Recent Cabinet Office Guidance has strongly encouraged parties to act responsibly and fairly in the performance and enforcement of contract obligations. In the context of the construction industry this guidance has been supported by additional guidance from the Construction Leadership Council and RICS. We summarise the effect of the guidance below and its likely impact on the construction industry.
Cabinet Office guidance
In recognising that adversarial contractual behaviour now could hamper the ongoing recovery of the economy, on 7 May 2020, the Cabinet Office produced a note encouraging parties to act “reasonably and fairly” where Covid-19 has had a material impact, in “a spirit of co-operation and aiming to achieve practical, just and equitable contractual outcomes having regard to the impact on the other party/ies the availability of financial resources, the protection of public health and the national interest”.
The note lists typical circumstances during the lifecycle of a project where the requirement to act reasonably and fairly is strongly encouraged. The following circumstances of particular relevance to the construction industry, are included:
- completion deadlines;
- compensation events (including Force majeure);
- payment clauses (requesting and making payments);
- claims in respect of breach;
- record keeping and notice provisions; and
- commencing and continuing disputes (including ADR and formal procedures) .
If disputes are unavoidable early resolution is encouraged, and reference is made to the Low Value Disputes Model Adjudication Procedure, as developed by the CIC and RICS, and RICS’ Conflict Avoidance Pledge.
The guidance will be revised as necessary, takes immediate effect, and will be reviewed on or before 30 June 2020.
CLC Best Practice Guidance
In support of the Cabinet Office’s call to arms for contracting parties to “play nicely”, while also acknowledging the inevitable Covid-19 related project delays and additional unforeseen costs, on the same day as the Cabinet Office and with Government support, the CLC has published a range of practical proposals aimed at mitigating the negative impact of Covid-19 on the construction industry.
It is hoped by the CLC that its guidance, to be read alongside the Cabinet Office’s note “will generate collaborative and constructive approaches to the resolution of contractual issues on construction projects during these challenging times”.
The key messages in the CLC guidance are set out below:
- Until proposals for dealing with Covid-19 induced delays and expenses are agreed, contractual requirements should be complied with.
- Proforma notices and letters to be used to comply with contractual notice requirements whilst opening without prejudice dialogues between parties, are appended to the guidance.
- Practical tips for allocating the unplanned costs impact of Covid-19 are offered. For example, the CLC suggests that where a Contractor might be entitled to time but not money:
- the Employer could consider, with recognition of the risk of supply chain insolvency (and the likely negative impact on the project), paying for the Contractor’s delay (notwithstanding that it is not contractually required to do so); and
- in considering the sum it can reasonably expect from the Employer, the Contractor could consider the likely costs and time it will incur in bringing an extension of time/additional costs claim and any termination rights the Employer might seek to exercise.
- Transparency and risk sharing are also encouraged. Parties are encouraged to share details of any Government support (furlough loans etc) that has been provided.
- Costs sharing and the need for the Employer to consider “supplier relief” outside that prescribed for in the contract, are encouraged.
- To ease cash-flow, some more radical options including early payment of retention and changing the agreed payment mechanism (for example from lump sum to target cost or open book) are raised for consideration.
- Good documentary house-keeping, and effective project management, including continuing the usual project meetings are also encouraged. The impact of Covid-19 on the project should be discussed and documented during these meetings.
- In circumstances where it is not possible to reach an agreement, alternative dispute resolution procedures are encouraged. Specific reference is made to the RICS Conflict Avoidance Procedure for assisting with the early resolution of matters.
RICS Conflict Avoidance Pledge
The pledge was created in January 2018 and is aimed at encouraging parties to work together to facilitate early dispute resolution and adopt conflict avoidance measures. The pledge was recently endorsed by the CLC on 30 April 2020.
In recognising the potentially crippling impact of disputes (in respect of cost; destruction of business relationships; and delays to projects) on the construction and infrastructure industries, the pledge was created in order to try and help the industry mitigate the cost of disputes, primarily by recommending early intervention techniques and collaborative working. Specifically, the pledge aims to “promote greater understanding and use of conflict avoidance techniques”. A number of well-known construction and engineering bodies (including the Chartered Institution of Civil Engineering Surveyors, Transport for London and Network Rail) have signed up to the pledge.
The pledge includes various declarations requiring the signatory to agree to promoting matters, during a project, that are relevant to facilitating early dispute resolution. This includes committing to working with industry partners to adopt mechanisms that enhance conflict avoidance; and agreeing to “recognise the importance of embedding conflict avoidance mechanisms into projects with the aim of identifying, controlling and managing potential conflict, whilst preventing the need for formal, adversarial dispute resolution procedures” and to committing to embed these procedures into the signatory’s projects.
