On 7 May 2020, the Construction Leadership Council published its COVID-19 Contractual Best Practice Guidance (the 'CLC Guidance').
The CLC Guidance, which is stated to apply to both the public and private sectors, supports the Cabinet Office Guidance Note on responsible contractual behaviour in the performance and enforcement of contracts impacted by COVID-19 (see our article for further details on the Cabinet Office guidance).
According to the CLC Guidance, unless parties engage in collaborative discussions as to how best to deal with the impact of COVID-19 on their projects, there is a risk that the recovery of the construction industry, and indeed the recovery of the wider national economy, will become burdened and impeded by costly and long-running construction disputes.
The CLC Guidance then goes on to provide examples of the types of contractual issues that are likely to arise on construction projects as a result of COVID-19, and provides recommendations as to how the parties might go about managing such issues, including:
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Risk
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Recommendations within the CLC Guidance
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Delays to live projects
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Consider the impact of COVID-19 on the programme, and where possible, amend the programme to reflect the impact of COVID-19 on the Works/Services. Agree extended completion dates which reflect the extent to which the Supplier has/will be delayed by COVID-19.
The Supplier’s entitlement to an extension of time will depend on the terms of the contract. However, parties should 'seek to take a collaborative approach' and discuss whether an extension of time can be granted.
The CLC Guidance includes pro-forma letters which can be used by a Contractor seeking an extension of time under its JCT D&B 2016 contract or compensation event under its NEC3/4 ECC contract.
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Choking of cash flow
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Employers are encouraged to consider Supplier relief with a view to ensuring projects do not stall, and ensure cash continues to flow through the supply chain. This can be achieved either through existing contractual mechanisms or through variations to the contract.
Parties should discuss whether additional costs arising due to COVID-19 might be shared between them. Examples of sharing mechanisms include pain/gain target cost arrangements or open book payment regimes, to be applied while productivity is materially impacted.
Can valuations and payments be adjusted to assist the Supplier? For example, can the retention be released early or can the frequency of payments be increased?
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Termination triggers
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The parties should consider agreeing to waive any relevant termination triggers in the contract, for example, by reason of delay or prevention.
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In line with its emphasis upon collaboration, the CLC Guidance goes on to append pro forma without prejudice letters (from both Supplier to Employer, and separately, Employer to Supplier), the contents of which seek to encourage dialogue between the parties on both the impact of COVID-19 on the contract and the possibility of Supplier relief.
Crucially, the CLC Guidance is not legally binding, and therefore does not override the parties' contractual and legal obligations.
Certainly, the emphasis on 'proper fair and reasonable administration of construction contracts' within the CLC Guidance is to be lauded. Furthermore, engaging in an open (though, without prejudice) dialogue is a sensible and practical step, and one which will surely benefit the majority of parties and their projects.
However, the message in the CLC Guidance is essentially that, regardless of the commercial bargain agreed between them, if one party is better able to share the financial burden of COVID-19, it should do so. In practice, this ideal will obviously need to be weighed against the parties’ responsibilities to shareholders and tax payers and it is far easier to say than to apply in practice where it cuts across the agreed contractual risk allocation.
Given that many parties - both public and private - will be facing a challenging and uncertain future as the impact of COVID-19 continues to resonate, it remains to be seen whether such a message will be embraced. Indeed, survival may well be the priority of many – and at the expense of the wider supply chain, if necessary.
In conclusion, will the CLC Guidance avoid construction disputes surrounding the fall out of COVID-19? Only time will tell, but one thing is clear, and that is the health of the construction industry is crucial to the recovery of the economy as a whole. The fast and efficient resolution of any differences that will inevitably arise between parties in these very difficult times, will continue to play an important part in ensuring this.
Contact
If you have any questions on this, please contact Richard Adams or Jessica Evans.