Practical responses to construction projects affected by COVID-19: Assessing claims for extensions of time

• United Kingdom

• Construction and engineering
• Coronavirus - Contractual issues
• Litigation and dispute management

28-08-2020

The delays and disruption to construction projects across the world as a result of the COVID-19 pandemic will likely continue to be felt for some time.

Contract administrators (“CAs”) will, if they have not already, receive claims from contractors for an extension of time to completion (“EoT”). The CA must then determine, often within a short period of time, whether the contractor has a valid claim under the contract and, if so, what the contractor is entitled to.

These are already complex questions in ordinary circumstances, but in these unprecedented times there will often be no clear contractual basis for an EoT to be granted and, where the true impact and extent of COVID-19 still remains unknown, a comprehensive assessment of claims can be near impossible. The CA’s position is not assisted by the fact that the majority of construction contracts will not allow an interim EoT assessment to be reduced, if it turns out that an award was overly generous.

As a result, although CAs will be sympathetic to the current difficulties facing contractors, CAs may be hesitant to assess claims or may simply feel the contract binds them to reject some claims outright. Rejecting claims outright or adopting a “wait and see” approach is likely contrary to the contractual claims mechanism and is contrary to the guidance in the 2nd Edition of the Society of Construction Law Delay and Disruption Protocol (“SCL Protocol”). Although this, in and of itself, is unlikely to be of great concern to an employer in terms of lability, this approach may pose a greater risk to the project, including: programme uncertainty and contractor insolvency; a build-up of claims which can only be resolved through costly dispute resolution; and a deterioration of the relationship between the parties.

Although difficult, CAs should so far as possible proactively engage with contractor’s EoT claims and follow the process of assessment which may or may not conclude in granting interim or incremental EoT awards. This process will ensure that a CA has all available information when making an assessment and, if at the end of the assessment, a CA remains of the view that an EoT cannot be granted on any basis, they will be on stronger ground if that view has to be defended at a later date.

Where no contractual solution exists, parties may need to consider stepping outside the boundaries of the contract to resolve EoT claims amicably.

This briefing note aims to provide practical guidance for those trying to assess whether an EoT claim is valid and if so how to approach an EoT claim in times of uncertainty.

(1) The contractual mechanism

Standard form construction contracts generally allow the construction period to be extended where there is a delay that is not the contractor's fault. This process is particularly important where the construction contract provides for delay damages in the event of late completion.

This procedure is intended to ensure that claims are dealt with quickly, to allow the project to continue without claims accumulating. However, in reality, delay claims can be complex and often neither contractors nor CAs have the time or resources to properly prepare/assess a claim. Moreover, in most cases, the true impact of the delay will not be known and once claims are made, the short time window for an assessment will require the contractor and the CA to determine the delay on a prospective basis (i.e. based on a forecast rather than actual events).

EoT claims arising out of COVID-19 in particular pose a difficult and potentially awkward problem for a CA. There may be sympathy for a contractor suffering the consequences of delays which are outside of its control. However, there may be limited contractual grounds for relief, and a CA will be wary of the risk of granting open-ended or significant EoT awards in circumstances where the true effect of delays is unknown.

In these circumstances, a CA may be tempted to delay making an assessment, for example by requesting additional information, or simply reject claims outright. However, such an approach is highly unlikely to be beneficial to the project as a whole. As a first step, CAs should properly consider all of the circumstances, including the guidance set out below.

(2) Assessing the validity of a COVID-19 related claim

Pandemics are generally not expressly referred to in most construction contracts, whether in the context of EoT claims, termination rights or otherwise. Contractors will therefore be faced with putting forward an alternative basis for an EoT claim (such as force majeure, material adverse change, or change of law). Whatever this alternative basis, it is likely to be novel, based on difficult grounds and often limited information. Ultimately, even where contractors may struggle to get such claims off the ground, that does not mean a CA should not engage with the EoT claim in front of them.

It is far more beneficial to all parties to understand the true nature of any event, and to consider any appropriate mitigation measures, before making an assessment of the impact. Rather than reject a claim in the first instance or request further information as a default, it may be better practice to work with the contractor to fully understand the difficulties that the contractor is suffering, without prejudice to any contractual limitations.

(3) Method of assessing the impact of delays

Once an EoT claim is submitted during the lifetime of a project, many standard forms only allow a short period of time within which an assessment of the claim needs to be carried out by the CA. This necessarily requires an assessment to take place in the interim, that is prior to completion, which requires a prospective analysis of the likely impact of the delays.

A prospective analysis refers to the future and seeks to determine the likely impact of an event on project completion. It can be a useful tool to provide contractors with a quick resolution and temporary relief while the full details of a claim remain unknown.

A true prospective analysis requires reference to a current programme (updated at the time the delay event occurs but without addressing the ongoing impact). In reality it is rare that enough information is available to allow the CA to carry out a sufficiently detailed or accurate interim assessment. The limited information on which an interim EoT assessment is often based can give rise to a number of risks, including open-ended EoTs being granted in circumstances where the cause of delay is not fully understood; other delays being wrapped up in the contractor’s claim; and no account being taken of mitigation or any float built into the programme.

A prospective analysis tends to benefit the contractor, not only due to the reasons set out in the preceding paragraph, but also due to the fact that interim assessments for an EoT can generally be extended but not reduced, if an award is subsequently found to have been incorrect. In addition, the contractor will typically have more knowledge and control of the programme during this dynamic phase. In contrast, it is often in the employer’s interest to carry out a final extension of time exercise after practical completion with the benefit of hindsight (i.e. retrospectively), allowing all actual events to be taken into account which may lead to the conclusion that delays thought to be on the critical path at the time, are not. There is therefore an incentive from an employer’s perspective to resist granting interim EoT awards.

