Covid-19 and the Construction Sector: What you need to know

As we see a widespread return to activity on construction sites in England, the panel covered key considerations for the sector both in terms of ongoing projects and those planned for the future.  Areas we covered included:

• The current Government guidance and industry sector advice; 
• Health and safety requirements; 
• Contractual relief under current contracts;
• Likely areas of dispute;
• Drafting concerns for future contracts; and 
• Market review. 

Please see below a written summary of the webinar which you may find relevant.

Current Government guidance and industry sector advice

There has been a lot of confusion about the Government guidance for the sector.  What is the current position?

The current position in terms of the Government advice is contained in a document called ‘Working safely  during Covid-19 in Construction and their Outdoor Work’ published on www.gov.uk on 11 May and most recently updated on 29 May. It states that work should be undertaken even where social distancing cannot be met if it is necessary for the business to operate.

The government recognises explicitly that eliminating the risk of transmission is not a feasible expectation. Instead, measures must be put in place to reduce the risk of transmission as much as is reasonably practicable.The guidance is described as a ‘practical framework’ within which it is up to the parties to satisfy themselves that they have adopted appropriate measures.

The CLC’s SOPs embellish the government guidance and suggest useful practical steps that can be taken to achieve some of these mitigating actions,or example, by outlining how the canteens and toilets should operate and how workers should travel to site. It is worth looking on Build UK’s website as it has a lot of examples of industry best practice as it evolves.

To what extent are construction sites now operational again following the lockdown? And how has productivity been impacted?

Since mid-April we have seen a gradual return to site. Build UK’s latest statistics reflect this. It is now widely accepted that construction work should continue, and that in terms of COVID-19, the safety requirements are met if mitigating measures can be put in place to reduce the risk of transmission.

The CLC’s road to recovery document – published this week – also starts from an assumption that its now a question of getting the sector back on track and, indeed, in a stronger position going forward.

What is the status of the government guidance on “responsible contractual behaviour” and what will the impact be on existing and future contracts?

On 7 May the Cabinet Office published guidance encouraging parties to act fairly and reasonably in their contractual behaviour. This guidance focuses on things like: ensuring cash flow is maintained; avoiding disputes; and acting in a spirit of co-operation.

The guidance states expressly that it is not intended to override contractual provisions. However, that is not to say that it should be ignored (see below). Again, the CLC has produced its own guidance to accompany the Cabinet Office guidance and contextualise it for the construction sector.

Health and safety requirements

What are the key health and safety responsibilities of construction companies for COVID-19 risks?

Existing health and safety obligations, such as those contained in the CDM regime, continue o apply during the pandemic. They have not been relaxed or superseded by the Government’s COVID-19 legislation or guidance. The expectation of regulators is that duty holders must continue o comply with legislation o manage and control workplace risks. That includes protecting workers from the risk of transmission of COVID-19 in the workplace, even though it is also present within the community.

It has been reported that the HSE will prosecute companies who breach the government’s guidance. What is the HSE’s enforcement position?

The HSE and the government have stated that a failure to comply with the guidance may result in enforcement action y health and safety regulators, for example, improvement notices to secure compliance or prohibition notices to shut down premises. It is not necessary for an inspector to form a view on compliance before serving a prohibition notice. Breaching an enforcement notice is a criminal offence which in the most serious cases can lead to a prosecution and criminal fine.

We might therefore expect to see an increase in appeals against enforcement notices where a breach of guidance has been alleged. Practical advice is to take immediate action in response to an enforcement notice, whether the strategy is to comply or appeal.

Contractual relief under current contracts

Does COVID-19 constitute Force Majeure?

This depends on the drafting of the contract. In the projects and infrastructure sectors, contracts normally define force majeure in one of two ways.

• Some contain lists of undefined, broad terms to cover a variety of unforeseen circumstances: the “closed list” approach.
• Others define FM events in a more nebulous fashion using terms such as unforeseeable and beyond the reasonable control of the affected party: the “open test” approach. For commercial property construction, where JCT use is widespread, force majeure is an undefined term - this is closer to the “open test” than “closed list”.

Unless the FM provisions are drafted on the basis of a “closed list”, and that “closed list” does not include epidemics or pandemics, it is difficult to argue that the C-19 outbreak does not constitute an FM event. If you are in “closed list” territory without express provision for epidemics or pandemic then there may be other routes to FM relief to be explored, e.g., Act of God.

