Collateral Warranties
The Covid-19 outbreak continues to present serious problems for construction firms. With the end of the pandemic seemingly in sight, a surge in construction projects since the easing of the various lockdowns has seen a drastic increase in the demand for materials – including timber, steel and electrical components – which, according to the Construction Leadership Council, are already in short supply.
With demand continuing to outstrip supply, and with prices for materials climbing, small to medium sized construction firms are already finding it more difficult to buy fundamental materials and it is easy to see how these conditions could quickly result in delays to construction projects.
In this context alone, and generally speaking, it is important that contractors properly understand the consequences of any delay or disruption to a project and the contractual mechanisms they may operate. If contractors fail to take appropriate steps in time, and the performance of their obligations is delayed because of reasons related to Covid-19,they may be liable for delay costs.
Properly drafted construction contracts will contain adequate provisions that deal with delay, and these provisions should be understood and followed carefully. In essence, they require the contractor to give prompt notice and relevant details of any event that is going to cause any delay to a construction project.
To bring a delay claim under the NEC contracts the contractor will be required to give notice of Compensation Events. Compensation Events are similar to Relevant Events referred to in JCT contracts. Generally, Compensations Events are events which are not the contractor’s fault and which delay completion of the works. If a Compensation Event results in delay, then the contractor may be entitled to additional time or money.
A contractor wishing to give notice of a Compensation Event must do so within 8 weeks of becoming aware that the Compensation Event has occurred. If not, then the contractor will not be entitled to a change in the price, the completion date or a key date.
Notification of Compensation Events within this 8-week period will usually mean that the impact of a Compensation Event will need to be assessed prospectively, i.e. before the delay, or the extent of the delay, can be properly understood. As part of the notification process, the contractor will be required to provide a quotation – essentially the contractor’s proposal for changes to the price and any delay to the completion date and key Dates – and it will be important for the contractor to include an estimate for its delay costs, backed by evidence where possible.
Examples of Compensation Events might include:
- Pandemic
- Actions of other contractors or third parties affecting the project
- Extraordinary weather conditions
- An employer’s failure to give access to the site
And to ensure that a contractor is best placed to take advantage of all Compensation Events that may be available, in addition to the notification procedure outlined above, it is essential that a contractor is familiar with:
- Any relevant Z clauses that provide additional obligations
- Risk allocation, for example by reference to the Employer’s Risks set out in clause 80.1 – an employer’s risk will, if it occurs, be a Compensation Event – and main option and secondary option clauses that may be relevant.
- Any additional risks as set out in the contact that may be relevant.
The importance of good contract management and early identification and notification of Compensation Events cannot be overstated in this context.
If there is uncertainty as to how best to proceed in the face of an event that is likely to cause delay, taking early legal advice to ensure you properly understand your position and take appropriate steps in good time could make all the difference.
George Masefield
8 February 2022
If you have any commercial or litigation related enquiries, please contact us as follows (all phone numbers are forwarded to our mobiles when we are out of the office):
| Lewis Cohen | lewis.cohen@bracherrawlins.co.uk | 020 7400 1547 |
| Hannah Slaughter | hannah.slaughter@bracherrawlins.co.uk | 020 7400 1536 |
| George Masefield | george.masefield@bracherrawlins.co.uk | 020 7400 1524 |
| Olivia Maurier | olivia.maurier@bracherrawlins.co.uk | 020 7400 1536 |
| Simon Rawlins | imon.rawlins@bracherrawlins.co.uk | 020 7400 1539 |
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