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Covid-19 and the Construction Industry: Emden Editor’s Letter 26 May 2020 by Isabel Hitching KC

On 31 March 2020 the Secretary of State for Business, Energy & Industrial Strategy in a letter to the construction industry noted its ‘hugely valued and critical contribution to the resilience of our Nation’ and the UK economy.  The letter recognised in particular the construction industry’s response to the crisis ‘by building temporary hospital wards, installing complex and life-saving oxygen systems, constructing the infrastructure that society needs to function or ensuring that people have safe and healthy homes to live in’.

In order to facilitate this response on 18 March 2020 the Government issued a Procurement Policy Notice ‘Responding to Covid-19’ PPN 01/20.   This was intended to address a perceived need to modify the provisions relating to procurement to enable speedy placement of contracts, or call-off under existing framework agreements.  How far the PPN achieved that goal has been questioned (see article), as  the new procedures can be adopted only ‘insofar as is strictly necessary where, for reasons of extreme urgency brought about by events unforeseeable by the contracting authority, the time limits for the open or restricted procedures or competitive procedures with negotiation cannot be complied with [and] … the circumstances invoked to justify extreme urgency must not in any event be attributable to the contracting authority.’ (emphasis added).  An answer that may only become clear if challenges arise and the courts are called on to unpick the cause of the urgency and to determine in each case whether it was truly caused by COVID-19 or due to the other circumstances including an authority’s lack of preparation or foresight.

The Courts have been called on to carry out a similar ‘unpicking exercise’ in relation to applications to halt or adjourn dispute resolution.  In Millchris Developments Ltd v Waters LTL 3/4/2020 (ex tempore) Jefford J refused to grant an injunction restraining an adjudication on an application by the Respondent contractor who argued that to allow the adjudication to continue would result in a breach of natural justice because it did not have the time or means to properly prepare its case because of the impact of COVID-19.

Jefford J held that, whilst the court has jurisdiction to grant an injunction in respect of an ongoing adjudication, it will only do so very rarely and in very clear-cut cases.  This was not such a case.  Tellingly in that case the adjudicator had offered a two-week extension which Jefford J held would have ameliorated difficulties faced in relation to contacting witnesses and transporting papers.  (For further discussion see the following article.)

The courts are also endeavouring to find practical solutions enabling court litigation to continue where possible.  In the stages prior to trial this is reflected in the changes to the CPR.  Practice Direction 51ZA permits parties to agree 56 day rather than the usual 28-day extensions without the need for court approval during the period for which it is in force, currently until 30 October 2020.

In relation to hearings and trials the courts have embraced the use of technology: telephone, various video platforms and, as of 15 May 2020, HMCTS’ Cloud Video Platform.  The TCC and Commercial Courts, already being used to utilising technology in trials (whether in on-line bundles, or in enabling overseas witnesses to be cross-examined by video-link) have been at the forefront of enabling hearings to continue where possible.

Whether it is appropriate for them to do so is a question of balance in each case.  In Ramvel v Countryside and Bartlett (unreported) for example O’Farrell J ordered an adjournment.  Significantly, one of the experts was in isolation but without internet access.  Among the many witnesses was one suffering from COVID-19, an NHS worker, two key workers and a number of single parents with childcare commitments.  The court was also able to offer a re-listed trial date in September.

Significantly, Ramvel was a subrogated claim proceeding between insurance companies to whom cash flow was of limited importance. (For further discussion see the following article.)

In contrast cash flow may be of great significance to parties in non-subrogated claims.  Adjourning hearings, and particularly trials, and the resulting delay in resolution of the disputes may severely damage cash-flow and even the ability of a party to survive.  The impact may not be limited to the parties to the dispute.  Not only will third parties contracting with the litigating parties be affected but an adjournment may affect the speed with which the court can deal with other disputes impacting cash flow in the industry more widely.

Cash flow has long been described as ‘the lifeblood of the construction industry’.  This has not only been recognised by courts and adjudicators seeking to facilitate resolution of disputes where they have been commenced, but by government and industry leaders encouraging contracting parties to find solutions to cash flow issues and to avoid disputes arising in the first place.

The need to cooperate and find a workable way through the situation is a theme reflected in much government and industry guidance published since the start of the current crisis.

The Government has strongly encouraged individuals, businesses (including funders) and public authorities to act responsibly and fairly in the national interest in performing and enforcing their contracts, to support the response to Covid-19 and to protect jobs and the economy.

