Does NEC provide a means of recovery against Coronavirus?
Coronavirus and NEC Contracts
This blog considers Coronavirus and NEC Contracts and a relevant clause in standard NEC 3 and 4 contracts that appears to enable contractors to recover lost time and money due to the Coronavirus pandemic.
Those familiar with NEC will already be aware that clause 60.1 (NEC 3 & 4) includes a number of compensation events that entitle a contractor to recover its losses (effectively, damages) in respect to matters including the effects of Project Manager’s instructions, access issues, instructions to stop work, the encountering of unforeseen physical conditions and exceptionally inclement weather.
Whilst clause 60.1 does not specifically mention ‘pandemics’, it does include clause 60.1(19) which would seem to be relevant in respect to the impact of the Coronavirus. The clause refers to “An event which:
· stops the Contractor completing the whole of the works or
· stops the Contractor completing the whole of the works by the date for planned Completion
shown on the Accepted Programme, and which:
· neither Party could prevent,
· an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable to have allowed for it and
· is not one of the other compensation events stated in the contract.”
(Please note wording is as NEC 4; albeit it is like that used in NEC 3.)
If we consider the first two bullets used in this clause, does the Coronavirus affect the contractor’s ability to complete the whole of the works? Whilst it seems likely that the works could still be completed at some future date, a likely effect of the Coronavirus could be that it impacts on the Contractor’s ability to complete the whole of the works by the planned Completion shown on the Accepted Programme.
Without going into a lengthy explanation here about the definitions of planned Completion and Accepted Programme (let’s save that for a future blog), it is sufficient to say here that it is likely that the impact of the Coronavirus outbreak and ‘Lockdown’ period will have delayed the contractor from completing the works on time; hence, delaying completion of the works until after the planned Completion date.
On this basis, it seems that the effects of the Coronavirus can be covered by this compensation event.
As such, NEC then has procedures to enable the contractor to claim for lost time and to recover its monetary losses (i.e. as Defined Cost) consequent upon the effects of the compensation event (please note: the assessment of compensation events, Defined Cost and assessing delays are all potential subjects for future blogs). Having ascertained that the impact of the Coronavirus pandemic seems to qualify as a compensation event, we also need to consider the three remaining bullets of clause 60.1(19) as these provide tests as to whether the Coronavirus outbreak is to be treated as a compensation event or not.
In respect to the 3rd bullet, it seems unlikely that either Party would be able to have prevented the Coronavirus outbreak.
In respect to the 5th bullet, I have already noted that pandemics are not specifically mentioned as a compensation event; albeit the contractor should check that the Contract Data Part 1 does not cover this under ‘additional compensation events’. A key consideration, which is likely to fuel some debate, relates to the 4th bullet which calls into question as to whether it is deemed reasonable for the contractor to have made allowance for the Coronavirus outbreak?
This bullet refers to an event that has “such a small chance of occurring that it would have been unreasonable to have allowed for it” and considers whether it is reasonable for any experienced contractor to have had sufficient knowledge for it to predict that a global pandemic was likely to impact its works…
With this in mind, I considered the occurrence of other significant pandemics over the past 300 years or so, and by reference to a couple of articles published by the Centre for Infectious Disease Research and Policy and the World Health Organisation, I was able to ascertain, excluding the current pandemic, that there have been 10 nr significant flu pandemics since 1700 (namely, in 1729, 1732, 1781, 1830, 1833, 1889, 1918, 1957, 1968 & 2009) with an average break of over 30 years between outbreaks.
Compare this with the compensation event for weather, namely clause 60.1(13), which only includes for extreme weather that “is shown to occur on average less frequently than once in ten years” (wording as NEC 4). Surely, if NEC is prepared to include a once in ten years event as a compensation event, it should also be able to make provision for an event which is only likely to occur once in every 30 years or more…
Whilst some pandemics have occurred more frequently than the average 30-year period, there are times when the period between outbreaks has been considerably longer (as dates above). Hence, it seems unlikely that an experienced contractor should have been expected to have made allowance for the outbreak of the Coronavirus and, as such, it seems entirely reasonable to me that the effects of the Coronavirus outbreak should be treated as a compensation event.
Please note that even if this so, contractors should not ignore the NEC requirements in respect to the notifying of compensation events (see clause 61.3) or the effect of any contract amendments and/or additional Z clauses.
I would like to hope that this blog on how NEC Contracts may deal with the impact of Coronavirus provides some reassurance to contractors that there is a possibility for them to recover losses incurred due to the Coronavirus. If you have any concerns about your entitlements or are concerned about the possible effect of any contract amendments, please feel free to send me a message, or give me a call. I would be pleased to hear from you.