract says. Below is a summary of the requirements levied on the various parties to a construction project:

  1. Client

    Regulation 4

    The client must make suitable arrangements to ensure that work can be carried out without risks to health or safety of persons affected by the project.

    Guidance Note– the client is not required to take an active role in managing the work. However, the client is required to make suitable arrangements for managing the project so that health, safety and welfare are secured. This includes ensuring that workers are provided with suitable welfare facilities for the duration of construction work. Where required this involves the client managing arrangements to set out the expected standards of health and safety, including safe working practices, and the means by which these standards will be maintained throughout.

    The client may also be required to appoint a competent person under the Health & Safety at Work Regulations 1999. These regulations set out "General Principles of Prevention", such as evaluation of risks and adaptation of workplaces to combat those risks.

  2. Principal Designer

    Regulation 11

    The principal designer is responsible for co-ordinating health & safety during pre-construction and (Regulation 12) must write up a construction phase plan to address health and safety concerns.
    Guidance Note – the principal designer must exercise judgment on how to reduce and control risks related to design elements. The focus should be on those design elements where there is a significant risk of injury or ill health.

  3. Principal Contractor

    Regulation 12

    The principal contractor must update the construction phase plan to address any new risks.

    Regulation 13

    The principal contractor must plan, manage and monitor and co-ordinate health and safety during the construction phase.

    Regulation 14

    The principal contractor should consult with workers on how to approach health and safety issues.

    Guidance Note

    The following definitions are provided:

    - plan: consider all affected parties (including members of public), and consider how to protect them from risks

    - manage: put in place measures to control risks

    - monitor: checking standards regularly and taking prompt action when necessary. Both active (e.g. routine checks) and reactive (e.g. monitoring cases of ill health)

    - Co-ordinate: instructing the contractors appropriately (e.g. liaising with client and Principal Designer)

  4. Contractor

    Clause 15

    The contractor must plan, manage and monitor its work to ensure it is carried out without risk to health and safety and it must comply with instructions from the principal designer and principal contractor.
What is the impact on banking arrangements?
  1. Will the impact of COVID-19 mean that I default under my financing arrangements?

    Whilst every facility agreement will need to be reviewed for the key provisions, the main provisions the parties should look at are as follows:

    Contractual complete on dates

    Most financing arrangements will impose an obligation on the developer to achieve practical completion by a fixed date. Unlike a building contract, there are typically no provisions allowing for an extension of this date and so whilst the contractor may be entitled to an extension of time under the building contract due to COVID-19, the developer may not be able to claim a similar extension under the loan agreement. In addition, many loan agreements impose a forward looking test meaning that a default occurs if the Lender determines that the contractor will not be able to hit the required completion date. Whilst the target dates for completion typically allow some time for delay the parties will need to consider and keep under review whether these dates can be hit.

    Abandonment

    Development finance arrangements typically contain a default provision in the event that the development is abandoned for a period of time (typically 28 days although parties may have negotiated longer). Looking at the length of time that Governments around the world have imposed lockdowns, it seems likely that a significant number of these clauses will be breached.

    Material Adverse Effect

    Whether a developer has breached this clause will depend on both the drafting of the clause and the circumstances of each transaction. Different conclusions may be reached depending on how long the disruption lasts for, the particular asset class and the impact on the market in general. Given that development financing arrangements are structured in a way that anticipates delays and cost overruns, it could be argued that delays and cost overruns caused by COVID-19 do not of themselves constitute a "Material Adverse Effect".

    Whilst developers and funders will want to understand whether there has been a default under their financing arrangements, the reality is that most lenders are likely to take a pragmatic approach and continue to support projects.

  2. Will my funder continue to fund the development costs?

    Most financing arrangements will oblige a lender to continue to fund the development project unless there has been an event default. Parties should therefore seek to identify whether a default has or will occur and if so should speak to their lenders to agree the way forward. Given that most defaults will have occurred due to events entirely outside of the control of developers, we would expect most lenders to be supportive of continuing to fund developments.

    Where a cost overrun has arisen, a lender can often require the developer to inject additional funds to finance that cost overrun before it resumes funding the development costs. Parties should try to agree the amount and timing requirements of any cost overrun as quickly as possible to ensure that the funding arrangements continue smoothly.

  3. What if my contractor becomes insolvent?

    The size and scale of both the economic impact of COVID-19 and the Governments financial support packages make any analysis of the on-going viability of contractors extremely difficult. It does however seem likely that there will be a greater risk of contractor insolvency and parties should consider the implications for their financing arrangements. Under most loan agreements, contractor insolvency will result in an event of default. Some loan agreements include a period of time for the developer to find a replacement contractor. In practice however these time periods tend to be unrealistically short and whilst the Government imposed lockdown arrangements are in place, finding an alternative contractor will be extremely difficult. We would expect lenders to be supportive and sympathetic where contractor insolvencies occur.

If you are involved in the hotel industry, we recommend reading James Salford's note on The impact of coronavirus on banking arrangements in the hotel sector.

Bird & Bird have also published a wide range of articles on the impact of COVID-19 on other businesses and industries which you can read here.

So, if sites have not been instructed to close, but it is impossible for them to remain open whilst complying with Government guidance, what should I do?
  1. Get legal advice. It is vital to review your contracts to map out:

    a. potential liability
    b. notice procedures
    c. risk allocation

  2. Talk with your counterparties. Discussions must be held to seek agreement on how to proceed. If a path can be agreed by both parties, this will make the process much easier. Regular updates and clear communication channels will continue to be important.

  3. Issue notice of your intentions. If your counterparty refuses to cooperate, compromise or negotiate, we can issue notice on your behalf of your intentions and set out the contractual bases for your actions.

  4. Ensure that projects are ready to start again. Works will eventually restart on site. If it is possible to make plans to arrange this and to safeguard skilled workers, the workforce and the supply chain, then do so. Ideally identify any activities that can continue remotely in the meantime.

  5. Stay up to date. Despite the three week lockdown, we anticipate further, more specific Government guidance in the coming days/weeks. This guidance could drastically alter which course of action is prudent to take. We will be providing further updates as soon as possible.
Last reviewed: 25 March 2020