Businesses face the risk of becoming bogged down in legal disputes over the effects of the coronavirus pandemic on construction contracts, the Construction Leadership Council (CLC) has warned.
The CLC urged the construction sector to follow guidance it has produced to ensure the “fair and reasonable administration” of contracts, cautioning that without it, covid-19 could have a “significant and detrimental effect” on the industry.
The warning came after a CLC survey found that there has been an increase in the level of notifications and claims under construction contracts because of covid-19. This included both chasing issues on legacy projects to increase cash reserves, and chasing the recovery of commercial positions due to the direct impact of covid-19 on current projects.
It also found that there was an increase in the number of claims under construction contracts being rejected because of covid-19. It said that initial indications were that while parties may be inclined to settle an entitlement to additional time for completion there was a “reluctance” to agree financial losses, costs and expenses.
The CLC said: “Commercial behaviour has changed since covid-19. In the short term, many reports indicated a positive and increased level of collaboration within Q2 and Q3 of 2020. However, in the longer term, indications were that commercial behaviour was hardening throughout the supply chain, including greater emphasis on management of existing contracts, increased tender lists and sub-economic pricing, increasing insolvencies and robust protective discussions on risk allocation in new contracts.”
The CLC predicted that there would be an increase in formal disputes in 2021, with a “perfect storm” of a negative economic environment, EU exit, reduced construction market activity, the end of government business support schemes, the introduction of reverse charge VAT, and a significant number of claims across the supply chain.
It said: “The CLC asks that industry works together to support the long-term health of our sector by constructively resolving all contractual disputes arising from the pandemic.”
Under the leadership of the CLC Business Models Workstream, the Contractual Practices Working Group has produced guidance including:
- CLC covid-19 Contractual Best Practice Guidance. Outlining how to navigate and accommodate the impact of covid-19 on existing contracts in order to avoid disputes, reach settlement and safeguard project delivery and supply chains. This guidance also offers templates for instigating collaborative dialogue within a safe and secure legal framework.
- CLC covid-19 Contractual Disputes & Collaboration. Summary guide, giving a high-level summary of the above guidance, tools and templates available and explaining how to manage the process of collaboration.
- CLC covid-19 Contractual Disputes & Collaboration. Record keeping guidance, highlighting the need for forensic record keeping in order to underpin collaborative contractual relations and settlements.
- CLC covid-19 Future Proofing Guidance. JCT/NEC Contracts amendments, offering template drafting options and guidance for standard form contracts, to incorporate and share the risk of Covid-19 disruption to project delivery.