How the construction industry might survive the coronavirus

How the construction industry might survive the coronavirus

 

On 7 May 2020 the Construction Leadership Council published some extremely valuable “Best Practice Guidance” to be followed by the construction industry in light of the current Coronavirus pandemic. It deserves to be read by anyone closely involved in the construction industry. A copy may be found here.

As well as offering very sensible advice to employers and contractors alike, it provides practical examples of model letters that could be used by contractors and sub-contractors / suppliers under different standard form contracts, addressing the impact of the coronavirus pandemic. If the CLC’s recommendations are followed, the economic harm caused by the coronavirus may be substantially mitigated.

 

Surviving the epidemic

 

The CLC’s guidance starts with a grim warning that unless the construction industry engages in collaborative discussions now, it will become embroiled in costly and long-running disputes. It says that a collaborative approach to payment, and the revision of contractual clauses, is not merely desirable but “must be reflected across the whole of the industry for it to survive for the long-term”. The importance could not be clearer.

The scale of the crisis facing the industry means that existing contractual arrangements (for example those dealing with force majeure) may not be adequate to cope with the impact of the coronavirus. The CLC suggest that

notwithstanding the contractual provisions, Employers and Suppliers should seek to take a collaborative approach towards successful project delivery and discuss whether an extension of time can be granted and any additional costs shared in any event, in light of the unforeseeable and unprecedented nature of COVID-19.

In other words: share the pain. In practice, this is an appeal to employers to make additional payments to their contractors, or to waive their contractual right to levy liquidated damages for COVID-19 delays. For the employer, this may pragmatically be the best or only means of getting the project delivered successfully. For the country as a whole, these steps may be necessary for the construction industry to survive. This pressure will apply equally to main contractors in their relations with sub-contractors, whose financial position may be even more precarious.

Whether employers and main contractors are willing to take on this “collaborative approach” remains to be seen. Collaboration is not a word one necessarily associates with the construction sector in times of crisis; but in these unprecedented times, we should expect the unexpected.

 

Thinking about collaboration?

 

From a legal perspective, what should a party be thinking about when adopting a collaborative approach? Are there any pitfalls?

One factor to consider is whether or not the parties intend the any departure from the contractual terms to be legally binding. Where a party refrains from acting upon their contractual rights, to the benefit of another party, there can be legal consequences. As Denning LJ famously observed in Charles Rickards Ltd v Oppenheim [1950] 1 All ER 420 at 423, [1950] 1 KB 623 at 423, where he said:

"If the defendant, as he did, led the plaintiffs to believe that he would not insist on the stipulation as to time, and that, if they carried out the work, he would accept it, and they did it, he could not afterwards set up the stipulation in regard to time against them. Whether it be called waiver or forbearance on his part, or an agreed variation or substituted performance, does not matter. It is a kind of estoppel. By his conduct he made a promise not to insist on his strict legal rights. That promise was intended to be binding, intended to be acted on, and was, in fact, acted on. He cannot afterwards go back on it."

Moreover, if the parties adopt a course which is not in accordance with the terms of the contract, the court may find that they have agreed to vary the contract terms by a course of dealing. This is what Edwards-Stuart J found had happened in Leeds City Council v Waco UK Ltd [2015] EWHC 1400; 160 Con LR 58, where the employer made payments in response to a contractor’s payment applications, despite them regularly being made out of time. The judge held that the parties had agreed, by course of dealing, that payment applications would be valid notwithstanding the fact they were late.

Where a party adopts a collaborative approach in the face of the coronavirus, but does not wish to create a legally binding variation from the contract, it would be prudent to record that all of their contractual rights are reserved. In this way, it cannot be said at a later date that they have waived their rights by making an unequivocal or unambiguous representation, possibly giving rise to an estoppel of some sort.

Furthermore, unless and until the agreed contractual terms are varied, it remains essential for the parties to carry on complying with the mechanisms which are in place to deal with issues such as delays, and costs. The parties should not assume that the obligation to comply with these terms simply goes away in the face of a global pandemic; on the contrary, this is precisely when they become paramount. The CLC advise that it is “imperative” that these requirements are followed, and express concern that “on the majority of projects contracts are not being administered in accordance with their terms”. If this really is the case, one can readily anticipate a tsunami of adjudications on the horizon.

 

Agreeing to act in good faith

 

If the answer is to be found in collaboration, why not simply enter into an agreement to collaborate? Or, could the answer be found in an agreement to act in good faith?

Although this is not addressed directly in the CLC’s guidance, they do draw attention to a model Deed of Variation produced by the Cabinet Office for use in public sector contracts: see PPN 02/20. The recital to that agreement states that “both Parties shall act in good faith and work together towards the aims and principles set out in PPN 02/20”. Under one of the options, the parties agree to “act transparently and with integrity and at all times in good faith and using best endeavours in relation to any COVID Relief”.