However, the success of delay claims (whether prospective or retrospective) will fall on the facts, and in particular, the availability of contemporaneous evidence in support of any such claim. It is therefore in all parties’ interest to attempt to assess delays at the time they occur, and to keep detailed records of events should a retrospective analysis be possible and necessary at a later date.

(4) SCL Protocol guidance

The SCL Protocol, which although not binding, encourages interim assessments as a quick method of resolving delay disputes. The SCL Protocol goes as far as suggesting that if an interim EoT mechanism is either implemented improperly or not at all when it ought to have been, this could have the effect of making time at large. That is, there is no enforceable date for completion, and the contractor only has an implied obligation to complete the works within a “reasonable time”. As a matter of law this is unlikely to be the case. In our view, failure to properly implement an EoT mechanism is more likely to simply give rise to a breach of contract.

The SCL Protocol includes significant details around the records that should be kept by the parties and how the programme should be operated, all of which leads to almost perfect information being available. From this standpoint, interim EoT awards are an attractive proposition for all parties. However, in reality such information and resource are not typically available meaning that interim assessments are not readily given.

The SCL Protocol does acknowledge that an EoT entitlement does not necessarily result in an automatic entitlement to be compensated for additional time to complete works. However, while the SCL acknowledges that some form of final reconciliation post practical completion may be possible (even where interim EoT awards have been granted) this will be fact dependent and is in itself contrary to the principle of assessing delays as they arise. Attempts to avoid or put off fully assessing the interim EoT claim are only more likely to result in a dispute.

The possible middle ground may be granting the EoT award incrementally (i.e. of a delay claim for 10 days if following an assessment a CA reasonably determines that only 3 days can be awarded, an incremental EoT award can be made and “topped up” if further information in respect of that claim comes to light entitling the contractor to more time). Such an approach will give the contractor relief but will provide little certainty on programme. Crucially, incremental EoT awards should not become a means of stalling a detailed interim assessment and could still amount to a “wait and see” approach which may give rise to:

• lack of certainty on/out of date programme information;
• increased risk of contractor insolvency; and
• the risk of expensive and time-consuming claims later down the line with an inflated risk of costly adjudication, arbitration or litigation being commenced.

It is worth noting that in assessing an EoT claim, the CA is entitled to take into account matters which it considers to have delayed the works but are not strictly relevant events as defined in the contract. Ultimately, proper record keeping and ensuring the rationale behind an EoT award is fully and comprehensively recorded will be the most effective method of protection for a CA should an interim EoT be subject to scrutiny later on.

(5) So, how should a CA respond to delay claims arising out of COVID-19?

A CA should seek to administer the contract pragmatically and understand the advantages and risks of doing so. The SCL Protocol “recognises that transparency of information and methodology is central to both dispute prevention and dispute resolution.”

This may include granting an interim EoT on a prospective basis, or granting incremental EoT awards, and being prepared to facilitate negotiations in order to reach a flexible solution.

Where an interim EoT procedure is contractually prescribed (i.e. a prospective method must be used) and the contractor has complied with all steps required to obtain a contemporaneous award, an interim EoT should generally be granted, whether incrementally or not. Overall, an interim EoT properly granted can: (i) have significant benefits for progress as against the contract programme; (ii) resolve disputes early, thereby limiting associated costs, insolvency risk and future claims; and (iii) maintain a collaborative working relationship between employer and contractor.

It may be possible to adjust the effect of an interim EoT (assessed prospectively) at the final account stage or when calculating time for prolongation compensation by using a retrospective method of analysis. The SCL Protocol recognises this, even if indirectly, and acknowledges that the two assessments of time may produce different results but this does not necessarily indicate errors in either method. It will however be difficult to justify discounting prolongation costs when an interim EoT has already granted, unless the contract expressly allows.

Ultimately, engagement with a contractor’s interim EoT claim on the part of a CA will place the CA in a stronger position to defend any claims at a later stage and/or advise on any amicable commercial discussions.

In all cases, and in particular where the risks associated with delay and disruption are ongoing and unlimited, it is advisable to keep thorough records (both of the method/rationale behind an interim EoT assessment and of any commercial discussions) and accurately record all agreements, especially when looking outside the strict contractual provisions to agree a commercial solution.

(6) Where there is no contractual remedy, consider negotiation

While it may be counterintuitive, in order to adequately deal with the pressures of accumulating delay claims, parties may need to step outside of the contractual provisions.

Employers and contractors, need to be cognisant of the contractual constraints within which CAs operate. A CA’s role is to administer the contract and they will have their hands tied where there is no contractual basis for a claim. Even after working through a thorough assessment of the EoT claim it will be difficult to do anything other than reject a claim with no contractual basis.

Parties also need to take into account the current economic climate and wider commercial issues impacting a project. For example, a contractor that at the time of the EoT notification is either: (i) already at risk of insolvency; and/or (ii) close to reaching its contractual cap on liquidated damages, is only more likely to slow down the pace of work or down tools completely if its claims are not adequately and timely assessed. In these circumstances it is particularly important to engage in a meaningful dialogue and seek to agree a commercial way forward as between employer and contractor.

This means that CAs and contracting parties, more so than ever, need to engage with each EoT claim and be open to the prospect of entering into commercial negotiations to resolve any contractual impasse. This might include agreeing extensions to project deadlines and re-pricing, in turn for greater certainty in the programme and clarity over the allocation of risks going forward.