Clear contracts during uncertain times

[edit] Introduction

In March 2020, the massive uncertainty of lockdown led the doomsayers to predict the end of civilisation as we know it. After a few hours, we came to realise that maybe those commentators were not quite correct.

Many companies in construction started to dig out their contracts. Of course, finding them was the first hurdle, especially when the paper version was locked in an archive to which entry was now forbidden.

[edit] To stop or not?

At this point, world leaders were somewhere on the spectrum between completely in control and on top of the science, and making it up as they went along. In the UK, lack of reliable clear guidance left the industry unsure if it was coming (home for the foreseeable) or going (to work on sites).

A fortnight later, there was a little more certainty – Scotland implemented a presumption against construction, and Wales created regulations requiring site operators to take all reasonable measures to maintain 2m distancing for staff and in England...there was still nothing concrete. What did this mean for your project? In England you were left to your own devices. It was rather hit and miss whether your project shut down, stalled temporarily or pretended to continue with ‘business as normal’. It was hard to see that the contracts were being any help at all!

Admittedly, most of our standard form contracts have some sort of clause which was loosely associated with the pandemic – whether it was force majeure, an act of prevention, illegal or impossible acts, change in law (depending on your project’s home nation), early or advance warnings, government intervention, failure of a supply chain or something else. Just interpreting these provisions, many of which had not seen this much action since World War II, was a full-time job for many construction lawyers or claims consultants.

[edit] Contractual uncertainties

However, it didn’t take a Zoom full of legal minds for the parties to realise that the contracts were not resolving the uncertainties of the pandemic; actually, they were adding to them. It was difficult to categorically advise a client, contractor or consultant what their rights and remedies were going to be – not just in the immediate short term but over the course of the pandemic. The very tools that could have been designed for managing the project – the contracts – were hindering the process of revising those deals, and so ended up stoking disputes and providing the doubt needed for claims.

Contractor notices started to fly around, as creative types decided that with the procedural clock ticking, they had better ask for time and money (if not a vaccine) as soon as they could – despite the fact that no contract administrator could predict the next few months and so none would be able to determine the respective merits of the parties’ positions. Some contractors decided unilaterally (and in breach of contract) to extend their payment periods to give them breathing space. Others just threw in the towel, and the list of construction insolvencies started to grow.

The UK Government, not as a benevolent but disinterested third party but as a major buyer of construction services, decided to weigh in with its guidance on behaving responsibly. The idea was that, without ignoring the strict terms of the contract which continued to apply, the parties would be collaborative, forgiving and trustworthy. The aim was to keep the sector working – it is after all a major contributor to the economy and accounts for 10% of GDP or £110bn annually.

[edit] Learning from the mistakes

It has been a rollercoaster few months for the industry. It seems to be far cheaper to learn from the mistakes of others or even the mistakes of our own past. So what have we learnt?

Lesson 1: whatever your contract writer promises, your contract cannot and does not cover every eventuality. Even though JCT 2016 DB unamended has over 50,000 words, and JCT states it is intended to be comprehensive, it cannot think of everything.

Our familiarity with these standard forms can often blind us to the uncertainties within our contracts – the fuzzy edges which neither party spot. More words does not automatically equate to more certainty.

Lesson 2: that even if you have a contract clause that appears to cover this sort of event, it is critical that both parties agree and follow any procedures strictly. Working from home is not an excuse for missing a time bar or for failing to notify a claim – do not rely on popping notes into the site manager’s office informally. Check your contracts carefully and know what you have to do, how, with what information and by when.

Lesson 3: detailed contract drafting can create more uncertainty than simple drafting. For example, change in law may or may not include the public health regulations or government guidance; it is hard to be sure. Your contract’s definition of force majeure may exclude reference to epidemics or pandemics, whereas the case law definition includes it. Perhaps we can learn to appreciate the simplicity of phrases like ‘events beyond the parties’ reasonable control’ which in the hands of collaborating parties should be good enough.

Lesson 4: contracts should be an effective tool to identify, respond to and review risks. We have come to rely on the default risk management set out in the standard forms – we rarely even think about what might not be expressly covered and whose risk that means it is. For a contractor or consultant working under a lump sum or fixed fees, if an event does not expressly entitle you to either time or money (or both), then you bear the time and cost risk. And yes, that means even for unforeseeable unprecedented and unpredictable events like this pandemic. In my experience, it is far better for all risks to be clearly identified and set out in the contract – so the parties can properly account for the allocation of those risks in agreeing their respective responsibility for changes to time, cost or quality.

Lesson 5: in my view the two key factors in whether the parties to a contract will succeed following the pandemic are (1) the degree to which they were already collaborating and working for the good of the project before lockdown, and (2) their willingness to see these events as primarily triggering the change management process under their contract.

Trust is at the core to resolving the uncertainties of the pandemic, from contracts through to government policies. It may not come naturally to everyone in construction – some people will need to be nudged or told.

In the article ‘Risk assessments for site visits and subsequent impacts on contracts’, Andrew Macleod and Harry Pangli suggested that parties should “engage pragmatically with clients to try and reach a reasonable agreement about how the situation can be managed most effectively without causing hardship for one party”. Government has also encouraged this sort of approach.

Perhaps my siren call is too little too late. But instead of hunkering down into our silos to fight out the inevitable recession, we need to focus our energy on creating strong collaborative relationships, robust change management procedures, and user-friendly contracts. Contracts can help us through a crisis not create yet another wave.

This article originally appeared under the headline, 'Who needs more uncertainty?' in the Architectural Technology Journal (at) issue 135 published by CIAT in fall 2020. It was written by Sarah Fox, 500 Words Ltd, Author of Small Works Contracts in Just 500 Words.

--CIAT

[edit] Related articles in Designing Buildings Wiki

• CIAT articles.
• Contractual obligation.
• Construction contract.
• Construction disputes.
• Coronavirus and force majeure.
• Coronavirus and the construction industry.
• Dispute resolution.
• Force majeure in construction.
• JCT.

[edit] External resources

• Andrew Macleod and Harry Pangli, Risk assessments for site visits and subsequent impacts on contracts.