“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.” Charles Dickens – A Tale of Two Cities
This time 3 months ago I was trying to finish the submissions in a Christmas adjudication so that I could get home to stuff the turkey. Typical construction lawyer stuff. Never could I have imagined that by late March the world would be facing a pandemic unparalleled in modern history, and that large numbers of countries, including the UK, would be enforcing severe quarantine measures on populations, with desperate cruise ships plying the seas trying to find somewhere to offload their passengers.
However, I was not at all surprised by yesterday evening’s announcement of new and draconian social distancing measures, having witnessed huge numbers of people, many in large groups, out on the common while I was doing my solitary and regular weekend dog walk. Unbelievable!
So how can the construction industry try to deal with what is happening?
The first thing to say is that events are moving at a rapid speed, and while I shall try to keep this blog relevant, it may be out of date pretty quickly. I have already had to redraft it once to keep pace with developments. But I hope to make some suggestions that will be useful whatever happens.
The scope of the government’s legislation and its immediate effect on live construction projects will become clearer during the course of the day, and watch this space for some guidance on what to do. In the meantime, here are some thoughts on medium term problems, in particular how to handle potential disputes.
The fact of the matter is that our current position is so unusual that, in the majority of cases, standard form contracts, even if amended, do not cater for it. Here is a blog we produced in February about this, and there are numerous blogs from legal firms which deal with similar issues.
The conclusion that they all reach is that nobody really knows how the standard term provisions will respond to COVID-19 and what will happen if projects are shut down or delayed as a consequence of
- a case of COVID-19 on site, or
- as a result of emergency government legislation, or
- by contractors voluntarily stopping work, or
- if work has to stop because a funder stops providing the funding to keep the project going, or
- if delays are incurred as a result of equipment or components being stuck overseas, or
- materials become difficult to obtain or more expensive, or
- a circumstance I don’t list here.
Nobody knows, for example, what exactly “Force Majeure” means (keep an eye out for our blog on this topic shortly) as it has never been properly tested in the courts and properly defined. But expect a number of cases on this in the not too distant future, from the insurance industry as well as in construction and other commercial areas.
The standard lawyer starting point, of asking what the contract says, is of limited help now.
As an added complication, we may be at the beginning of long term disruption, COVID-19 might turn into a perennial issue with repeated waves of infection, similar to the Spanish Flu epidemic.
So what can we do now to mitigate the impact on construction? And, given the contractual uncertainty, how can we resolve disputes?
The construction industry will be under extraordinary financial pressure in the coming weeks and months, keeping parties solvent will keep projects going, and to do this we are going to have to find novel and creative ways to deal with disputes and problems as they arise. Compromise, so alien to the disputatious nature of the construction industry, is a skill we are all going to have to learn, and fast. Here are some thoughts.
The first thing you must do is to check your contract’s existing provisions on notices and delay. If you are using an amended or bespoke contract there may already be provisions in place that respond to epidemic, for example, or the effect of unanticipated government legislation. If there are clauses already in place, check how they are going to apply to your circumstances.
The next thing to do is to make sure everyone is complying with their notice requirements. Most contracts require notification of any event that might adversely impact the works. Do not miss out on a contractual right for want of a notice.
If you have not already done so, start talking now to agree how you are all, throughout the contractual chain, going to manage matters. It may be that the contract is silent on the matter or the course of action it specifies is one that neither party deems acceptable. If so the sooner parties start talking the sooner you can agree how you will manage matters. Taking overly aggressive contractual positions, the default position for so many in the industry, is not a good idea.
As a priority you will need to think about the health and safety of your workforce.
Contracts are not set in stone and can be amended. If you have a project under way, and major issues are being experienced, it is always possible to amend the terms of the contract itself to produce a fairer, and clearer, bargain between the parties, and to deal with unanticipated circumstances.
If you do decide that you want to amend the contract, don’t forget to involve other interested parties, for example funders, at an early stage.
