Navigating contracts under COVID-19

With COVID-19 continuing to have a significant impact on the construction industry, the extent to which JCT 2016, or indeed any other contracts can be applied is likely to be tested in the courts. At the same time, the court process itself has been inhibited by the pandemic so judicial answers are yet to be provided.

There is as yet no new case law clarifying whether the responses to the pandemic constitute force majeure. However, the precedents of Lebeaupin v Richard Crispin and Company [1920] 2 KB 714 and Tandrin Aviation Holdings Ltd v Aero Toy Store Llc [2010] EWHC 40 confirm that an epidemic is a force majeure event.

If, after the contract base date, the UK government or any local or public authority exercises any statutory power that is not occasioned by a default of the contractor or any contractor’s person, this is also classified as a relevant event. It remains to be seen whether COVID-19 restrictions imposed by the government or local authorities will be recognised as affecting the execution of works under the JCT contracts, and therefore as a ground for an extension of time.

Another relevant event is "any impediment, prevention or default [to the contractor’s regular progress], whether by act or omission, by the employer or any employer’s person except to the extent caused or contributed to by any default … by the contractor or any contractor’s person". So if an employer instructs a contractor to stop activities due to the pandemic, that could well constitute a relevant event.

In connection with this, it is worth noting that the JCT contracts require the employer and contractor to agree that they will comply with the applicable Construction (Design and Management) Regulations in relation to the works and site. Health and safety is therefore an important obligation on each party, and the failure of an employer to comply with its health and safety obligations in respect of COVID-19, perhaps even by omission, may be a ground on which contractors will seek to obtain an extension of time. At the time of writing, these matters remain untested by the courts.

In a time when numerous employers face the risk of insolvency, contractors should bear in mind that many of the JCT forms will give them the right, at the time of each interim payment, to request that the retention is placed in a separate bank account designated to identify it as held in trust for them.

Similarly, contractors should bear in mind that, where their employment is terminated due to employer insolvency, they should submit their account on termination as soon as reasonably practicable. If they are owed any balance, the amount properly due under the account is to be paid within 28 days of the submission of that account, without deduction of retention.

It is not entirely clear that the pay-less notice provision in section 4 of the JCT contracts applies literally and strictly to the contractor’s account on termination, so as to enable the employer to serve a pay-less notice against it. However, in the case of Adam Architecture Limited v Halsbury Homes Limited [2017] EWCA Civ 1735, the court said that there must be a pay-less notice mechanism in relation to final payment under construction contracts.

If the JCT contracts have not precisely provided for this, then the scheme for construction contracts would apply as the statutory default regime, requiring a pay-less notice 7 days before the final date for payment.

The Court of Appeal’s judgment in Triple Point Technology Inc v PTT Public Co Limited [2019] EWCA Civ 230 deals with how to apply a liquidated damages clause where the contractor never completes its work. The court summarised 3 different groups of legal judgments on this point.

In the first, the liquidated damages clause was held not to be applicable at all where it was clear that completion would not be achieved. The leading case in this group was British Glanzstoff Manufacturing Co Limited v General Accident Fire and Life Assurance Co [1912] SLR 13. This was a decision of the House of Lords, the UK’s highest court, which has never been overturned.

The second group of cases decided that the liquidated damages clause was applicable up to the moment where the contract was terminated. This was regarded by the Court of Appeal as "the orthodox analysis".

In the third group, it was decided that the liquidated damages clause continued to apply up to the time when the replacement contractor achieved completion. How liquidated damages will be applied where the original contractor is never going to finish will turn on the precise wording of the liquidated damages clause in question. The Court of Appeal did not decide between the different lines of authority.

However, given the House of Lords’ decision in British Glanzstoff Manufacturing, it is clearly arguable that, if the contractor is never going to be able to finish the works, then no liquidated damages can be levied at all.

In Triple Point, the Court of Appeal also emphasised the importance of order of precedence clauses in the event that there is a conflict between provisions in a contract. Sir Rupert Jackson, who gave the leading judgment, said that such clauses are of "particular importance in construction contracts".

He added: "Sometimes … the contracts are so vast that no human being could possibly be expected to read them from beginning to end. The traditional rule that you construe a contract as a whole must now be understood in this context. Conflicts between different parts of the contract documents are almost always inevitable in such cases. Precedence clauses tell the reader how such conflicts should be resolved."

Triple Point case has been appealed to the Supreme Court and a judgment is awaited.

In the case of Grove Developments Limited v S&T (UK) Limited [2018] EWCA Civ 2448, the Court of Appeal confirmed that an employer is entitled to refer to adjudication a dispute over the true value of a contractor’s interim payment application, even though the employer had failed to serve a valid pay-less notice.

The court said that the employer could only bring its "true value" adjudication after the it had paid the sum due in the interim payment application. Where there is a valid contractor’s interim payment application and no pay-less notice from the employer, the contractor can bring a so-called smash-and-grab adjudication to insist on payment of the value of its interim application. But it then faces the prospect that the employer will bring its own adjudication to establish the true value of the application.

In this context, Lord Justice Coulson commented in Bennett (Construction) Limited v CIMC MBS Limited [2019] EWCA Civ 1515 on the way that the scheme for construction contracts operates as a default regime where contracts fail to comply with the requirements of the Housing Grants, Construction and Regeneration Act 1996, as amended, in respect of adjudication and payment terms.

If the contract does not contain proper adjudication provisions, therefore, then the adjudication regime of the scheme applies lock, stock and barrel. But in the case of payment, the provisions of the scheme apply only if or to the extent that the contract does not contain the relevant payment provisions.

Therefore, "piecemeal incorporation is permitted" in respect of the scheme’s payment provisions to remedy defective payment terms in a construction contract, as in the judgment in Bennett (Construction) Ltd v CMC MBS Limited [2019] EWCA Civ 1515.

While the payment regime of the JCT contracts is not defective, there have been a large number of reported cases in which the parties have replaced or amended it with their own regime that subsequently proves to be defective. This is a risk across all JCT contracts.

It will be interesting to see how the courts will amend these payment regimes by applying the scheme.

Related competencies include: Contract administration, Contract practice, Legal/regulatory compliance