What next for the construction sector: looking at how other common law jurisdictions are responding to COVID-19

What next for the construction sector: looking at how other common law jurisdictions are responding to COVID-19

What next for the construction sector: looking at how other common law jurisdictions are responding to COVID-19

"In such a situation, you don't talk contract. You talk equity, you talk justice, you talk about what is the right thing to do," – Singapore’s Law Minister K. Shanmugam 

Since 31 March 2020, the government of England has asked the construction industry to tread the precarious line of remaining open for business during the COVID-19 epidemic while strictly complying with social distancing guidelines. Construction is one of the key industries that the government has chosen not to directly or indirectly force to close. This does not mean that the government has decided that all construction projects are of equal importance, but it has thus far given no indication that it wants the role of having to determine which construction projects should and should not shut down. As shown below, not all governments have been as shy, but the approach of each jurisdiction is understandably influenced by that nation’s own unique economic, political, and cultural background.

In England, the general rule has long been that the state should not intervene in (a legally permissible) contract save to provide the means for remedy if one party breaches their obligations. This is reflected in the government’s response to the current epidemic. Australia has closely followed the English model in its decision to designate construction as an essential industry that should remain open. Closer to home Wales has also followed England in allowing construction sites to remain open provided a two metre rule is maintained between workers on site. However, an additional feature in Wales is that where a two metre separation is not possible the employer will not be acting unlawfully provided they have taken “reasonable measures to minimise the risk of transmission and the risk to workers”. While this is an objective test and will depend on the facts of the specific work environment it clearly indicates an intention for flexibility by the authors.

In contrast, New Zealand and Scotland have both decided that construction work will only be permitted to continue if it is essential to maintaining critical infrastructure and imperative services during the epidemic. While a much more extreme form of intervention it does relieve parties from having to make difficult decisions by effectively making it for them.  

Singapore is another common law jurisdiction that has taken a particularly interesting approach. Singapore also took the decision to close down all construction for a specified period of time, with an option to apply to the government for an extension if it is not possible to safely secure a site within that timeframe. In addition, it has placed a moratorium against claims for failure to comply with obligations under construction contracts, including various associated security documents such as bonds. Instead, parties’ performance of all contractual obligations (including to pay) are postponed until after the lockdown period is over. Any party can issue a notice that it cannot carry out is obligations (i.e. diligent progression of works on site) due to COVID-19. The recipient can challenge this assertion but only by application to the government, which will investigate and make its own determination. Effectively this takes the nascent dispute out of the parties‘ hands, which in normal time would have been referred to litigation or arbitration. The stated reason for this approach is to avoid a build of litigation, which will otherwise erupt at the end of the lockdown potentially crippling businesses already weakened by the effects of the epidemic.

So what does this mean for construction sites in England?

An approach as has been taken in Singapore is unlikely to be followed in England, although in such times anything is possible. It is more likely that even in these extreme conditions the government of England will try to avoid interfering with contracts. Instead it has opted to provide economic support to mitigate the impact on businesses caused by the fact that contractual obligations will not be fulfilled in the manner envisaged prior to the epidemic. The one major change to the legal status quo that has been made is the suspension of many of the insolvency proceedings that would normally be available to an unpaid creditor. It is otherwise implied that the government expects common sense to prevail and for parties to be flexible enough to vary their agreements to account for the new conditions.

This means that parties’ contracts will still determine who will bear the inevitable economic pain caused by the present disruption to works. Most construction contracts have mechanisms which deal with suspension due to government edict, but the situation in England in this regard is unclear. This has led to judgment calls being made that may or may not prove to be correct in the long run. Consultants, contractors, developers and funders must all try to navigate the new landscape while complying with contracts that likely did not envision this crisis. Even if there is no outright ban on construction work, the epidemic has caused other problems to arise. These are primarily all to do with shortages, examples include people, materials, safety equipment and finance. The result is that parties are looking to their contracts to see how they respond to these events, with particular emphasis being placed on force majeure clauses and , to a lesser extent, the doctrine of frustration. 

Force majeure clauses have already been called upon as grounds for excusing non-performance of contracts in China, but that is in the context where the state has issued certificates that confirm beyond challenge that a force majeure event has taken place. The situation in most common law jurisdictions including England & Wales is that it remains a legal question of interpretation whether a force majeure event as defined under a contract has taken place and what relief this grants. It is also the case that the majority of force majeure clauses and the doctrine of frustration are blunt tools that can lead to unforeseen and unsatisfactory outcomes for both sides. While progression of works may not be achievable at this time, it will be possible in the (hopefully near) future for the works in question to be completed, so strict application of a force majeure clause may not be the best solution. 

Depending on your contract the right thing to do in the present situation, may not be the legal thing to do. The court system of England & Wales has already stated it is concerned about being overwhelmed by an avalanche of litigation once the lockdown comes to an end. Parties to a construction contract would be well advised to take steps now to agree the position between themselves and vary their contracts if necessary, rather than wait to see what shape they are in at the end of lockdown in the hope that - a) the contract deals with the issues that have arisen and b) does so in their favour. While it may seem counter intuitive to re-open a contract you are commercially happy with, it could avoid litigation in the long run to start having those difficult discussions now.

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