Canada: Directors fiduciary duty in a pandemic: You need a protocol!
COVID-19 has had and will continue to have impacts on virtually every corporation in Canada and globally.
The UK enjoys three separate legal jurisdictions: England & Wales, Scotland and Northern Ireland.
Since political devolution in Wales occurred in 1999, the term “Welsh Law” is increasingly being used to describe the body of law that applies in Wales that diverges from England; devolution is resulting in divergence between laws within the confines of one jurisdiction.
In the UK, both in the built environment and infrastructure, construction is procured using industry standard forms of contract, which are heavily amended. The most common standard form construction contracts are the suite of building contracts produced by the Joint Contracts Tribunal (“JCT”) and the family of agreements produced by the NEC.
The analysis below reflects the law that applies in England (“English law”) within the jurisdiction of England & Wales and is based on the unamended terms of the JCT and NEC standard forms. In addition, unless stated otherwise, words and expressions that use initial capital letters and references to clause numbers are to the specific terms of those industry forms.
Contracts based on the JCT standard forms of construction contract are used in connection with approximately two thirds of all UK private sector real estate developments procured in the domestic property market (both commercial and residential).
JCT-based contracts dominate the UK real estate development market. Now almost 90 years old, the JCT maintains a comparatively traditional approach that concentrates on the transfer of risks and liabilities under the contract. The JCT’s most recent suite of agreements was published in 2016.
The members of the JCT represent a wide range of interests in the building and construction industries. The JCT produces standard forms of contract, guidance notes and other standard documentation for use in the industry.
The JCT’s contracts have been drafted specifically for use in connection with projects in England and Wales The Scottish Building Contracts Committee (SBCC) produces separate building contracts that are based on the JCT forms for use in Scotland; The Royal Society of Ulster Architects maintains adaptation schedules for JCT forms so that they can be used in Northern Ireland.
The first NEC contract, known as the “New Engineering Contract”, was published in 1993. The NEC introduced its latest edition, NEC4, in 2017. Launching its consultative form sixty years after the JCT was formed, the NEC suite of agreements represented a radical departure from existing building and engineering contracts.
The NEC requires and enables a more proactive and collaborative approach to managing the contract (such as found in its “early warning” and programme provisions). Another feature is the drafting in plain English (simple language) and avoidance of the use of legal terms. The NEC’s own widely publicised aim has always been to encourage cooperation, collaborative working and a fair allocation of risk between the parties to the contract.
NEC contracts have become public sector contracts of choice in the UK and are used for nearly all projects procured by national and local government bodies and agencies. During the last 20 years, NEC contracts have been used on a number of major projects including the London 2012 Olympics and London’s Crossrail project (a 120 km new railway line), one of Europe’s largest railway projects. The NEC is therefore used extensively in connection with UK infrastructure projects.
The JCT Design & Build Contract (“DB16”) is the JCT’s most commonly used building contract. Accordingly, the summary below is of DB16.
The JCT forms make reference to but do not define force majeure. The term will therefore be construed in accordance with ordinary principles of contractual interpretation.
In relation to JCT contracts, clause 2.26.14 lists force majeure as a “Relevant Event”, but force majeure is not listed as a “Relevant Matter”: see the commentary below (in relation to the next question) explaining the JCT’s use of the terms “Relevant Events” and “Relevant Matters” and the NEC concept of “Compensation Events”.
Under clause 8.11.1, either party may terminate the contract due to force majeure if substantially the whole of the uncompleted works were suspended for a 2 month period.
How have the English courts interpreted the expression force majeure? In Lebeaupin v Crispin (1920), force majeure was held to mean all circumstances beyond the will of man and which it is not in his power to control.
It follows that the COVID-19 pandemic, if in itself deemed to be a force majeure event, would constitute a Relevant Event under the JCT form and would entitle the contractor to a fair and reasonable extension of time, although this would depend on individual facts and circumstances in practice.
The NEC Engineering and Construction Contract (“ECC”) is the main construction contract within the NEC family, from which six options are extracted. The summary provided below in relation to the NEC is of the NEC3 ECC form, which represents the majority of NEC-based main construction contracts already entered into in the UK.
Clause 60.1(19) is the NEC equivalent of the force majeure provision and concerns an event which:
Clause 91.7 gives the employer the right to terminate if an event occurs which:
The mechanisms in NEC3 ECC are materially the same as those in NEC4 ECC and within the other NEC forms. Unlike the JCT distinction between “Relevant Events” and “Relevant Matters”, the NEC makes provision for “compensation events” (CEs) which entitle the contractor to both time and money: in relation to events which stop the contractor from completing on time, both aspects (time and money) can be considered together.
Clause 91 sets out 21 valid reasons for termination (termed R1 through to R21). Some entitle the employer to terminate, others the contractor, others both parties. To validly terminate the contract, there must be a valid reason for termination and the parties must follow an appropriate termination procedure.
