- 30 March 2020
- Posted by: Jonathan Mills
- Categories: Commercial Law, Construction Law, Covid-19 Updates
The impact of the Government announcement of 27 March 2020 on Construction Contracts
This note is part of a series that the lawyers of Reddy Charlton will issue on the major legal, personal and business issues that will confront us all during the Covid-19 crisis.
This article focuses on what impact the Government’s temporary closure order of 27 March will have on construction projects and in particular what contract clauses construction professionals need to be mindful of as a result of the delay events now arising.
Given the impact of Covid-19 on the country and the economy, it was inevitable that there would be a significant impact on the construction sector. There was uncertainty as to what threat would ultimately cause the impact, whether it would be a lack of materials, a shortage of manpower or increased health and safety guidelines. These particular threats were displaced by the announcement by An Taoiseach on Friday, 27 March last when he ordered all non essential work to stop for a minimum of two weeks with immediate effect. The legal basis for the announcement is the Health (Preservation and Protection and other Emergency Measures in the Public Interest) Act 2020 and in particular section 10 which amends the Health Act of 1947.
The following day, Saturday 28 March, the list of essential work that could continue was published and it was clarified that with very limited exceptions, the construction sector was not considered essential and as a result construction activity would have to stop. The Construction Industry Federation (CIF) was quick to support the Government order and clarify for its members that all construction sites (with limited exceptions) were to close immediately. The Government did identify that certain construction related activities are considered essential and they are:- essential health and related projects relevant to the Covid-19 crisis; repair/construction of critical road and utilities and the delivery of emergency services to businesses and homes on an emergency call out basis.
What immediate actions should a Contractor take?
Contractors should conduct immediate contingency planning with a view to identifying the most probable and the most serious risks that this temporary closure order presents to their particular projects, sites and businesses.
Contractors should make sure their sites are secured and safe to avoid potential issues arising during the closure. If entering the site to secure it, advance liaison with An Garda Siochána is recommended by the CIF.
Contractors should notify their Employers of the delay event in strict accordance with their contractual notice provisions.
The Contractor should engage at the earliest possible stage with their Employer and consider the project implications of the delay. Early and open engagement is more likely to result in acceptable adjustments being agreed. These adjustments can then be formalised.
What are the contractual considerations as a result of Covid-19 and the Government announcement?
It is important to note that neither Covid-19 nor the Government announcement automatically entitles a party to renege on its contractual obligations. These obligations remain enforceable against the parties even if performance of the obligations has become more onerous. If a party is unable to perform its obligations, it must identify the exact cause and circumstances giving rise to its inability to perform.
In light of the crisis and the closure order, there are a number of important contractual considerations as follows:-
• What extension of time mechanism does my contract have (if any)?
• Is Covid-19 a force majeure event under the contract and if so what are the contractual implications?
• Has Covid-19 frustrated the contract and made the contract impossible to discharge?
• Is there a requirement to formally notify the other party of the event?
• What are the payment and financial implications?
What extension of time mechanism does my contract have?
In short, this depends on your contract. By looking at the two most prevalent contract types in Ireland we can gain an understanding of the most common issues that may arise.
The RIAI form contract outlines the delay and extension of time provisions under clause 30. Under this clause there are 10 grounds pursuant to which an extension of time may be granted.
Some grounds which may become applicable in the current crisis are:-
30 (a) Force majeure:
(h) the contractor or any nominated sub-contractor or supplier has been unable for reasons beyond their control to secure such labour and materials as may be essential to the proper execution of the works;
(i) by delay on the part of other contractors, artists or tradesmen engaged by the Employer in executing work not forming part of the contract;
(j) by reason of any act or default of the Employer causing delay in the progress of the Works as provided (in accordance with clause 29(b)).
Where one of the reasons is applicable, the Architect may make a ‘fair and reasonable’ extension of time for the completion of the works.
