On 7 May 2020, the UK Cabinet Office (PDF) and the Construction Leadership Council (PDF) (CLC) released mutually endorsed guidance ('the 7 May guidance') encouraging contracting parties to work in a collaborative, rather than adversarial, manner during COVID-19.
The UK government has urged 'responsible and fair behaviour', while the CLC has requested that the construction industry 'works together to support the long-term health of our sector by constructively resolving all contractual disputes arising from the pandemic'.
The 7 May guidance does not create additional statutory obligations nor provide parties with an excuse for non-performance. Instead, it offers practical guidance as to how parties can administer contracts fairly to mitigate the impact of COVID-19. (Advice on best use of each of the JCT (PDF), NEC4 (PDF) and FIDIC (PDF) standard terms in circumstances created by COVID-19 has been produced in the past weeks.)
The 7 May guidance recognises that parties can enforce certain rights as a matter of contract, but urges parties to work 'responsibly and fairly': the implicit position of the government and CLC therefore seems to be that parties should be slow to enforce those contractual rights if it would fall foul of the requested 'responsible and fair behaviour'.
The particular scenarios resulting from COVID-19 that are covered in the 7 May guidance are:
- delays in performance and associated costs;
- delays in payment and maintenance of cashflow;
- supply chain management; and
- anticipating and dealing with disputes.
Delays in performance and associated costs
While a party’s right to an extension of time is a matter of contract, the 7 May guidance advises that parties should seek a collaborative approach in agreeing whether an extension of time can be granted. The CLC’s guidance includes pro forma letters for parties to use in order to achieve a collaborative approach to resolving delays and the associated increases in costs, including specific pro forma letters for use under the JCT Design and Build Contract 2016 and NEC3/4 Engineering and Construction Contract 2013.
The Cabinet Office notes that responsible and fair behaviour will include 'requesting, and allowing, extensions of time, substitute or alternative performance and compensation, including compensation for increased cost or additional performance'.
The CLC also suggests that parties may wish to consider how they divide increased costs, for instance by way of a pain/gain mechanism.
However, the CLC does advise that any such collaborative negotiations concerning (for instance) extensions of time, allocations of increased costs and changes to payment amounts, should be undertaken on a ‘without prejudice’ basis (for further advice on this, see the CLC guidance) and any interim agreement is expressly ‘subject to contract’, to avoid the risk of parties creating new contractual obligations unintentionally.
It also reiterates that contractual obligations should not be ignored: the 7 May guidance is clear that notice provisions must still be followed (and see Ben Guest's blog post on NEC4 contract terms for further explanation of this).
Delays in payment
It is highly likely that disruptions to cashflow will contribute to delays in payment. Simultaneously, increased costs incurred by contractors/suppliers will make receiving prompt payments more urgent. The Cabinet Office's guidance advises prompt requests and payments in order to reduce the strain on parties.
Parties should look to PPN 02/20: Supplier Relief where available for ideas on how to reframe payment methods and timetables. See the blog post by Elizabeth Forster and Kate Gough for more details.
Dealing with supply chains
Public authorities are strongly encouraged under PPN 02/20 to accelerate their payment practices from the mandated 30 days under the Public Contracts Regulations 2015 in order to protect wider supply chains.
The Cabinet Office's 7 May guidance urges payments 'ensuring cashflow is maintained, including to pay the workforce and individuals and businesses throughout the supply chain'.
Businesses can help by:
- prioritising or 'targeting' high-value invoices, where these will help to maintain a supply chain; and
- considering how payments to the supply chain could be monitored and protected, for example, by suppliers agreeing to provide evidence of supply upfront when invoicing (perhaps through a digital payment/transaction management system) or the use of a project bank account (which is the default policy for the public sector in England, Wales, Northern Ireland and Scotland).
Dealing with disputes
The Cabinet Office's 7 May guidance seeks to encourage parties to prevent contractual issues becoming intractable disputes. It points parties towards various fast-track and alternative dispute resolution procedures.
Where disputes cannot be resolved parties are advised to continue acting fairly and responsibly. Escalation clauses, for example, should not be used 'solely to prolong and protract a dispute in order to improve [a party’s] short term commercial position'. The CLC's 7 May guidance provides extensive advice for parties in choosing which dispute resolution path to follow, noting in particular the relative costs of each one (the likely principal concern currently).
It is hoped, however, that inevitable delays and failures in performance of contractual obligations can be mitigated by efforts at collaborative working and parties acknowledging, where reasonable, the exceptional circumstances which their counterparties find themselves in.