If amendment is the agreed way forward, make sure it is done in writing, or recorded in writing and signed by both parties, or agreed in an exchange of emails, or even explained in a recorded conversation on video link, to avoid possible arguments later.
By now, law firms will have created their own bespoke drafting to deal with the COVID-19 outbreak. We have our own clauses to suit a variety of contracts and can prepare bespoke ones appropriate to individual contractual requirements.
The standard form contracts may well introduce amendments in due course, but inevitably there will be a time lag before these appear.
Using standard unamended contracts for a new project would be reckless for the foreseeable future.
The key issue will be to allocate risk between the parties in relation to COVID-19 and to be ready for unanticipated impacts it is likely to have. Any drafting will need to take long term possibilities into account, particularly larger contracts which may continue for a number of years.
- factor in the possibility of the government enacting emergency legislation to impose quarantine or other emergency measures on the country, and consider how this can be dealt with in the contract. (I wrote this bit on Friday! The government has acted, but this may not be the end of it and further emergency legislation may follow, so the key will be to preserve maximum flexibility.)
- consider clauses that deal with suspension of works, conditions required for restart and who bears the costs of looking after the site during these periods. These clauses are often overlooked.
- consider longstop dates if works do come to a halt due to COVID-19 related events. At what point (if any) do parties want the right for either to bring the contract to an end on unilateral notice on a ‘no fault’ basis.
- Consider payment for materials, and in particular payments for materials procured in advance, consider ensuring that these are paid for in full. Equally ensure any advance payments for materials are secured. While it is hoped to be avoided, the fact remains that the economy in the short term is uncertain and workflows will be disrupted. This increases the risk of insolvency for all businesses. Therefore clauses to secure materials and payment for both parties must be policed even more carefully than normal.
- Don’t forget insurance, who will be responsible for it if the site is shut down?
Another thing to think about is to incorporate dispute resolution procedures into the contract, either bespoke procedures, or signing up to the RICS’s Conflict Avoidance Pledge which I have previously blogged about here .
Incorporating these types of clauses will help the parties to avoid the time consuming and expensive burden imposed by disputes. For companies fighting for their lives, money spent on formal dispute resolution procedures is money which could go towards keeping wages and suppliers paid. Dispute resolution procedures in the contract could be a lifeline.
You will need to consider too how your documents are going to be signed. Here is a link to our guidance on this, but we recommend getting specific advice in relation to documents to make sure they are signed properly
Looming Disputes, and what to do about them?
What about litigation?
The Lord Chief Justice last week issued preliminary guidelines which make it clear that the administration of justice, as a vital public service, must be maintained but that many adjustments will have to be made and some matters prioritised. As part of that guidance he said “I would urge all before agreeing to adjourn any hearing to use available time to explore with the parties the possibility for compromise.” This is likely to extend to parties wanting to commence litigation. A judge will take a dim view of a Claimant who issues proceedings in the current situation without, at the very least, fully observing the provisions of the relevant pre action protocol (with appropriate adjustments to cater for the preaction protocol meeting) and probably taking more active steps to reach a settlement. Defendants who fail to participate fully can also expect a dim judicial view to be taken of their conduct. Judges are often in the age groups most at risk from COVID-19 , they will not take kindly to being hauled into court for an unnecessary hearing resulting from intransigent conduct by one or more parties.
More detailed guidance on court proceedings is being issued on a daily basis as the court system endeavours to maintain a basic service.
Adjudication is a rapid, fast paced process which needs large amounts of input from people on the team within a short amount of time, the swift assembly of relevant documents, comments and responses. All this from people who now have to stay at home unless absolutely necessary or who may be ill, self-isolating, working at home without access to the office and relevant files, or at home looking after their children. The referring party might have time to sort out the referral notice at leisure, but don’t forget that the adjudicator is likely to order at least 2 rounds, possibly more, of exchanges of submissions, so both parties will be facing difficulties. Most adjudicators deal with everything on email and using electronic bundles, but assembling those bundles and the necessary evidence may be a problem.