The extent to which any such agreement could have any practical effect is a matter for debate. Historically, English law has tended to regard good faith as being a rather illusive and content free concept. As is well known, agreements to negotiate in good faith are regarded as unenforceable: see Emden 2.55. Moreover, while some standard form contracts contain aspirational statements about good faith (e.g. the JCT Construction for Excellent Contract provides at cl.2.1 that “The Overriding Principle guiding the Purchaser and the Supplier in the operation of this Contract is that of collaboration”) the extent to which this entails any substantive content is unclear.

However, it is now thought that “good faith” is more than mere waffle. In a recent TCC case, Fraser J considered in detail what a duty of good faith might entail in ‘relational contracts’ (see Bates v Post Office Ltd (no 3: Common Issues) [2019] EWHC 606 discussed in Emden 4.115. He said that it was more than merely being honest, and that acting in good faith means “the parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people.” That potentially opens up an interesting debate about what ‘reasonable and honest people’ would regard as commercially acceptable behaviour in the time of the coronavirus. An employer may be hesitant about the obscure and open-ended scope of this obligation.

 

The perspective of the contract administrator

 

However ‘unprecedented’ or ‘unforeseeable’ the coronavirus epidemic may have been, the role of the contract administrator remains the same unless the parties agree to vary the terms of their agreement. In Scheldebouw BV v St James Homes (Grosvenor Dock) Ltd (2006) 105 ConLR 90, [2006] BLR 113, Jackson J said that a certifier had to use “his professional skills and his best endeavours to reach the right decision”, and “to act in a manner which has variously been described as independent, impartial, fair and honest” (para 34). That duty is more important than ever. As the CLC point out,

Without proper fair and reasonable administration of construction contracts COVID-19 could have a significant and detrimental effect on an industry which is expected to play a central role in helping the economy recover from the effects of COVID-19.

When contractors encounter significant financial difficulties, it would not be surprising if contract administrators suddenly felt under pressure to act more generously on questions about time and money. They may themselves look to adopt a “collaborative” approach in contract administration.

Caution is advised. Notwithstanding the benefits of a collaborative approach, the contract administrator cannot unilaterally decide to circumvent the approach set out in the contract which they are administering. Any agreement to depart from the contractual provisions when it comes to extensions of time, or matters of payment, must be a decision for the parties. However well-intentioned, a contract administrator who acts without authority by granting extensions of time or certifying payments which are beyond the scope of the contract, may find themselves in breach of their duty to the employer.

All of the above underlines the need for the nature of any collaborative approach to be clearly agreed, clearly defined, and properly communicated, so that the contract administrator is able to implement the agreement.

 

The approach to variation

 

If the parties do agree to vary the terms, how might this be achieved? A mere oral agreement may not be sufficient. In Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24; [2018] 4 All ER 21 the Supreme Court upheld a clause in a contract which provided that it could not be subject to any oral modification. According to Lord Sumption, there were a number of reasons why such clauses should be upheld:

The first is that it prevents attempts to undermine written agreements by informal means, a possibility which is open to abuse, for example in raising defences to summary judgment. Secondly, in circumstances where oral discussions can easily give rise to misunderstandings and crossed purposes, it avoids disputes not just about whether a variation was intended but also about its exact terms. Thirdly, a measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.

While “No Oral Modification” clauses may not be commonplace in standard form construction contracts, they are regularly encountered where bespoke modifications are made, or where parties have their own standard terms and conditions. In any event, Lord Sumption’s point that a written record of the variation avoids future disputes about what was agreed is obviously very sensible.

As noted above, the Cabinet Office has produced a model Deed of Variation which can be used to vary a JCT or NEC contract to accommodate the challenges presented by the coronavirus. The CLC point out that, whilst drafted for use in the public sector, they can apply equally to private sector agreements – although they would need to be tailored to the facts of each case. As with all significant legal agreements, it is always wise to take legal advice on any proposed contract which affects your legal rights and obligations.

 

Conclusion

 

It is hard to over-estimate the challenges currently facing the construction sector. The prospect of significant financial losses is real and imminent. The advice contained in the CLC Best Practice Guidance could, if adopted, help the construction industry to weather the economic storm which is set to unfold in the weeks and months ahead.

 

Further reading:

Construction Law - Practice Notes & Guidance

In-house - Practice Notes & Guidance

Dispute Resolution - Practice Notes & Guidance

  

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About the author:

Richard Sage’s practice is in the fields of construction, professional negligence, insurance, product liability, property damage and general commercial litigation / arbitration. Richard has substantial advocacy experience, and regularly appears in the County Court, High Court and Court of Appeal.

In 2013 Richard was awarded a distinction in the MSc in Construction Law and Dispute Resolution at King’s College London. In addition to his court practice, Richard is a co-author of Emden on Construction Law.