1. INTRODUCTION
The pandemic has caused upheaval and havoc in the lives of most, from the youngest to the oldest among us, nobody has escaped its grasp.
The construction industry has also had its fair share of disruption and distress since the start of the pandemic. With the initial shut down of construction occurring last March 2020, the pandemic has had a profound effect on both construction output and relations with the entire supply chain. At the time of writing this article we remain in partial lockdown, until at least 5 April 2021, with certain "essential" construction being permitted to continue. The full impact upon the economy of this partial shutdown is yet to be fully understood. However, a recent report by EY DKM on behalf of the construction industry indicates that contraction in construction output in 2020 was as high as 7.3%, or €24.7 billon1. It is these circumstances that have caused the supply chain to review existing construction contracts and to assess what COVID-19 related issues may impact upon the contracting parties' contractual rights and result in contractual disputes.
This article aims to shed some light on the contractual themes recurring in the industry over the last 12 months that we have advised on to our broad spectrum of clients who traverse the supply chain in construction sector.
2. COVID-19 PANDEMIC
On 12 March 2020, the Irish government announced measures to take effect in order to limit the spread of COVID-19. As a result, a number of construction sites closed in order to ensure the safety of staff and their families. However, it was not until 27 March 2020 that legislation was enacted to prevent all persons/employees travelling to and/or continuing to work on construction sites. From this date all persons were legally obliged to stay at home unless the construction work was deemed "essential". This had the corresponding effect of work ceasing with site closures across the country until 18 May 2020, which then immediately negatively impacted projected timelines for completion of affected construction projects. Attention from each section of the supply chain then began to turn to what precisely each clause of the relevant construction contract provided for in cases of delay; did the contract permit for automatic extensions of time and, if so, what were the financial implications.
We discuss the most frequently recurring clauses below:
2.1. Force Majeure Clauses
A force majeure clause is intended to remove liability for natural and unavoidable events, which disrupt or prevent the parties from fulfilling their obligations. Often these clauses will specify (i) the events that either party can rely on, (ii) the notification requirements such as a prescribed amount of time and/or delivery method or address, (iii) consequences arising from declaring a force majeure under the contract.
Before the COVID-19 pandemic, force majeure clauses in contracts were often overlooked and rarely given a great deal of consideration by the parties. However, after the site closures in March 2020, a scurry of activity occurred to review the impact of force majeure clauses in existing contracts. Each construction contract differs and this resulted in the need for a careful analysis of the impact of COVID-19 upon each force majeure clause, so that we could assess what different events were or were not provided for and anticipated, and what consequences were permitted, if any.
The first assessment was to decide if the wording in the particular contract under review provided for a force majeure event and if COVID-19 fell within that definition. If so, the next question was to assess whether the contract permitted additional time and, if so, in what context. Further, if the contract permit additional time under the relevant wording, did it also prescribe condition precedents to securing time and/or money in terms of timely issue of notices and the form of such notices.
By way of example, if the construction site closing in March 2020 was based on a NEC3 or NEC4 contract (in its unamended form), a force majeure type event would give rise to a Prevention/Compensation Event entitling the contractor to additional time and money under the contract.
In contrast, if a construction site closing in March 2020 was based on an (unamended) RIAI contract, then force majeure only entitled the contractor to time with no money, as such a delay event only entitled the contractor to claim an extension of time but with no corresponding entitlement to compensation in money.
Generally contracts will (in their unamended forms) provide the conditions where it is possible for contractors to make claims for additional time and money but the more heavily negotiated and amended, the more required as to the pre-existing rights under each contract for force majeure events.
However, a word of warning: while force majeure may have appeared as a superstar in 2020, its sparkle may be fading in 2021 as subsequent lockdowns due to COVID-19 may not be considered force majeure events (even if the first lockdown period did permit for time and/or money. COVID-19 and delays arising may no longer be the exceptional event that it first appeared between 12 March and 18 May 2020, as it arguably became the "norm". That said the status of COVID-19 as an event that triggering a force majeure clause is yet to be tested before the Courts.
2.2. Change of Law Clauses
Change of law clauses in construction contracts were another form of clause that came into sharp focus during the pandemic. These clauses typically permitted contractors to recover their increased costs or to benefit from extra time due to a change in legislation by the government. However, there are some events where a change of law can be considered a force majeure event under the relevant drafting. Each contract will have different reliefs that the employer, contractor or sub-contractor can benefit from where the change of law clause has been included in a construction contract.
