John FFF O’Brien of John Farage O’Brien Dispute Resolution Consultants, sets out some critical contract matters for Construction contractors need to consider in the context of the COVID-19 crisis.
No one knows what the full impact of COVID-19 will be on the economy or wider society in Ireland. However, what we do know is that its impacts will be wide-ranging for every industry, including construction.
As yet, there has been no direct instruction from Government that construction sites be closed.
The position, on the basis of the Taoiseach’s address of 24th March 2020, is that where social distancing measures can be adequately implemented, then sites may stay open. This is positive for the industry and the economy overall, but with the inevitable delays that will result to projects due to the wider impacts of COVID-19, Contractors must be conscious of their exposure.
Contractors operating under the Public Works Contract may feel particularly concerned considering the risk profile of that contract and the onerous provisions with regard to entitlements to time and money. In particular, contractors need to be mindful of the provisions to be complied with in order to obtain or maintain entitlements.
With that concern in mind, we set out below some critical matters for Contractors engaged under the Public Works Contract to consider in the context of the COVID-19 crisis.
Communications with the Employer
As an initial and overall point, the most important thing to do now is to maintain the relationship, communicate and, if possible, agree steps to take with the Employer – now is the time to pick up the phone and to discuss matters sensibly. That said, notwithstanding any discussions that do take place, Contractors must at all times comply with the contractual provisions to ensure no entitlements are lost.
The guidance to Employers issued by Government does appear to take a cooperative and conciliatory approach to dealing with the issues thrown up by COVID-19. In particular, in a guidance note to Employers issued through the Construction Procurement Reform website, which operates under the remit of the Department of Public Expenditure and Reform, employers are directed towards clause 4.1 of the Public Works Contract, which provides that the Employer and the Contractor shall cooperate. The guidance reads as follows:
“…sub-clause 4.1 Co-operation should be used as the vehicle to assess the likely impact of the Covid-19 response measures on the progress of the works, the issues currently arising and any potential mitigating measures that can be taken. Where the issues arising are linked to the impact of Covid-19 response measures the Contracting Authority [Employer] should adopt a proactive and collaborative approach to address the issues.”
As a Contractor, if you are faced by an Employer/Employer’s Representative who is unwilling to engage or does not engage of their own volition pursuant to clause 4.1, some pointed correspondence quoting the above guidance may assist in generating the required engagement.
Extensions of Time and Adjustments to the Contract Sum
It is unavoidable, delays will occur as a result of the COVID-19 crisis. Whether it be social distancing measures slowing down work progress, or delays in the wider supply chain causing materials to take longer to come to site, progress will be curtailed and deadlines missed.
In order to maintain entitlements, Contractors must operate within the contractual conditions and notify the delay pursuant to clause 9.3 or 10.3 of the contract. Remember, under clause 9.3, Contractors are required to issue a notice when they become aware that work under the contract is being or is likely to be delayed.
Contractors are aware that work is likely to be delayed as of now, so the relevant notice should be submitted. Contractors must also input the required follow-up notices to maintain entitlements pursuant to clauses 9.3/10.3.
In the context of COVID-19, the Contractor should also consider its position under clause 2.5 Safety, Health and Welfare at Work Act 2005 and Safety, Health and Welfare at Work (Construction) Regulations 2013 which provides:
“2.5.1 The Contractor shall [without limiting other obligations] ensure, so far as is reasonably practicable, that the Works are constructed to be safe and without risk to health…..”
[A worrying choice of words in this context perhaps?] but one of the Contractor’s other obligations with regard to proceeding diligently [without delay] under Clause 9.1.3 is that:
“9.1.3 …The Contractor shall, unless the Employer’s Representative directs otherwise, proceed regularly and diligently in order to achieve Substantial Completion of the Works and each Section by its Date for Substantial Completion.”
Without exercising social distancing, the constructing of the works will [according to the current guidance from the Department of Health] create a risk to health.
It appears to be reasonably practicable to exercise social distancing on many sites, but in doing so it will also affect efficiency of output, and slow down overall progress. This will most certainly put the contract Date for Substantial Completion of the Works in jeopardy [and thus heighten the risk of liquidated damages being levied against the Contractor] unless the Employer’s Representative (ER) grants an appropriate extension of time.
Is the ER obligated now to direct otherwise and instruct social distancing on sites as a Change Order and limit the Contractor’s other obligations referred to in clause 2.5?
The statement issued on the Construction Procurement Reform website recommends to Employers that they should utilise the clause 10.4 mechanism in relation to potential issues faced as a result of COVID-19. Clause 10.4 permits the Employer to request a proposal from the Contractor with regard to an instruction to be given by the Employer. The guidance states:
“…it is suggested that the ER make use of sub-clause 10.4 Proposed Instruction by requesting the Contractor for a proposal to address the particular issues as they are identified under subclause 9.3.”