As regards the Public Works Contract (PWC), clause 9.3 outlines the provisions in respect of delay and extension of time. Pursuant to this the Contractor must give full details of the delay to the Employers representative within 40 days of becoming aware of the delay. In accordance with 9.3.2, if the delay event is not of the contractor’s creation, if the contractors make all reasonable efforts to avoid the delay and if the contract does not provide otherwise, there shall be an extension.
Is the Government announcement a force majeure event under the contract and if so what are the contractual implications?
We have discussed Force Majeure in the context of Covid-19 in an earlier note – click here. In regard to construction contracts, it is highly likely that such an announcement by the Government under the Health (Preservation and Protection and other Emergency Measures in the Public Interest) Act 2020 would be considered a force majeure event. However, particular clarity on this would be dependant on the relevant circumstances of the contract and project. A contractor may be entitled to an extension of time for the period of closure under the relevant clause of the contract (as above). Payment obligations may not automatically be suspended as a result of this force majeure event. Payments will be dependent on the terms of the contract and in particular on how such payments are calculated and disbursed.
Has Covid-19 frustrated the project contract and made the contract impossible to discharge?
A secondary remedy that may be available is the doctrine of frustration. Our commercial contracts article deals with this issue. For present purposes, this doctrine may arise when external factors radically alter the basic assumptions on which the contract is founded so that the performance of the contract is impossible or futile. If such a remedy were granted by the Court it would mean that the contract concludes and the parties will be discharged from the contract. Construction project closures as a result of Covid-19 may be considered as events of ‘frustration’ but it is very important to note that frustration is extremely difficult to prove in an Irish court.
A party that is intent on asserting either force majeure or frustration or any other remedy should seek clear legal advice in advance.
Are Notice Requirements necessary in such a crisis as Covid-19?
Yes, absolutely. Where a party is seeking to bring a claim for a delay or any other event, that party and all parties to the contract must adhere fully to the contractual notification terms as provided. The notifications must be submitted in strict accordance with the contract. The receiving party of a claim will seek to examine, as an immediate priority, whether or not the notice requirements were satisfied. Notice requirements are essential for effective contract management and provide certainty for both parties.
What are the financial implications if delays are not agreed or contracted for?
If a contractor fails to complete the works by the date specified in the contract (as extended by agreement or pursuant to the appropriate extension of time mechanism in the contract), the contractor will be in breach of the contract and the employer will be entitled to the remedies stipulated in the contract. Generally, this will be liquidated damages and the right to terminate the contract and engage another contractor to complete the outstanding works. The amount of liquidated damages which may become due are usually defined within the contract. The amount must be a genuine pre-estimate (or a lesser sum) of the loss to the employer in the event of late completion. The employer may deduct liquidated damages from sums payable to the contractor. If the contractor does not complete within a ‘reasonable time’ the employer may be entitled to claim liquidated damages. In the RIAI contract clause 29 provides for non-completion damages whilst within the PWC clause 9.8 contains the appropriate provisions.
What are the key take away points?
• Conduct robust contingency planning which identifies the appropriate courses of action that may occur.
• Close your site, ensuring you leave it safe and secure.
• Consider your project contract and in particular clauses relating to delay and extension of time.
• Consider the payment and financial implications of such a delay event.
• Consider whether the event causing the delay may be an event of force majeure or a frustration of the contract.
• Failure to complete on time (as extended) may result in the payment of liquidated damages.
• Contractual Notification requirements must be carried out correctly.
• Seek appropriate legal advice in a timely manner.
• Engage with the other parties in your project to share contingency planning and map out in a collaborative manner the best way forward for your shared project.
How can we Reddy Charlton help?
During this Covid 19 crisis, Reddy Charlton Solicitors are eager to support, encourage and guide your business. If you have any queries or seek further information on the impact on Construction projects or any other area of commercial law, please contact Paul Keane at email@example.com or Jonathan Mills at firstname.lastname@example.org.