Michael Conroy: COVID-19 and NEC Contracts
With the Scottish Government and the Construction Industry Coronavirus Forum advising that all non-essential building sites in Scotland should close in response to the coronavirus pandemic, Harper Macleod partner Michael Conroy outlines what this means for building projects that are governed by the NEC suite of contracts.
Amidst the confusion of mixed messages from the UK and Scottish Governments about construction site closures, some Contractors continued work on construction projects in Scotland until the Project Manager issued an instruction on behalf of the Client that the works should be suspended. This is because a Client generated instruction to suspend works is a Compensation Event under NEC contracts whereas a Contractor decision to withdraw labour in response to the First Minister’s guidance may not be.
Clause 34.1 of the NEC 3 and NEC4 ECC allows for the Project Manager to instruct that work be stopped or postponed without giving a reason. This suspension may continue for a period of 13 weeks before termination rights arise.
Additional time to complete
Clause 60.1(19) of the NEC3 and NEC4 contracts allows an extension of time to the completion date as well as compensation for the costs of delay where an event:
- prevents the completion of the whole of the works, or
- prevents the contractor from completing the works by the planned completion date shown on the accepted programme,
and is one which:
- neither party could prevent
- an experienced contractor would have judged at the time of contract to have such a limited a chance of occurring that it would have been unreasonable to have allowed for it, and
- is not one of the other Compensation Events stated in the contract
A Contractor must notify the Project Manager of a Compensation Event under Clause 60.1(19) within 8 weeks of being made aware of the event or they will not be entitled to a change in the Prices, Completion Date or Key Date. There are limited exceptions to this, one being that the Compensation Event arises from the Project Manager or the Supervisor giving an instruction, issuing a certificate, changing an earlier decision or correcting an assumption.
The Health Protection (Coronavirus) (Restrictions) (Scotland) Regulations 2020 do not expressly require construction sites in Scotland to close. The Regulations implement the UK Coronavirus Act 2020 in Scotland and the UK government approach to construction operations differs to the Scottish approach therefore construction sites are not included in the list of business premises currently under mandatory closure. However, the Scottish Ministers have the power under paragraph 16 of Schedule 22 Part 3 of the Coronavirus Act 2020 to close premises in Scotland or impose restrictions on persons entering or remaining in them. This power may be exercised to order closure of any non-essential construction sites which have continued to operate against government advice. If such an order is made in respect of a construction site it is likely that it could be interpreted as being a Compensation Event resulting in additional time for completion and compensation.
Bearing in mind that additional time to complete and compensation for delay is only available in respect of events that are unforeseeable at the date the contract was entered into, there may be a difficulty for Contractors who have very recently signed NEC contracts if there is subsequently a delay caused by the coronavirus outbreak. Contractors considering entering into an NEC contract should be aware of the potential longer term impact of the pandemic and assume that it is foreseeable that projects will suffer disruption for a long time to come as a result.
If the construction works are suspended for more than 13 weeks under clause 34.1 then either party is entitled to terminate then works may be terminated in terms of clause 91.6.
Under clause 91.7, the Client is entitled to terminate the contract if an event occurs which
- stops the Contractor completing the whole of the works or
- stops the Contractor completing the whole of the works by the date for planned Completion shown on the Accepted Programmed and is forecast to delay Completion of the whole of the works by more than 13 weeks,
- neither party could prevent and
- an experienced contractor would have judged at the Contract date to have such a small chance of occurring that it would be unreasonable to have allowed for it.
Read all of our articles relating to COVID-19 here.