Covid-19 risks and NEC4 ECC contracts – a legal perspective

Key Points

• Contractors on NEC4 contracts entered into before January 2020 can notify a compensation event for stoppage due to Covid-19 but need to do so quickly to meet the 8 week deadline.
• Parties which have more recently entered, or are about to enter, an NEC4 contract should consider adding a bespoke Covid-19 compensation event.
• As a last resort either party can terminate if, following a project manager’s instruction, work is prevented from restarting for more than 13 weeks.

At the time of writing, the seemingly relentless march of the 2019 coronavirus disease Covid-19 is affecting lives and business in most regions of the world. Across the globe, successive governments have put in place strict preventative measures aimed at limiting, or at least delaying, the spread of the disease, including quarantine of people and places. The construction industry has not escaped the effects.

The Scottish government advised on 23 March 2020 that non-essential construction sites should close as part of the efforts to contain the spread of Covid-19.

Although the UK government has yet to order the closures of sites, construction companies must apply the ‘two metre rule’ for social distancing among other measures. Given the practical difficulties in maintaining this rule, which will render many sites either uneconomical or impossible to run, many major contractors have closed their sites. This is particularly the case where they are not considered ‘essential’ infrastructure, such as hospitals which, understandably, are being encouraged to remain open.

In Hong Kong, construction operations have been significantly disrupted since January, with an estimated 50,000 workers laid off – around a fifth of the workforce.

Even where sites have yet to be closed in the UK, few in the industry will not be feeling the effects to some degree, and all parties will be questioning how they might deal with risks. These include a reduction in available and healthy workforce; unavailability of subcontractors; unavailability or delay in the supply of materials and plant; and lack of access to sites.

Covid-19 is clearly beyond the control of both the client and the contractor to a contract, but what does this mean for the potentially significant losses and liabilities that might be suffered as a consequence? Fortunately, for both in-force contracts and those yet to be started, the position under the NEC4 Engineering and Construction Contract (ECC) is clear – see the official NEC4 Contract Board guidance.

Covid-19 and NEC

Clause 60.1(19) of the NEC4 ECC provides that the following are compensation events:

An event 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 Programme
• and which neither Party could prevent,
• an experienced contractor would have judged at the Contract Date to have such small 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.’

Up until news of the outbreak was first widely reported in January 2020, it would be unreasonable to have expected an NEC contractor to make allowance for the potential effects of Covid-19. Few would argue that the current crisis is unprecedented. Where an NEC project is adversely affected by restrictions on movement of people and goods, staff absence and even site closures, such that the date for completion of the works is delayed, a contractor should therefore be entitled to notify a compensation event. This would entitle it to both time and money for the disruption, delay and/or additional costs.

For contracts entered into after January 2020, there would be a strong argument that allowance could or should have been made. Parties which have recently entered, or are about to enter, into an NEC4 ECC contract may therefore wish to consider negotiating an additional bespoke compensation event to part one of the contract data. An example wording might be:

‘the occurrence of a ‘public health emergency’, being the outbreak and/or spread of Covid-19 virus or other similar virus and/or any implementation of public health measures in connection with the outbreak and/or spread of Covid-19 virus or other similar virus which affects the ability of the Contractor to Provide the Works’.

One approach that appears to be finding favour with clients and contractors alike is to spread the risk by allowing an extension of time but not recovery of associated loss and expense. This would require further bespoke wording to be added to the standard form.

Eight-week notification period

Contractors should be aware that under the NEC regime it is vital that timely contractual notices are served by them to preserve a claim under clause 60.1(19). Clause 61.3 requires that the contractor notifies the project manager of a compensation event within 8 weeks of becoming aware of the event, in this instance the impact of Covid-19 on the works. Failure to do so on time will mean that the contractor loses its entitlement to either time or money. An early warning notice under clause 15.1 should also be issued. Given the uncertainty over how long the effects of Covid-19 might last, it is prudent for a contractor to ask the project manager to state assumptions under clause 61.6 when requesting a quotation.

So when should a contractor issue its notice? It is an arguable point as to when a contractor should reasonably have become aware that the outbreak of Covid-19 was likely to become a compensation event. However, the 8 week clock is clearly ticking for all contractors. Restrictive measures, first introduced in China, became evident as early as 23 January. Hong Kong likewise began introducing measures as early as 25 January and, though the UK did not follow suit until much later, it would be surprising if there are any construction sites not yet experiencing some impact on progress and the ability to meet the planned completion date. With that in mind, if contractors are yet to issue notices, they should move quickly to do so.

Prevention and termination

Following notification, the project manager must issue an instruction in line with clause 19.1 on prevention, setting out how the Covid-19 event is to be dealt with. That instruction may also amount to a compensation event under one of the other provisions of clause 60, such as a change in the scope or an instruction to stop the works, entitling the contractor to both time and money.

The aim of clause 19.1 is to try and overcome the consequences of a clause 60.1(19) event but in practice that may not be possible for most projects in relation to Covid-19. Under clause 91.6 the right to terminate as a result of Covid-19 may arise where the works have been suspended for a period of 13 weeks. This right can be exercised by either party if the suspension has been the result of an instruction under clause 19.1. Otherwise only the employer can terminate, although the contractor is largely protected from the effects of the suspension by relief provided by an extension of time and ability to claim compensation in the interim.

Only time will tell whether NEC users will see such clause 19.1 termination provisions but, for the sake of the industry and society at large, it must be hoped they will not be necessary on most projects. The message for all projects must be for the parties to keep in close communication and work together in charting a way through the current crisis.