It does not cost anything to become a signatory to the pledge. By signing the pledge, a signatory will become a member of the International Conflict Avoidance Pledge Coalition and will be entitled to utilise the pledge logo and wording recognising that the party is a member of the pledge, on promotional and corporate documents. Whilst those signing the pledge “commit” to certain behaviour, such as “working proactively to avoid conflict and to facilitate early resolution of potential disputes”, the pledge does not indicate whether such commitments are intended to be legally enforceable.
RICS has also produced a more detailed Conflict Avoidance Toolkit which sits alongside the pledge and provides a proactive strategy to guide parties through dispute avoidance fundamentals. The toolkit sets out the difference between dispute avoidance and early intervention, stating that the former is about “stopping the smoking embers of a dispute by bringing them to the attention of people who can do something about them”, whereas early intervention is preventing smoking embers igniting into a fire.
Conclusions and implications
Disputes over the cost and time implications of Covid-19 may significantly hamper progress on individual projects and have wider impacts on the construction industry and a collaborative approach is to be welcomed.
The Cabinet Office guidance calls for parties to act “responsibly and fairly in the national interest” but leaves significant room for interpretation. On one hand, contracts between construction industry participants will reflect an allocation of risk which in most cases has been carefully considered, costed, secured and insured. It could be said that the fair and responsible thing to do in such a market is to hold the parties to their contractual bargain. On the other hand, the circumstances brought about by the present pandemic are unprecedented and it might be said that existing risk allocations in some cases no longer reflect a fair or sensible result.
From a legal perspective, the Cabinet Office guidance can be viewed in a number of ways:
- It could be taken as suggesting that in certain circumstances parties should give up or refrain from exercising their contractual rights, beyond what they might ordinarily do as part of commercial negotiations during the course of a project, in the furtherance of the national interest. If this interpretation is taken, the non-binding nature of the guidance could potentially pose governance issues as to whether the national interest can properly be taken into account consistently with a director’s duty to promote the success of a company. The relevant legislation includes within that duty the impact of a company’s operations on the community and the desirability of the company maintaining a reputation for high standards of business conduct. Parties should also give thought to the consequences of following the guidance (in this sense) under any indemnities or contracts of insurance which may apply.
- It could be taken to suggest that the manner in which contractual rights are exercised be fair and responsible. This might roughly align with the concept of good faith as it is sometimes implied into English law contracts.
- It could be taken merely as encouragement to favour collaborative and negotiated outcomes to disruption and disputes, rather than simply “standing on one’s rights”. The benefits of taking such an approach will already be well known to many construction industry participants and is exemplified in many respects in the CLC guidance.
The CLC Guidance provides a helpful charter for dealing with Covid-19 issues and disputes in a pragmatic and collaborative way. It is open about its proposals being deviations from what might have been contractually provided for, but also clear that parties should reserve their rights, hold discussions without prejudice, and document any agreed variations clearly. While the proforma letters and notices included within the guidance are a helpful starting point, and a good steer for those dealing with potential extension of time and/or money claims, the proforma notices are (understandably) based on unamended standard form contracts. Parties should always be careful to check whether any amendments have been made to their contracts which affects the form or content of these notices.
The RICS pledge sets a positive baseline for the industry to adopt. The broad scope of entities across the industry that have signed up to the pledge indicates that it has been well received to date. Clearly the more industry bodies that commit to the pledge, the more effective the pledge will be. The positive approach of the pledge (amongst other collaboration and ADR measures) will hopefully help to drive industry change towards reducing the negative impact of costly and time-consuming formal dispute processes. This is particularly significant in the current Covid-19 environment. While having an eye on the helpful collaborative stance of the pledge, parties should, of course, continue to refer to any contractual dispute resolution measures (for example expert determination or specialist meetings to seek to avoid escalation).
Both the Cabinet Office Guidance and the CLC Best Practice Guidance suggest approaches and behaviours to adopt in dealing with issues in extant projects, but neither offer any suggestions for dealing with future contracts in a changed post-pandemic world. This isn’t really their purpose in fairness, but parties are, sensibly, choosing to address this risk now before entering into new contracts and, just as with any type of risk allocation, we are seeing and negotiating a range of proposals. It remains to be seen whether more specific industry guidance on sample clauses for pandemic risk allocation, and conflict avoidance and resolution, will be forthcoming.