Noteworthy reasons include:
The JCT forms differentiate between “Relevant Events” which entitle the contractor to claim additional time and “Relevant Matters” which entitle the contractor to claim additional costs. The scope of Relevant Matters is narrower than the scope of Relevant Events.
Clause 2.26 lists 14 Relevant Events (please see below) whilst Clause 4.21 sets out the five events that will entitle the contractor to loss and/or expense (money), the Relevant Matters.
Clause 2.26 offers the contractor potential relief in the form of other routes it may go down (provided, of course, it has not contributed to the default and taken all reasonable steps to avoid it); however, each case will be fact specific and depend on the circumstances.
Clause 2.26 of the JCT Design & Build contract lists a number of Relevant Events, the following potentially offering alternative relief:
2.26.1: matters and instructions which constitute a ‘Change’ under the contract: this would extend to and include any change in the law that necessitates a modification of the Works (184.108.40.206) and any restrictions being imposed by the employer concerning access to the site and limitations of working space and working hours.
2.26.2: the employer exercising its contractual right (under clause 3.10) to postpone any work
2.26.3: if the contract allows the employer to do so (clause 2.4), the employer defers giving possession of the site to the contractor
2.26.6: “any impediment, prevention or default … by the Employer, or any Employer’s Person …”
2.26.12: exercise by the UK Government, a local or public authority of any statutory power that directly affects the Works
2.26.13: delay in receiving any necessary permission or approval from a statutory body exercise
Clause 4.19 provides that, if direct loss and/or expense is incurred or likely to be incurred as a result of a Relevant Matter causing a delay in handing over possession of the site (or part thereof), the contractor may be entitled to reimbursement.
However, none of the items listed in Clause 4.21 would purport to be directly applicable to the COVID-19 pandemic. The parties would therefore bear their own costs, except perhaps in circumstances where there is a “Change” or if the employer exercised its contractual right (under clause 3.10) to postpone any works, for which there is a corresponding Relevant Matter.
Under clause 8.11.1, either party may terminate the contract due to the occurrence of certain events causing the whole or substantially the whole of the uncompleted works to be suspended for a specified continuous period (two-months in the default). The events include those outlined in 2.26.12 and 2.26.13 (see above).
The other NEC clause 60.1 ‘compensation events’ that might offer relief include:
60.1(1): Changes – the project manager instruction changes the scope of the works
60.1(2): restrictions on access to the site
60.1(3) and (5): delays for which the employer is responsible (example – does not provide something it is required to provide by the date shown in the programme)
60.1(4): if the project manager gives an instruction to stop or not start any work or change a key date
60.1(16): the employer does not provide materials, facilities and samples for tests and inspections as stated in the scope.
In addition to the NEC ‘compensation events’ highlighted above, an additional compensation event is provided for in clause 60.1(17) – the employer corrects an assumption made in relation to one of the other compensation events.
Change in law is not found in clause 60.1 but in clause X2: this provision is one of the NEC’s secondary options which means that the parties would need to have selected it at the time they entered into the contract in order for it to apply. Clause X2.1 deals with a change in the law of the country in which the site of the works is located. The drafting of the clause is wide.
Clause 16 contains a hallmark feature of the NEC - the ‘early warning mechanism’: either the project manager or the contractor can instruct the other to attend a risk reduction meeting and the employer can also be asked to attend. The purpose of the meeting is to discuss impact on time, cost and the works themselves. Following such a meeting, the parties might agree to a course of action that would result in a compensation event.
Clause 19.1 deals with the subject of prevention: the project manager is required to instruct the contractor on how it is to deal with an event that stops the contractor completing the works on time, could not have been prevented by either party and was so unlikely that no reasonable contractor would have allowed for it. The clause ties in with the compensation events.
Under English law, there is no doctrine of force majeure. The expression is used to refer to clauses in an agreement which relieve a party from performance of its contractual obligations where that performance is impacted by events outside its control.
Under English law, force majeure is not a standalone concept; contractual performance will be excused due to unexpected circumstances only if the reasons fall within the relatively narrow doctrine of frustration (and then it will apply by default unless the parties agree something else in their contract). The doctrine of frustration applies where a supervening event the occurrence and impact of which has not been provided for in the contract takes place and renders further performance of the contract impossible or illegal or changes the nature of the parties’ rights and obligations to such an extent that it would be unjust for the parties to be held their original bargain.
The Law Reform (Frustrated Contracts) Act 1943 provides for the legal consequences of frustration. It is, however, a very rare event that causes a contract under English law to be frustrated; in practice, the applicability of the doctrine is likely to be limited and there are relatively few reported cases where contracts have been held to be frustrated as a matter of law.
COVID-19 has had and will continue to have impacts on virtually every corporation in Canada and globally.
As business resumes in the workplace and circumstances change, American companies must be ready.