Colin Jones, a Partner in Hewitsons’ Construction Team, writes:
First, with the source of the outbreak reported to have been in China, a set of measures in that country to control the spread of the virus has led to a slowdown in the manufacture and supply of all products, including construction materials produced for export. Given that China has become one of the World’s leading exporters of construction materials, the import of goods from China for UK construction projects is clearly at risk. The UK imported £43bn of goods in total from China in 2019 of which components such as lighting and other forms of electrical installation made up a substantial proportion. When considering also the import of raw materials, steel and concrete and other products and materials from China, supply chain issues for the UK construction industry caused by the Coronavirus outbreak are inevitable.
As potentially more factories in China close, there will be shortages of products and increases in related prices. And with the spread of the virus globally its more than just Chinese imports we are now having to assess in this regard. Closer to home countries such as Italy are also big exporters of materials for construction and that country will also now likely see an impact on its manufacturing output with the whole of Italy being categorised as high risk for spread of the virus.
As to the other key element in a construction project, the labour resource to make it all happen, if we end up seeing sites closed down for periods of time if a virus concern arises then this is one category of labour which cannot “work from home” as an office worker might. So site shut down risk is a further factor to add to the list of potential project delays and disruption.
Like all sectors of the economy, construction businesses will be following the best advice practices recommended by Government. So what more might be done in this context?
Ensuring good communications between the whole supply chain, between contractors, subcontractors, professional team members and suppliers will be all important. Much is to be said for open conversations about which materials on a project could be affected and where any alternatives might come from. Bearing in mind that the post Brexit trade deal with the EU, our other main source of construction materials, is still to be done the Brexit effect has already for some years now been particularly felt in regard to construction material supplies. As a consequence the UK building industry has become used to making plans in this regard, but there is now an additional supply obstacle to consider.
A wide spread shortage of key materials in particular will impact on tender prices. There will also be an impact on prices in the case of existing contracts in which case a lot of cost risk is going to pass to the contractor. However, as with putting the full burden of Brexit related disruption on to contractors there comes a breaking point. It is not going to be in the interests of employers to see contractors go under now that the new risk of virus generated material supply disruption or labour supply problems have come about.
Consider then in these circumstances whether for example substitute materials can be used. If alternative materials are more expensive or are not within the original design specification but are more readily available and such an alternative is raised early in a project, then the employer and project team can make informed decisions as to priorities and the realities in achieving completion. Such open discussions could lead to employers taking decisions to put projects on hold or to procure them in a different way. Open conversations regarding supply chain issues will at the very least minimise risk or enable mitigation measures to be taken. We are experiencing unique circumstances with the Coronavirus outbreak and a pro-active approach is going to be better for projects than adopting a stance of wait and see.
As to how to cover this in building contract terms, commentators have been reviewing how the standard form building contracts cover such risks already. Force majeure clauses are common in building contracts such as that produced by the JCT. However, there is no general acceptance of just what that expression should cover and whether the Coronavirus outbreak is an ‘act of God’ of the kind that force majeure is said to anticipate. Therefore for new contracts consider making it clear how the virus is to be handled and also where under the contract the risk of delay and additional cost resulting from the Coronavirus impacts should rest.
Under the JCT Standard Form Building Contract for example, an event of force majeure is treated as a Relevant Event which the Contractor is able to rely upon to make a claim for an extension of time for completion of the project works. You could add in an amendment to the contract to make it clear that under the contract force majeure events will be treated as including for the effect of Coronavirus. However, even if treated as a Relevant Event, the JCT does not treat force majeure as a Relevant Matter which is what a contractor has to identify in order to be able to claim additional payment if so affected. Therefore, risk allocation in regard to the virus needs to be thought about carefully under the JCT.
In the NEC building contract, clause 60.1(19) provides that a ground for compensation (a Compensation Event) includes one which stops the contractor completing the whole of the works by an agreed date and is an event which is not one which could have been prevented and which the contractor would have judged as having such a small chance of occurring it would have been unreasonable for the contractor to have allowed for it when entering the contract. So this Compensation Event could cover the impact of Coronavirus and under the NEC, Compensation Events can give rise to claims both for additional time for completion as well as for additional payments. However, the greater awareness of the virus now means that it will become more difficult for a contractor to rely a claim based on not being aware of the risk. Therefore, there are grounds for dispute as to interpretation of this clause going forward.
Given the global nature of the construction industry in the UK parties should always consider how unpredictable and uncontrollable problems such as Coronavirus will be dealt with in their contracts. Good legal drafting should provide a resolution for any such issue and this should now include for new viruses or other related forms of risk.
For more advice as to how to approach this risk in relation to construction projects, contact Colin Jones, a Partner in Hewitsons’ Construction Team.