Opportunities for future-proofing construction contracts (Japan)

The ability to adapt to changing circumstances will be a defining feature for businesses in 2020 and the construction industry is no different. The construction industry has had to cope with liquidity stresses as well as non-availability of supplies and manpower. As businesses cope with the changes brought about in these unprecedented times, many are now turning to consider how to future-proof their contracts – in other words how to anticipate future developments and minimise the shocks and stresses these can impose on a business.

New future-proofing guidance from the Construction Leadership Council (“CLC”), published on 14 July 2020, may be a helpful resource in this regard. Although the guidance focuses on JCT and NEC contracts – used primarily in the British market – the issues it raises are of universal application to contractual documentation for projects whatever standard forms are used.

The CLC’s future-proofing guidance

The CLC’s future-proofing guidance sets out options for adjusting construction contracts to allow for the impact of events – such as the Covid-19 pandemic – on costs and delays to the delivery of project milestones.

Broadly, the guidance looks at two issues:

1. extensions of time together with allocation of liability for losses and expenses incurred in dealing with a pandemic; and

2. termination of the contract in the event of sustained hardships caused by a pandemic.

These topics present a useful starting point identifying the most immediate issues which projects face in light of the Covid-19 pandemic and the measures governmental authorities have taken in response.

The suggested future-proof drafting published by the CLC relies on a new defined term – a “Pandemic Event”. This definition covers Covid-19 and its possible mutations but also goes further to include any pandemic. Furthermore the definition goes beyond the pandemic itself and covers both (i) legislation and regulation issued by governmental or public authorities issued in relation to a pandemic, and (ii) any consequences of any pandemic which are outside the reasonable control of the contractor such as losing site access, delay to the delivery of materials and the non-availability of labour to resource the project.

These suggested drafting can obviously be used in new contracts. Parties will also want to consider any amendments to their existing contracts arising out of the present circumstances carefully. For example, amendments may not be appropriate where parties have already made allowances for the difficulties caused by the pandemic and the legislative responses that have been taken to Covid-19 in their contractual programme and budget.

The CLC acknowledges this and recognises that bespoke amendments may be required to reflect individual circumstances, but the guidance provides a starting point for the parties to think about the issues that they now need to provide for – whether in their existing project contracts or contracts they are about to enter into.

Extensions of time and allocation of risk for the Contractor’s costs

The CLC guidance sets out three options for parties when dealing with questions of whether a Pandemic Event should give rise to an extension of time:

1. Option 1: grant only an extension of time to the Contractor. With this option, the Contractor will bear any losses and expenses caused by a Pandemic Event.

2. Option 2: grant an extension of time as well as payment of all the Contractor’s losses and expenses. This option provides for the Employer to bear the losses and expenses.

3. Option 3: grant an extension of time as well as payment of a pre-determined percentage of the loss and expense incurred i.e. a cost-sharing mechanism between the Employer and the Contractor. The precise percentage allocation of risk is a matter for negotiation between the contractual parties.

Termination

The CLC guidance suggests providing for the possibility of termination of contracts if a Pandemic Event causes suspension of works for a specified time. If parties follow the CLC guidance, then termination for a Pandemic Event has the same consequences as termination for force majeure.

Parties considering their contractual position should also consider whether such a right of termination should apply to both parties (rather than just the Contractor) especially if the Employer bears the risk of additional costs and delay.

Conclusion

There can be no off-the-shelf drafting that works for all parties when dealing with the challenges and complexities that a pandemic can raise; however the CLC Guidance provides a useful starting point which might be tailored to suit the parties’ needs where there is a consensus that some change is required.

Many governments around the world are encouraging parties to take a collaborative approach to the challenges Covid-19 poses with the twin aims of reducing insolvencies and avoiding a steep rise in costly and long-running disputes. Indeed, the CLC itself released its Covid-19 Contractual Best Practice Guidance in May 2020 encouraging participants in the construction industry to adopt collaborative approaches to payment and the revision of contractual clauses. In light of this, parties to construction contracts should consider carefully the full range of options available to them to cope with the challenges posed by Covid-19 and make sure that any outcome works best for their particular circumstances.

If you would like to discuss how the CLC guidance might impact on your projects or how to amend your contracts to deal with the challenges facing the industry please get in touch with the authors or your usual Herbert Smith Freehills contact.