Real estate

Construction contracts: old tools and new risks

Published on 30th Oct 2020

Can the CLC's guidance future proof the JCT contract from effects caused by the pandemic and Brexit?

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The Joint Contracts Tribunal (JCT) has published a paper on the impact that Covid-19 and Brexit is likely to have on future projects. The JCT also provides commentary on the Construction Leadership Council's COVID-19: Contractual Disputes and Collaboration Guidance.

The CLC guidance sets out a range of possible amendments in the JCT including adding a new Relevant Event of 'A Pandemic Event' in the extension of time provision. The JCT highlights several potential issues with including the CLC's definition:

  • It does not specify what constitutes a 'pandemic', which could lead to uncertainty.
  • The existing JCT definition of a Relevant Event overlaps with the part of the CLC definition of 'A Pandemic Event' relating to the "exercise of any statutory power". The JCT suggests that the addition of 'A Pandemic Event' is therefore unnecessary because should another pandemic arise, or indeed an epidemic, the government would intervene on public health grounds. Where that happens, it provides a clear trigger point for the Relevant Event covering UK government intervention.
  • The CLC definition is drafted too widely and would allow a claim for 'any consequences of any pandemic which are outside the reasonable control of the Contractor'. The JCT suggests that, if used, it should be restricted to consequences of a pandemic which directly affect the Works (capital 'W').

The CLC's guidance was informed by its industry survey, which revealed a need for guidance on amendments to standard forms to deal with the effects of the pandemic. If you are planning on making amendments to your contracts in order to navigate the risks of the impact of a pandemic or epidemic, then it is prudent to seek legal advice since making additions or amends may contradict other clauses and alter the allocation of risk and liabilities in unexpected ways.

Brexit: the potential impact of inflation

Of course, 2020 is not just about the pandemic; Brexit is also playing a major role in uncertainty for the construction industry.

In its article, the JCT comments on the risk of inflation, which has been furthered by the prospect that the UK and the EU will not agree a trade deal for the Brexit transition period which ends on 31 December 2020.

Inflation is problematic in construction contracts as the contractor will have to bear the cost of the rising price of goods and materials, which are not usually claimable from the employer. In times of low inflation the contractor is expected to absorb this risk, with the client seeking certainty of price.

Given the increasing risk of inflation, the JCT suggests that parties consider including fluctuation provisions in new construction contracts. Under the JCT Design and Build, the default position is that JCT Fluctuations Option A applies. This provides for changes to contribution, levy and tax fluctuations, which occur after the Base Date.

Fluctuation provisions work by allowing the contract sum to be adjusted throughout the construction project to account for the rising prices of goods and materials. This shifts the burden of rising costs during a project from the contractor back onto the client.

Whilst clients are likely to resist fluctuation provisions for introducing uncertainty into the contract, the potential for volatility brought about by Covid-19 and Brexit may well force such a change particularly where projects continue to increase in size and duration in the UK.

It may be that standard form contracts do change, but the JCT emphasises the importance of considering the full range of existing contracts (and options within contracts) – along with site operating procedures and government guidance on contracting behaviours – to tackle the risks that can arise on new projects. Simply put, there are already a lot of tool in the tool box so check there before looking for a new gadget.

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Covid-19 Project Toolkit

What do you need to consider if you are making or facing a claim as a result of the impact of Covid-19 on your project?

Covid-19 Project Toolkit

This update is part of Osborne Clarke’s comprehensive Covid-19 Project Toolkit. The Toolkit is designed to help you navigate the complex issues around Covid-19 claims, covering the FIDIC, JCT and NEC standard forms, along with guidance on the disputes process, commentary on government guidance and site operating procedures, and our expert view on future-proofing the next generation of projects.

For access to the Toolkit, please contact one of our experts listed below.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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