As of Monday 22 June, the construction sector entered phase 3 of the construction restart plan. Phase 3 is "steady state operation," meaning that contractors can gradually return to construction sites where physical distancing can be maintained.
However, three months after COVID-19 related restrictions came into place, we're seeing some parties exercise their right to terminate building contracts, rather than resume works on site. We explore those termination rights in more detail below.
Rights of termination under JCT and SBCC contracts
JCT/SBCC – Clause 8.11: if the carrying out of works is suspended for the continuous period stated in contract particulars (the default position is two months) due to, among others, force majeure, either party may terminate. They can do so, provided that they have served a written notice to the other party, confirming that if the suspension continues for a further seven days following receipt of the notice, they intend to terminate.
Rights of termination under NEC contracts
NEC3 & 4 ECC – Clause 91.6: parties can terminate if the project manager has instructed the contractor to stop and an instruction to restart is not given within 13 weeks. If the reason for instruction is a contractor default, the employer can terminate. If the reason for instruction is an employer default, the contractor can terminate. For any other reason, either party can terminate.
All these contracts also deal with the consequences of termination, depending on the circumstances that led to it.
What trends are emerging?
The majority of Scottish construction sites have been shut since the end of March/beginning of April, meaning that the default periods of two months under JCT / SBCC contracts and the 13 weeks under NEC have now expired.
As a result, we have seen some termination notices from contractors looking to bring contracts to an end. Some have reached the decision that it is more cost-effective to walk away from sites now than to bear the cost of starting back up and continuing works with the requisite public health measures in place.
Of course, this is dependent upon what stage the project was at prior to COVID-19 restrictions coming into play, the extent of works still to be completed and any relief available under the form of contract to compensate for this.
There have also been cases of employers requesting contractors to waive their termination rights to provide certainty.
There is, however, evidence of some parties arguing that the termination notice is not valid on the basis that Phase 1 and/or Phase 2 of the construction restart plan interrupted the "continuous period" requirement under SBCC / JCT contracts, given that some limited works could have been restarted when these phases were entered into.
We have also seen employers and contractors agreeing to vary building contracts by extending the period for termination from the period stated in the contract (being the default two months/13 weeks), to 12 months to cater for the disruption caused by COVID-19.
Consequently, this allows for a prolonged period during which the works can be resumed and completed without either party having the option to terminate.
Future contracts
Many new projects that had been put on hold, can now be moved forward again. Sensibly, parties are looking for ways to contractually allocate the risks related to COVID-19 and the possibility of a similar scenario occurring in the future.
One such area is looking to increase the two month/13 week period under the SBCC/JCT and NEC contracts respectively, to six or 12 months.
Given the unpredictable nature of COVID-19 and the length of time sites have been closed, this hopefully will provide more reassurance to both parties moving forward.
Inevitably, however, parties will need to discuss how the financial burden of such prolongation periods would be managed.
Contributor
Partner
