NEC3 and the impact of COVID-19
The Coronavirus has now spread to over 100 countries and the World Health Organisation has declared a pandemic. Some countries have taken drastic measures to contain the outbreak, and it is likely others will follow.
Construction supply chains operate across local and global boundaries, relying on movement of materials and other resources to arrive just in time to align with the construction sequence. These supply chains have already been affected by the pandemic and there is no certainty of how long or deep it could impact our industry.
Projects operating under an NEC3 contract should review their terms to understand whether this event entitles them to relief, additional contribution, or indeed obligates one of the parties to act.
Provisions of contract
Carefully review the terms of your contract, with particular attention to any amendments (Z Clauses). Map out relevant provisions that apply to interruption of your project as a result of the outbreak and determine the status of your project in relation to that. The following standard form clauses should be considered in the first instance.
Clause 16.1 – Early Warning: As a minimum an Early Warning Notice should be submitted as soon as possible. The Coronavirus is a risk which has or will impact most projects. The notice should state the potential impact of the outbreak on your project and be widely drafted to cover any possible outcomes which may transpire. This will avoid potential time bar issues.
Clause 19.1 – Prevention: The NEC definition of Prevention is aligned with the principles of force majeure, or an unforeseeable circumstance preventing someone fulfilling a contract. This should not be confused with the legal doctrine of prevention, which is an entirely different matter.
Clause 19.1 needs to be read carefully to determine the rights and obligations of the parties. In summary, if the Contractor is stopped from completing the works, or from meeting its completion date because of the Coronavirus, then Prevention (NEC definition) has occurred. This is subject to the parties not being able to prevent the event, nor it being reasonably foreseeable at the time of contract.
An event which stops the Contractor completing the works altogether is unlikely at this stage. However, if your Contract has time sensitive conditions and corresponding termination provisions within the Contract, Subcontractor or supply agreements, this could be a possibility.
More likely to occur or have already occurred is the second limb, which stops the Contractor completing by the date shown on the Accepted Programme. Indeed, events occur all the time which delay the completion date, this is routinely managed through the time and compensation event provisions of the contract.
Providing the contractor has an accepted programme, and a basic understanding of where the critical path flows, this may be sufficient to determine the completion date cannot be met. Where the programme is more complex, or not current some analysis may be required.
Clause 60.1(19) – Compensation Event: This compensation event Clause replicates the wording at Clause at 19.1 for Prevention. Where the Project Manager has issued instructions under Clause 19.1, or the Contractor believes it has or will be impacted then a Compensation Event Notice accordingly.
Clause 91.6 & 91.7 – Termination: The Prevention event could permit a right of Termination by either party. Clause 91.7 again replicates the words at Clause 19.1 for Prevention but includes a trigger period of 13 weeks delay to the completion date before the Employer is permitted to enact it. Clause 91.6 gives the Contractor the right of Termination, but again the trigger is 13 weeks and is subject to prior instructions from the Project Manager to stop work. The Employer retains the right to terminate at convenience regardless.
The terms and consequences around termination need careful attention and you should always seek expert legal advice before enacting these clauses.
Option X2 – Change of Law: Where the Government is providing guidance or is implementing restrictions on the gathering and movement of people, does this amount to a Change in the law. This is not easily defined, therefore if you believe this may apply, you should seek expert legal advice on the applicability and remedy.
Could reasonable mitigation measures avert a Prevention event occurring?
There will likely be a point of no return, where mitigation will be unlikely to recover any delays incurred to achieve the completion date. This may occur sometime prior to the planned completion date when factoring in the time required to remobilise resources and re-establish supply lines after the pandemic has passed.
Is it reasonable for a contractor to have anticipated the outbreak of a pandemic and made provision for this in its tender price and programme?
The answer will depend on when the contract was formed. If the contract was formed prior to the knowledge of an outbreak, it is clearly unreasonable to have allowed for its effect. However, if formed any time after the outbreak there may be a legitimate argument conversely.
If you are in the process of agreeing contract terms, it is imperative you consider this in your current negotiations as Clause 19.1 may not be triggered and the Contractor may have no contractual provision to terminate the contract nor entitlement to a compensation event under Clause 60.1(19).