Our advice to contractors is to make proposals under 10.4 for a Change Order on the basis of additional constraints being imposed on completing the works causing delay, those constraints being the recommendations of the Department of Health with regard to social distancing. This Change Order will result in both an extension of time and an adjustment to the Contract Sum pursuant to Event 1 in Part 1 K of the Tender and Schedule.
It is also specifically noted in the guidance on the Construction Procurement Reform website that many items of delay may be dealt with pursuant to Event 15 in Part 1 K of the Tender and Schedule. This event is a delay event but not a compensation event, so provides an extension of time, but no adjustment to the Contract Sum. It seems likely that Event 15 will be the official default position on all Government contracts for COVID-19 giving Contractors time, but no money.
Event 15 reads as follows:
“Delay to the Works caused by the order or other act of a court or other public authority exercising authority under Law, that did not arise as a result of or in connection with an act, omission or breach of Legal Requirements of the Contractor or the Contractor’s Personnel or a breach of the Contract by the Contractor”
There is currently a potential difficulty with regard to how Event 15 occurs in that there is no ‘Law’ (as yet) on which to hang an entitlement for an extension of time. All actions that are being taken stem only from ‘guidance’ as issued by the Department of Health. This leaves it open to Employers, if they wished to do so, to be difficult with regard to granting and extension of time under the contract pursuant to Event 15. This is obviously subject to change on the basis of emergency legislation due to be passed. That said, should there be difficultly in bringing the Employer to the table to have sensible discussions in relation to how matters should be dealt with in respect of the continuation of the works, it may be useful to remind the Employer of the indemnity he has provided to the Contractor pursuant to clause 3.5 of the contract. Clause 3.5 reads as follows:
“3.5 Employer’s Indemnity
The Employer shall indemnify the Contractor against:
(1) liability for death, injury, or illness of any person or loss of or damage to any physical property that the Contractor incurs in the course of performing the Contract to the extent caused by the negligence of the Employer and
(2) liability for property damage that is the unavoidable result of executing the Works in accordance with the Works Requirements”
Conceivably, on foot of clause 3.5, should the Employer be negligent with regard to how he conducts himself in relation to the COVID-19 crisis and should such negligence result in death or illness of any person due to COVID-19, then the Contractor will be indemnified in respect of such negligence. Therefore, the Employer has a significant interest in coming to the table to discuss, agree and instruct sensible and achievable actions to deal with COVID-19.
Should it not be possible to implement social distancing measures as a result of the type of works that are being undertaken on a particular project, the Employer may decide to suspend the works, or, if a proposal is sought from a Contractor pursuant to clause 10.4, the Contractor may decide to propose that the works be suspended.
Such suspension would qualify as both a delay and compensation event pursuant to Event 3 in Part 1, K of the Tender and Schedule. As a result, the Contractor would benefit from both an extension of time and an adjustment to the Contract Sum.
There is also a question of potential negligence here, should the Employer fail to instruct suspension of the works either of his own volition or on foot of a proposal from the Contractor pursuant to clause 10.4, particularly should an operative on site have tested positive for COVID-19. Such issues seem yet to have arisen, but surely this will inevitably occur.
The COVID-19 crisis is fertile ground for claims orientated Contractors and obstructive Employers to lose sight of the public health emergency and embroil themselves in wasted exercises of attempting to make or save money under Public Works Contracts. It is hoped that perspective will win out and that all Contractors and Employers take a different approach.
What needs to occur is for Employers and Contractors to sit down together to identify the best way forward and for both to work together to ensure that, where possible, work progresses in a manner that is conducive to maintaining public health and facilitates through the carrying on of as many construction projects as possible. Until these conversations happen and decisions are taken on foot of those discussions, Contractors should be mindful to maintain their entitlements in accordance with the contractual provisions. As delays do occur, extensions of time and adjustments to the Contract Sum, where appropriate, should be given in a proportionate manner and be reflective of what is happening on the ground. Construction is vital to economic activity and if activity can continue in a safe manner, it should. Moreover, the industry has a responsibility to the wider economy to keep activity going, assuming it can do so.
(John FFF O’Brien 25th March 2020)
John FFF O’Brien is principal of John Farage O’Brien Dispute Resolution and Legal Support Consultants. He has been engaged in resolving construction disputes for more than 19 years, and his firm recently passed a significant milestone, handling disputes involving €3 billion worth of contracts. More details at www.johnfarageobrien.ie