“Resolution Of Costs And Delays Will Rest On Engagement And Contract Provisions”
Siobhan Kenny, Associate, Property & Construction, Eugene F Collins, writes that the current Covid-19 crisis is unprecedented and none of the standard contracts make provision for its consequences.
As everyone involved in projects at this difficult time will be aware, the construction industry is facing a litany of novel issues courtesy of the Covid-19 emergency, and the unprecedented measures taken by Government to deal with it.
The construction landscape has changed. As on-site activity resumes, contractors are faced with a full regimen of new regulations and constraints, the effect and impact of which will remain unclear for some time. We have undertaken a review of relevant contract provisions.
Standard Forms Considered
In considering the issues arising on the resumption of on-site activity, we have concentrated on the two forms of Main Contract in most common use in Irish construction projects – the Public Works Contract (Employer Design) (PWC) and RIAI standard form (2017). These standard forms do not provide for the current crisis.
The PWC standard forms are rarely amended, but the RIAI standard form is rarely left untouched. In larger private projects, amendments to the form are often substantial, resulting in an entirely bespoke form of contract. Every contracting party, on every construction project, would be well advised to check the terms of the contracts that they have entered into with every other contracting party.
Engagement and Cooperation
From the outset, commentators have recommended that the best way for contracting parties to respond to the challenges they are facing is to engage with each other. Such engagement should remain of the highest priority in the context of the resumption of activity on site.
The Office of Government Procurement (OGP) has issued guidance encouraging engagement and drawing attention to the specific provisions of the PWC, which require this.
“The Employer [subject to restraints as a public authority] and the Contractor shall support reciprocal cooperation for the Contract purposes, including cooperation with and between Contractor’s Personnel and Employer’s Personnel.”
While the RIAI standard form does not contain an express cooperation provision, legal authorities are clear that a party to a construction contract is required to do that which is necessary to enable the other to perform their obligations. A failure to comply with an obligation to cooperate through meaningful engagement amounts to a breach of contract.
Engagement on these issues will, of necessity, involve consideration of contractual provisions, as well as commercial realities.
The PWC standard form includes a rigid, condition precedent notice procedure for claims. Failure to comply strictly with that procedure will, in all likelihood, result in a loss of entitlement.
The equivalent provision of the RIAI standard form also requires that the Contractor gives notice of claims, but it is not a condition precedent to entitlement. Many private sector contracts include provisions similar to the PWC provisions by amendment of the RIAI standard form.
The pandemic is an event that should be notified; it impacts on the time and cost involved in progressing the works. Notices should be served within stipulated periods, and further information should be provided in accordance with the contract and, as necessary, notices of continuing effect should be served.
The full impact of the new regulations on-site activities will not be fully understood until the new measures are implemented and works recommence.
Claim notices should be continuously updated, and include as much detail as possible in each update. The importance of record-keeping cannot be overstated.
Time and Prolongation Costs
Implementation of the new regulations is likely to have an impact on the progress of the works, and the time required to complete the project.
Contractual entitlement to additional time (and consequent protection against LADs) arises under Clause 9 of the PWC Contract, and Clause 30 of the standard form RIAI. Recovery of costs arising from a prolongation of the contract period is contingent on establishing that the event giving rise to the prolongation is one for which the Contractor is entitled to compensation. The contractor is under continuing obligation to mitigate the effects of such delay.
Under the PWC standard form, the issue causing prolongation must be a Delay Event as set out in Schedule 1K.
Delay Event 15 (Schedule 1K) is of particular significance in the context of this emergency. Event 15 is usually a Delay Event only. No entitlement to costs arises, and no element of the programme contingency is used up in respect of a Delay Event that is not also a Compensation Event.
Prolongation costs, evaluated under Clause 10.7, will be recoverable if the event causing prolongation is identified in the schedule as a Compensation Event as well as a Delay Event.
Under Clause 30 of the RIAI contract, an extension of time will be granted if the Architect forms the view that the event Siobhan Kenny, Associate, Property & in question (as per the list set out in that clause) has caused delay, and does not arise as a result of Contractor default. The list of events is broad enough to capture Architect instruction, variations and changes, as well as force majeure. The Architect must act reasonably in forming the opinion and in granting the resultant extension. Prolongation costs will be recoverable if the cause of the delay is one for which the Employer is contractually responsible – which does not usually include force majeure.
Recovery of additional costs incurred as a consequence of the implementation of the new regulations on site comes down to questions of contract interpretation and contractual responsibility – unless the parties reach agreement as to how issues are to be managed.
Clause 10 of the PWC standard form, and Clauses 2 and 4 of RIAI Standard form of contract are of relevance.
Under the PWC standard form, the Contractor is required to establish that their claim for an adjustment arises on foot of a Compensation Event, as identified in Schedule 1K.
The most relevant Compensation Events in the PWC standard form appear to be the following:
- The issue of a Change Order
- The failure of the Employer’s Representative to respond to a request (Clause 4.11) for a required instruction (Clause 4.5.4).
Change Order is defined as meaning’ “an instruction of the Employer’s Representative to change [including add to or omit from] the Works or to change [including impose or remove] constraints in the Contract on how the Works are to be executed.”
Under Clause 4.5.4, “If in the ER’s opinion, it is physically impossible or contrary to Legal Requirements to complete the works in accordance with the Works Requirements, the ER shall give a Change Order”.
The Contractor may argue that the new constraints render it physically impossible or contrary to Legal Requirements to carry out and complete the works in accordance with the Works Requirements. In that case, he will submit a request for a Change Order to cover the issue, in accordance with the procedure set out in Clause 4.1.1. The failure to issue a Change Order in circumstances where it is warranted comprises a Compensation Event.
If a Compensation Event has occurred, the Contractor is entitled to an adjustment to the Contract Sum (Clause 10.1) to be calculated in accordance with Clause 10.6 – for the value of any additional, substituted and omitted work arising as a result of the Compensation Event.
The parties might also consider implementing the Contractor Proposal mechanism provided for in Clause 10.4. In making such a proposal, the Contractor will be in a position to set out the issues, the likely costs, and how it is proposed to manage the time and cost implications of the imposed restraints.
If the ER accepts the Contractor’s Proposal, they then notify the parties and make any resulting adjustments to the Contract Sum (Clause 10.5.1 (2)).
Finally, it should be noted that under the PWC standard form, the Contractor is expressly obliged to comply with the Law and with Legal Requirements – both of which terms are defined broadly – in completing the Works.
Clause 2 of the RIAI standard form provides for the issue of Architect’s instructions. If the instruction involves a variation, it will be valued under Clause 13. In addition, if compliance with an instruction involves the Contractor in loss or expense beyond that provided for in the contract Sum, the amount of that loss/ expense should be recoverable.
Clause 4 of the RIAI standard form – dealing with legislative enactments – is relevant. The EMPI legislation and the regulations issued under it comprise legislative changes, which will give rise to additional costs. Commentators differ as to whether the clause is broad enough to allow Contractor cost recovery, but the reference to the change – “affecting the cost of labour or otherwise” – is of assistance to the Contractor.
The current emergency is unprecedented, and none of the standard contracts make provision for its consequences. If, however, it happens again, it will no longer be unprecedented. Standard form contracts will require amendment to reflect that new reality.
Siobhan Kenny is an Associate with the Construction Team at Eugene F Collins solicitors. If you would like more information on this issue, email firstname.lastname@example.org; or visit www.efc.ie