Addressing subcontractor concerns
Many contractors and subcontractors initially suspended on-site operations (or vastly scaled them back) following the UK lockdown coming into force on 22 March.
Most have since implemented further safety measures on site and returned in some capacity (albeit with productivity impacted).
Some site operators similarly took the decision to close sites temporarily (for periods ranging from 24 hours to a month or more).
This gave them the opportunity perform risk assessments and contact clients and suppliers to ascertain their concerns and practical restrictions on continuing to operate.
As of the end of April, phased re-openings of many of the construction sites that had been shut down was beginning to commence, with new measures to ensure social distancing is observed.
Given the lack of definitive guidance from government on how to implement Public Health England (PHE) guidelines, the most effective approach seems to have been for site operators/lead contractors to consult with subcontractors about what work they believe they can continue to perform safely.
In many cases, this has meant construction work has been able to proceed, albeit on a more limited (and less productive) basis.
Some subcontractors have reported a failure of lead contractors to engage with them, which has made it harder for these businesses to plan and increased the risk of subcontractors pursuing claims.
Equally some main contractors have reported the same failings of clients – and vice versa.
It is likely to be in all parties' interests to try to preserve commercial relationships, which means avoiding claims in favour of negotiation where possible.
However, whether parties opt for discussion over dispute will depend on their respective financial positions and strategies.
In the first month of lockdown, contractors reportedly received relatively few claims from subcontractors, suggesting that most are waiting to see how long the disruption will last and whether claims can be avoided.
Contractors are generally trying to avoid issuing notices to subcontractors who breach contracts, preferring to take a softer approach of demonstrating compliance with PHE and Construction Leadership Council (CLC) guidelines and encouraging suppliers to return to site.
For further analysis of the CLC's guidance, please see our previous article: The CLC updates COVID-19 Site Operating Procedures – but some clarity is still wanting.
While the UK government's Coronavirus Job Retention Scheme (CJRS) has been welcomed by many in the construction sector as a way of mitigating cash flow pressures, furloughing staff is not always straightforward.
A worker must agree to be furloughed, under which designation they continue to receive 80% of their wages (up to a cap of £2,500 per month) but are not allowed to work for their employer while on furlough.
It is not necessarily a requirement to look to furlough staff before deciding to reduce hours and remuneration instead, but employers may face challenges to the fairness of failing to consider alternatives.
Amending employment terms
Changing employment terms in connection with furlough (e.g. to temporarily reduce salary – whether to the cap under the CJRS, or otherwise) must still be performed in accordance with employment law norms.
Broadly, the starting point is that an employer must have some form of clear contractual ability to make such amendments.
Historic examples include lay-off clauses or short-time working clauses, however these are not common to most contemporary employment contracts.
If employment contracts do not contain any such contractual authority, employers can either seek to gain employees' consent to cut hours and pay in light of the current circumstances, or try to force changes through by dismissing and re-engaging staff on new terms.
The latter approach is much less attractive legally, as it tends to trigger collective consultation obligations (where the employer envisages forcing through changes to 20 or more employees at one establishment through termination and re-engagement), which tends to be extremely onerous and time-consuming.
Generally, offering employees options for how their terms of employment might change reduces the risk of challenges, as long as the steps proposed are reasonable.
All approaches involve certain risks, but early engagement and flexibility will help minimise these.
For further guidance on furloughing staff, please see our previous article: Everything you need to know about furloughing, unfurloughing and rotating staff.
In addition to furloughing and wage reductions, other ways construction companies can mitigate the impact of waning cash flow is to investigate what compensation may be available from upstream sources.
For companies operating under fixed-price contracts, while time relief and protection from liquidated and ascertained damages (LADs) may be likely, losses arising from delays or disruption to projects will probably be classed as contractor risk and non-recoverable.
However, some reimbursable forms of contracts may allow contractors to recover certain costs incurred as a result of the COVID-19 disruption from clients (in these cases, it may make sense not to furlough staff and recover their wage costs instead, subject to obligations to mitigate losses).
The parties' respective entitlements and rights will of course depend on the terms of the contract.
Changes to insolvency rules
On 28 March, UK Business Secretary Alok Sharma announced that the rules relating to ‘wrongful trading’ will be suspended from 1 March until 1 June 2020, as part of a package of measures to help companies struggling as a result of the COVID-19 lockdown.
The full set of new insolvency rules were expected to come into force in May.
This raised serious concerns for many in the construction industry, particularly with respect to payment obligations, as some may find themselves making payments to businesses that are effectively insolvent during this period.
Anecdotal evidence suggests construction companies are being cautious about any changes to insolvency rules and practices and so far these have prompted few changes to industry practice.
For further analysis of the implications of changes to insolvency rules, please see our previous article: Will the UK's new insolvency measures help companies affected by coronavirus?
The UK government has issued public procurement notices (PPNs) concerning payment of contractors and suppliers during the COVID-19 lockdown.
These notes suggest that public sector clients should take a pragmatic approach to contracts and not rely on force majeure provisions and, more generally, try to ensure payment continues to flow through the supply chain.
To date, the response to these PPNs by public sector clients has been mixed.
Some local authorities are taking a hard line approach and cutting payments, while others have embraced the spirit of the PPNs and are meeting their payment obligations, or engaging with contractors to discuss possible short-term variations to contracts.
Adjudications are continuing to take place and the Technology and Construction Court (TCC) has rejected efforts to injunct proceedings on the grounds of pandemic-related disruption.
For further analysis of the TCC's approach to this issue, please see our previous article: Application for injunction to prohibit an adjudication due to COVID-19 rejected virtually by the TCC.
Parties and adjudicators need to be flexible – both on timetables and provision of hardcopy documents – but the process is still being used and is still working.
The TCC is also continuing to operate via virtual case management conferences (CMCs), applications and hearings.
As of the end of April 2020, there appeared to be a backlog of cases to clear in the TCC, leading to delays in the arrangement of CMCs until the end of the year.
Keeping up with official guidance
Keeping track of official guidance on how the construction industry should implement infection control measures and manage workforces and sites is challenging, but the best advice continues to be to remain vigilant for updates.
There have now been three versions of the CLC's SOPs (including the hastily withdrawn Version 2).
The broad nature of guidelines issued so far has created some confusion over their interpretation, and it is sensible to seek second legal opinions where there is ambiguity.
For more information about how the construction industry should respond to the disruption caused by COVID-19, this video contains some FAQs, with answers that continue to align with current guidance.
If you have any questions or concerns about your projects in light of the coronavirus outbreak, Fieldfisher's construction and projects team would be happy to discuss your specific circumstances with you.
Sign up to our email digest
Click to subscribe or manage your email preferences.