Does the Government’s response to COVID-19 constitute change in law?

Again it will depend on the drafting but the legal status of the Government’s guidance means the position is not clear. Key to the analysis will be the breadth of the definition of “Law”. This can range from very narrow, including only Acts of Parliament and statutory requirements, to wide where all types of decisions, regulations or measures are captured. In the latter scenario the Government guidance may come within the definition of Change in Law.

What developments are we seeing in response to COVID-19 change in law/force majeure provisions?

Force majeure: For parties who wish to put in place pandemic FM options, they should address these in a detailed “Pandemic/Epidemic” sub-clause. It is useful to define “pandemic” as specifically as possible to provide certainty and limit scope for dispute regarding the start point of the pandemic. Referencing an authoritative public body, such as the WHO, to determine whether a pandemic is in existence can help prevent abuse of the mechanism by a counterparty.

Change In Law: Future drafting should specifically address whether “soft law” guidance is included in the definition.

Disputes: likely areas, risk mitigation and practical guidance

What are the likely areas of dispute arising from COVID-19?

On projects which are otherwise progressing well what we are seeing is that parties are doing their best to find solutions and work collaboratively. This may result in disputes being avoided or significantly reduced on those projects.

However, where (1) projects are distressed or (2) the current situation has given rise to financial hardship for one or more of the parties, we are seeing disputes starting to crystallise.

While each project is different, these disputes are focused on two broad themes:

Entitlement to time and cost relief: there are two aspect to this:

• Depending upon the precise wording of the contract in question, it is likely that we will see an increasing focus from contractors on change in law arguments. The various government guidance is not legislation but aspects of it might be argued to have “force of law”, for example, via enforcement of existing health and safety legislation.
• In terms of force majeure, in the construction contracts we have seen, COVID-19 is generally caught by the FM clause. However, FM clauses usually include mitigation obligations and we are already seeing arguments about what could and should have been done to mitigate the impact of the pandemic.

Extent of relief: Even where entitlement can be demonstrated in principle, there is significant scope for argument over the impact of COVID-19 and, in particular, the extent of any delay which has arisen as a result and whether that delay is critical given other issues that may exist. Given the importance of this to all the parties (including in respect of any termination rights arising from an extended Force Majeure delay), keeping accurate and contemporaneous records of progress is vital.

What impact will the CLC and government best practice guidance on contracting have on disputes?

The guidance has no legal force and, therefore, the rights and remedies will be governed by the contract, however, it would not be prudent to ignore it completely. See our detailed briefing here.

Drafting for future contracts

In addition to COVID-19 specific provisions, are there are any other key issues which clients need to bear in mind for new projects?

One of the main areas of focus will be the financial covenant strength of those involved and the wider issue of insolvency risk across the supply chain.

• For employer clients, carrying out detailed financial due diligence on its contractors but also understanding the covenant strength and financial pressure points in the supply chains will be vital. Employers will need to ensure that they have a robust performance security package in place. Parent company guarantees and performance bonds will therefore continue be very important, as will securing a comprehensive warranty package (be that collateral warranties or third party rights).
• From a contractor’s perspective, we are likely to see: requests for shorter payment periods; requests for advance payments, particularly for long lead-in items and goods/materials being procured from overseas; and inevitably a debate about retentions, be this the amount to be retained or whether retention should be used at all.

What contractual recourse will employer clients be looking for in the future against contractors for non-compliance with COVID-19 guidance?

The vast majority of construction contracts should already have fairly robust contractual protections through existing public liability type provisions. However, we will probably start to see additional specific provisions being included in contracts (possibly backed up by indemnities) which deal expressly with non-compliance with COVID-19 guidance.

We might also see COVID-19 compliance plans, tailored for individual projects, being formally incorporated into contracts. We may also see employers developing their own specific corporate policies on how they want to deal with COVID-19 (similar to corporate sustainability policies or anti-corruption policies) which are then stepped-down into construction contracts, with contractors and all others involved in the project having to comply with these policies.

Alongside this, we will see enhanced on-site monitoring requirements and detailed reporting obligations which contractors will need to follow and implement.

This is an edited transcript and a recording of the complete webinar is also available. these materials are for training purposes only and are not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Please take legal advice before applying anything contained in these materials to specific issues or transactions. For more information please contact the presenters or your usual contact.

If you have any queries regarding this webinar, please contact one of the speakers below or email the Events Team.