Further to our blog post which covered the Cabinet Office’s guidance on implementing Procurement Policy Note (PPN 02/20) in government construction contracts, this post will look more closely at the model deeds of variation attached to that guidance and discuss the issues they give rise to for contractors.
The model deeds provide two sets of terms that can be used to amend NEC3 and JCT standard form contracts. Where a contracting authority has identified that a contractor is at risk due to the impact of COVID-19, the model deeds provide for that contractor to obtain relief in a specified form.
Our earlier post discusses the available forms of relief and the matters to be considered when deciding on an appropriate form or combination.
It is important that parties seek legal advice to ensure that the variations made are consistent with the contract which is being amended.
Will granting relief constitute a material variation?
Under the Public Contract Regulations 2015, a material change to an awarded contract can potentially require a fresh procurement process. This post does not consider this risk in detail, but contracting authorities and suppliers should consider whether the proposed amendments to the contract allowing relief would constitute a material change (under regulation 72) and, if so, whether any exemptions from conducting a new tender would apply.
Are suppliers at risk of being in breach of contract?
The four forms of relief set out in the model terms are intended to enhance or maintain cash flow within the supply chain. The terms do not set out any relief, compensation or force majeure events by which a party would be excused for under-performance or a breach of its obligations.
The model terms do acknowledge that non-performance is a potential outcome. For example, one available form of relief is the certification of interim valuations based on previous valuations where the relevant work has not actually been undertaken. This would involve the contracting authority continuing to make payments where the supplier has not performed its contractual obligations. Similarly, the wider guidance states that where works have been paused, contracting authorities should continue to pay suppliers that are at risk until the end of June 2020.
Essentially, where obligations cannot be performed due to COVID-19, the model terms provide for financial relief from the consequent hardship but not for relief from the obligations themselves. To what extent contractors are excused from these obligations therefore depends on the scope of relief available in the underlying contract, for example, whether a pandemic would be covered by the contract’s definition of a force majeure event. See our colleagues’ blog post for more information on force majeure provisions in the context of COVID-19.
Where COVID-19 is not covered by a relief, compensation or force majeure event in the contract, contractors may obtain financial relief using the model terms but ultimately still face breach of contract or liquidated damages claims from the authority. There is a risk that contractors will gain a false sense of security by obtaining financial relief under PPN 02/20 and later find themselves in breach of contract.
What steps can contractors take?
We would advise contractors to:
review the relief provisions in their existing contracts;
identify whether the scope of these provisions would adequately excuse a failure to perform where this was caused by the impact of COVID-19; and
if not, ensure that any variation of the underlying contract also amends these provisions as required.
Position under the standard form contracts
Under the JCT building contract, a contractor is entitled to claim relief in the form of an extension of time where a “Relevant Event” causes delay to the works. Relevant Events include such things as government action and changes in law, compliance with which affects execution of the works or delays the project. The JCT lists force majeure as a Relevant Event, but does not define it, so parties contracting under this standard form would need to review any scope of the definition agreed at the outset of the contract, as well as any bespoke amendments made to the list of Relevant Events.
The JCT standard form also allows contractors to suspend the works where it is impracticable to continue in the light of the current restrictions. If the suspension that follows is longer than that stated in the contract particulars, then either party may give notice of termination of the contractor’s employment.
Under the NEC3 ECC contract, clause 19 (Prevention) deals with situations where work has been forced to stop or suffers delay. This could arise, for example, where workers have been restricted from travelling to the site, or where materials or equipment cannot be obtained due to restrictions on movement. The delay must impact the date of completion of the whole of the works.
If the clause 19 test is satisfied, the event will be treated as a “Compensation Event”, entitling the contractor to claim an extension of time and additional cost. This clause is generally regarded as dealing with force majeure style events, though these are not defined. Clause 19 is widely drafted and frequently deleted by employers, so parties should review carefully what relief remains available to them.
For more on the impact of COVID-19 on your business, visit our risk and compliance blog and coronavirus alert hub.