Arbitration, as a private, contractual procedure, is a much more flexible method of dispute resolution than litigation or adjudication, and arbitrators have a much larger degree of control over the way proceedings are conducted, depending upon the rules under which they are operating. This may give arbitration the edge as the dispute resolution method of choice, particularly if the parties are able to agree on procedure with the arbitrator and if matters can be conducted via video link.
However, arbitration, like litigation, involves substantial preparation in terms of pleadings, the assembly of documentation, witness statements and expert evidence. These are going to be very difficult to arrange for the next few weeks.
Are there other possibilities?
In order to avoid the comprehensive preparations required for one of the 3 main formal methods of dispute resolution, there are lots of different options available which, with a bit of creative thinking, may be able to allow a dispute to be resolved before something formal has to be started.
Here are some suggestions
It is a purely legal issue, or a matter of contractual interpretation?
You could think about referring a discrete legal point, or a point of contractual interpretation, to an experienced construction lawyer to provide an opinion, either a solicitor or a barrister. The opinion could be non binding, or binding, depending on what the parties want. The beauty of this is that it can be done entirely on paper, or if the parties want an opportunity to make verbal submissions, this can be done by video conference to an agreed time limit. Cases often hang on one or two legal issues, and if the parties can get an impartial assessment of their relative strengths and weaknesses on these issues, this can allow them to consider the likely outcome and perhaps do a deal.
More formally, there is the option of early neutral evaluation, which is offered by many bodies such as the RICS, CEDR, the Chartered Institute of Arbitrators and the Academy of Experts.
The TCC, and other specialist courts, have for many years been offering a judge led Early Neutral Evaluation service. The procedure is very flexible and the parties can decide if it is to be binding upon them or not. There is provision for a hearing, but this is not essential and the evaluation can be done entirely in writing. The advantage of early neutral evaluation by the court is that you get the opinion of a TCC judge. The procedures are, however, formal and the relevant Civil Procedure rules will have to be followed.
Use a mediator
The traditional lawyer’s approach to mediation, where you all go and sit in an overheated hotel conference room or a solicitor’s office with a mass meeting of all involved followed by sitting in a separate meeting room until past midnight while the mediator shuttles between you trying to get everyone to agree a deal, isn’t compulsory. Why not ask a mediator to engage with you in a different way? It’s not necessary to sit together, or be in the same place. A clever mediator will be able to work with the parties to agree alternatives – perhaps by telephone or video conferencing with individuals or teams. Most mediators offer on line mediation, and there are even apps which may be of assistance. Many established mediation services are already offering online services as an option. Think flexibly and do some research and focus on what you need and you may find a mediation service useful, even if it only deals with some of the issues. It might narrow them enough for the project to proceed.
The Chinese Government, for example, is actively promoting online dispute resolution and has issued a guideline calling for the acceleration of its use as part of its reaction to the coronavirus epidemic.
Lawyers tend not to like expert determination because it is extremely difficult to appeal or overturn an expert’s findings, even if they are clearly wrong. However, it has its place and it does have some important advantages, particularly if you have a technical issue that needs to be resolved quickly. You can refer a technical issue to a specialist in that particular field and your evidence and submissions can be highly refined and focussed. There is no need to have to explain matters to a judge who knows nothing about the specialist technical issues and needs it all to be explained from scratch. So the documentation and submissions can be shorter and more precise. And often it is possible to conduct matters in writing, although sometimes site inspections might be required. These will have to be managed carefully as appropriate.
If you have a technical dispute, even if you would not normally want to use it, expert determination is well worth considering to enable a decision to be taken and the project to move on. You could adapt the procedure to suit your situation, perhaps by making it non binding or even temporarily binding, a bit like adjudication.
The construction industry cannot revert to its default position of disputation and conflict if it is to survive the existential threat posed by COVID-19. We need to adapt to a radically different landscape and find new and innovative ways to work together.