In relation to contracts with public authorities PPN 02/20 (published 20 March 2020 and updated 19 May 2020) stated ‘The current outbreak of COVID-19 is unprecedented and will have a significant impact on businesses of all sizes. Many suppliers to public bodies will struggle to meet their contractual obligations and this will put their financial viability, ability to retain staff and their supply chains at risk. Contracting authorities should act now to support suppliers at risk so they are better able to cope with the current crises and to resume normal service delivery and fulfil their contractual obligations when the outbreak is over.’  It continued ‘The public sector must act quickly and take immediate steps to pay all suppliers as a matter of urgency to support their survival over the coming months.

PPN02/20 not only addressed payment terms (building on PPN 01/20) but encouraged public authorities to work collaboratively and to grant ‘other contractual relief’ such as extensions of time or waivers, where appropriate.

On 7 May the Cabinet Office published ‘Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency’ (see here). Expressly applying to both the public and private sector, it encourages ‘responsible and fair contractual behaviour’ in relation to a long list of matters: extensions of time, variations, payments and requests to mediate and enforcement of judgments.  It also encouraged parties to act ‘in a spirit of cooperation and aiming to achieve practical, just and equitable contractual outcomes’.

The same emphasis on fair and collaborative behaviour is found in the Construction Leadership Council’s ‘Best Practice Guidance’ also published on 7 May 2020. It stated ‘There is a real concern that the construction (including maintenance) industry will become embroiled in costly and long-running disputes over the effects of COVID-19 on projects if it does not look to engage in collaborative discussions to try and resolve such issues as and when they arise.’  It contained a similar message to 02/20: ‘notwithstanding the contractual provisions, Employers and Suppliers should seek to take a collaborative approach towards successful project delivery and discuss whether an extension of time can be granted and any additional costs shared in any event, in light of the unforeseeable and unprecedented nature of COVID-19.

It remains to be seen how such post-contractual guidance can be enforced, if at all.  The duty of good faith may provide one route.  In Bates v Post Office Ltd (no 3: Common Issues) [2019] EWHC 606 (discussed in Emden 4.115)  Fraser J stated that the duty meant that ‘the parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people.’ How far that question should be assessed after rather than at the time of entry into the contract and if so quite what that standard would be will no doubt continue to be debated.  This only highlights that parties should be astute to think through and record how far a collaborative approach, in line with this guidance, is intended create a legally binding variation from the contract. (For further discussion see the following article.)

Where, however, a party is already in breach COVID-19 may well affect the losses that the other party will suffer.  The Court of Appeal in  Pluczenik Diamond Co NV v W Nagel [2018] EWCA Civ 2640 recognised that damages will not always be assessed as at the date of breach, describing this ‘not a rule of law but merely a rule of thumb’.  A court may be willing to depart from it where it ‘would give rise to injustice” or doing so is “necessary or just to do so in order to give effect to the compensatory principle”. (Johnson v Agnew [1980] AC 367 at 401A and The Golden Victory at [13].)  It will not however necessarily do so.  Whether the impact of COVID-19 should be reflected in damages will be a case specific assessment.  (For further discussion see the following article.)

Contractors and employers will also be looking to their insurance policies and in particular the scope of any business interruption cover. (For further discussion see the following article.)

The duration of the crisis has been and remains uncertain.  PPN 02/20 for example is of effect until 30 June 2020.  It is not currently known whether it will be extended.  The government, and the industry, are in any event starting to look ahead.  Even when the immediate lockdown is over, new ways of working will be required.  There have for example been calls for new approaches to health and safety regulation (for further discussion see the following article and article).   The longer-term impact, in particular the extent to which the industry embraces a more collaborative approach, or the government introduces permanent changes designed to facilitate it, remains to be seen.

The Cabinet Office Guidance of 7 May 2020 concludes at paragraph 20 ‘The Government will continue to review behaviours in contracting, including public sector procurement, performance, prompt payment and contract management arrangements, as we emerge from this public health emergency to ensure that contractual arrangements can function effectively and maximise their contribution to jobs and the economy.’   Emden will continue to monitor these developments.

But all is not changing.  There are some fixed points.  As that paragraph notes whatever the content of obligations parties will want them to be expressed in contracts.  In a timely message of certainty the courts have confirmed that the principles of contractual interpretation are clear and consistent.  (For further discussion see the following article on recent developments in the interpretation of contracts.) English contract law is able to adapt and deal with the current crisis and the future needs of the industry.  A welcome message of certainty for the UK construction industry and those involved in international projects with English choice of law clauses.




View the article on LexisNexis here and Emden here.

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