3. ISSUES
The force majeure and change of law clauses are included in most instances to afford the contractor the necessary latitude to complete the contract when such events arise. However, the extra time afforded or extra monies agreed between the parties may not be sufficient to cover the delay caused by an extended Level 5 Lockdown, and the contractor may still be liable to the employer for liquidated and ascertained damages (LADs). LADs are common in construction contracts and are agreed between the parties before they enter the contract at a pre-determined rate in order to minimise the financial impact and the risk of litigation in the event of a breach of contract.
It is commonly known that smaller contractors will often agree to terms set out by the employer who hold the better negotiating position in order to "win" the work. It is also likely that contracts negotiated and executed prior to the pandemic were not practically considered in the event of the circumstances over the last year. This has led to projects becoming financially unviable for contractors to complete regardless of the provision made under the force majeure and change of law clauses.
In order for contractors to satisfy the agreed contracts in consideration of the issues outlined, it will likely become a central area of focus for contractors/sub-contractors to assess their losses and consider what claims they can legitimately make. This has the potential to lead to chaos as we emerge from the full effects of COVID-19 and return to commercial normality in late 2021 and onwards.
4. LIQUIDATED AND ASCERTAINED DAMAGES IN ABANDONMENT
As mentioned above, the contracts entered into by contractors and the subsequent circumstances brought on by the pandemic may have led and/or continue to lead to certain contractors being insolvent and/or unable to complete projects (i.e. abandonment by the contractor). This will most likely entitle the relevant employer to bring claims against the contractor for LADs for delay and/or making claims on performance bonds if they are in place.
In 2019 the UK looked at the issue of LADs in construction contracts in the Triple Point2 decision. Before Triple Point there were three approaches identified by the UK High Court in three separate matters when determining if and how LADs should be given to employers:
- The Glanzstoff3 approach, which is that the relevant LADs clause only applies if the original contractor completes the relevant works;
- The Orthodox4 approach, which is that the LADs clause applies up to termination of the contract and thereafter, the employer must prove their losses in the normal process for general damages; and
- The Van der Heiden5 approach, which is that the LADs clause applies up to and until completion by the second contractor.
When the Triple Point matter was before the High Court, the judge had adopted the Orthodox approach that led to Triple Point owing PTT approximately USD$3.45 million. However, Triple Point appealed the matter to the Court of Appeal. Here, the judges' starting point was the 'precise wording of the liquidated damages clause in question'. They reviewed the matter and their interpretation of the specific LADs clause agreed between the parties was that LADs would only apply to the work that had been completed by Triple Point and thus they adopted the Glanzstoff approach. This meant PTT were only entitled to USD $154,000 in LADs under the contract.
This is important as the Court of Appeal highlighted the importance of interpreting each LADs clause as it is agreed between the parties. The Court also commented that where the project was terminated or abandoned, general damages under the ordinary rules might be more appropriate in these instances as the rate of LADs agreed between the parties may be 'artificial'.
This decision has been highly controversial and the Irish Courts have not yet commented on the decision so it is not clear if the view of the English Courts would be followed in Ireland. However, Irish commentators have advised Irish employers to take heed of the decision and to include the necessary amendments in drafting construction contracts to ensure that the difficulties that arose in the Triple Point case do not occur to them. The matter was further appealed to the UK Supreme Court and the judgement is still outstanding so there may be further development shortly in this area.
5. CONCLUSION
COVID-19 has drastically affected nearly every industry in Ireland but arguably none more so than the construction industry. It is clear that industry professionals have learnt many lessons from the events of the last year and these will be borne in mind for all future contracts so that the possible logistical and monetary issues of future events can be minimised and their business is adequately protected.
Further to the issues set out in this article, other logistical issues that contractors may encounter could be access to site, delay of materials, reduced labour work force permitted on site or available to work, which may also cause an additional cost burden on the contractor.
In addition to the lessons learnt by industry professionals as a result of pandemic, the decision in Triple Point offers a sage lesson as it highlights just how critical the correct and comprehensive drafting is to ensuring a party's entitlement to relief in the event of works being abandoned or delayed where LADs have been agreed.
Footnotes
2. Triple Point Technology Inc v PTT Public Company Ltd [2019] EWCA Civ 230
3. British Glanzstoff Manufacturing Co Ltd v General Accident Fire and Life Assurance Co. [1913] AC 143
4. As acknowledged as being the 'Orthodox approach' by Jackson LJ in their judgement at note 3, para [110].
5. Hall v Van der Heiden [2010] EWHC 586 (TCC)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