Could neither party have prevented the event occurring?
The answer must surely be no, in relation to averting a pandemic with origins somewhere else on the globe. However, the provision relates only to the impact upon the project, not the entire world, therefore could either party have prevented the impact upon the project?
Could the contractor have stockpiled materials, tested its workforce earlier, restricted access for any operatives with signs of illness, provided enhanced sanitary facilities, expanded its supply chain to cover the risk of a reduced workforce or considered converting to offsite construction techniques.
Could the Project Manager have intervened and instructed additional control or mitigation measures?
Early engagement between the parties is essential to consider possible mitigation measures. Decisions that may have been effective are far easier to identify after the event, therefore a joint project decision rather than a unilateral one may prevent the accusation of failure to adequately mitigate at a later date.
Many businesses have implemented a work from home policy, however this does not mean the entire workforce should become isolated. It is prudent to hold regular conference calls with the teams throughout the day. The interaction will ensure you can check on the wellbeing of your teams, maintain moral and ensure productivity continues. This is of course much more difficult for your trade employees who may be effectively stood down.
Whether you are entitled to recovery of time and cost through your contract, insurance policy or statutory entitlements, such as the recent commitment from the Government for sick pay, it is essential you are able to prove your losses, otherwise your claim may fail.
It is for the claimant to prove the case and therefore the collation and documentation of records is essential during this period. You still need to demonstrate the pandemic is the cause of loss and link this to the effects.
In relation to time, being able to frame the dates upon which the event began to impact the project is essential, whether this is a critical stop, or when disruption of some activities started to occur. Submission and agreement of a programme immediately prior to that event is beneficial, this will allow a clear analysis of how the event has impacted from that date to identity any separate delays already manifested.
Under the NEC3, a Contractor is required to provide a compensation event quotation when instructed so by the Project Manager. Prior discussion with the Project Manager is advisable to ensure adequate assumptions accompany the quotation. Due to the unpredictability of the pandemic it is unreasonable to expect the initial quotation to include all possible effects.
To prepare, the Contractor should be readily collating records to identify its resources and how they are impacted. The Contract often stipulates which records are required and these should be provided to the Project Manager as a minimum, plus other supporting information that may assist the Project Manager in assessing the impact.
There may be obligations that cannot be met due to the outbreak itself, such as minutes of meetings that did not happen due to isolation, or the absence of biometric site access data which is suspended to reduce the risk of spreading the virus by touch. Agreement of alternative methods should be agreed with the Project Manager which could include the submission of regular and detailed records in paper or electronic formats in the interim.
- Check the relevant provisions of contract – particularly any amendments to Prevention, Time, Compensation Events and Termination.
- Seek expert legal advice if you are unsure what the implications of those amendments are.
- Ensure the contract programme is up to date and preferably agreed. The frequency of programme submissions in contract data, is a minimum, therefore submit an updated programme corresponding to the Clause 19 event date.
- Provide the relevant Early Warning notice (Clause 16) at the earliest opportunity.
- Where effects have already been felt or are likely, prompt the Project Manager for instructions under Clause 19.1.
- Convene a risk reduction meeting to discuss and agree any mitigation measures which may reduce the impact of the pandemic.
- Where the pandemic and/or mitigation measures instructed are likely to increase cost or delay completion, submit the relevant Compensation Event notice (Clause 61) and await the Project Managers instructions in relation to submitting quotations.
- If developing events increase the risk of additional cost and delay, provide updated Early Warning or Compensation Event notices.
- Where the event is likely to delay completion by more than 13 weeks, consider whether termination is beneficial or if the parties believe the project should continue.
- Where the event makes it impossible to complete the works, prepare the project for termination.
This commentary reflects the NEC3 unamended standard form of contract. The majority of NEC contracts contain amendments, or ‘Z clauses’ which add, omit or alter the construction of standard clauses. Clauses 19.1 and 60.1(19) are commonly omitted or amended from standard forms.
It is prudent to seek expert legal advice to interpret the meaning of your contract and deciding on the relevant course of action. It is also prudent to seek the assistance of delay and quantum experts in determining the impact of time and cost on your project.