Covid-19: Ex Gratia Payments and Public Works Contracts
When it comes to ex gratia payments, it’s the difference between charity and entitlement, says John FFF O'Brien
YOU MAY RECALL my comments in May last year when the OGP first published guidance in relation to Employers making ex gratia payments to Contractors for costs associated with the stoppage of works and closure of sites. I both started and finished with the line:
Private contractors on public works contracts do not get gifts or favours from the government.
Having considered the OGP’s latest publications on the ‘Covid Co-operation Framework’, which proposes ex gratia payments for the costs of implementing measures on construction sites required under the ‘Return to Work Safely Protocol’, the sentiment in that line still remains valid.
The Current Position
First, let’s take stock of the current position: there are now two ex gratia relief mechanisms offered on a ‘without prejudice’ basis to contractors who entered into Public Works Contracts before the occurrence of Covid-19.
The first of these provides a contribution from the Employer to the Contractor for their costs of demobilisation, securing the site and prolongation costs, where these result directly from the stoppage of non-essential works and closure of sites due to Covid-19.
The second ex gratia relief provides a contribution from the Employer to the Contractor for: (1) the costs of re-mobilising and getting back to work after the Covid-19 suspension, and (2) the costs for carrying out the remaining contract works under heavily disrupted [socially distanced] conditions, collectively labelled “the Return to Work Safely Protocol” (the ‘Protocol’).
First Ex Gratia Payment Relief
In my opinion, the stoppage of works and closure of sites in respect of non-essential works results in a suspension to the works that Employers’ were obliged to instruct in compliance with directions from Government. Do not forget, the direction from the office of the Taoiseach at the time was that Employers were to decide whether or not works were ‘essential’ and to inform Contractors of this.
It follows, if Employers decided that works were non-essential and communicated this to Contractors as they should have, this amounts to a de facto instruction to suspend the works. That instruction then falls squarely within Event 3 Part K of the Tender and Schedule entitling the Contractor to time and money. Event 3 reads as follows:
“The Employer’s Representative directs the Contractor to Suspend the works under sub-clause 9.2.”
The OGP has sought to avoid this issue and has instead suggested that the closure of sites and stoppage of works was an Event 15 under Part K of the Tender and Schedule entitling the Contractor to time only.
Event 15 reads as follows:
“Delay to the Works caused by the order or other act of a court or other public authority exercising authority under Law.”
I do not agree with the OGP’s position that the closure of sites and stoppage of works qualified as an Event 15. This is for a number of reasons:
- First, as set out above, as a matter of fact, in compliance with directions from government, it was for Employers to decide whether or not works were essential and to inform Contractors. Where this process was not followed in respect of non-essential works, it is simply Employers seeking to shirk responsibility and avoid having to give both time and money pursuant to Event 3.
Unfortunately, the OGP’s stated position gives misplaced credibility to Employers that did not follow the process that was envisaged by the Department of the Taoiseach.
- Second, the OGP’s logic that the suspension falls within Event 15 at all, is incorrect. This is because, plainly, it was not “the introduction of a law or the order or act of a court or other public authority” that “caused” the delay to the works – what actually caused delay to the works was the occurrence of a global pandemic and the subsequent outbreak of the illness in Ireland.
The pandemic itself is the root cause of the delay, not any law or order brought about as a result of it. The introduction of laws or orders made to deal with the pandemic are a secondary matter, which the OGP is seeking to rely upon in order to shoehorn site closures and stoppages of works into Event 15.
- Third, and following on directly from my second point, in any event the Regulations made by the Minister for Health which underpinned the Taoiseach’s announcement with regard to the closure of sites were not introduced until after sites were closed and until after the instruction by the Employer with regard to suspension of the works should have been given.
The OGP cannot therefore properly rely on the making of those regulations as a basis for shoehorning the suspension into Event 15, since the Regulations only came into effect after suspension occurred.
Public sector Employers’ and the OGP’s approach in relation to this matter can be seen as even more cynical when viewed from the perspective of the indemnity provided by the Employer to the Contractor pursuant to sub-clause 3.5(1) of the Contract.
That indemnity is for “liability for death, injury, or illness of any person or loss of or damage to any physical property that the Contractor incurs in the course of performing the Contract to the extent caused by the negligence of the Employer”.
Considering the breath of this indemnity, which obviously encompasses issues that might arise as a result of Covid-19, the Employer should have taken immediate and appropriate action to instruct the suspension the works.
Unfortunately, this is not what occurred in practice, with many Employers leaving it to the Contractor or the Employer’s Representative to take action independently, notwithstanding a direction from Government that it was for the Employer to take such action.
Second Ex Gratia Payment Relief
The second ex gratia relief relates to costs incurred by Contractors in implementing measures on construction sites to comply with the Return to Work Safely Protocol.
This time, the OGP has decided that compliance with the Protocol is now not even an Event 15. Its position has hardened and it now states that the Contractor is neither entitled to time nor money in completing its works in compliance with the Protocol:
“The OGP considers that the standard forms of Public Works Contracts (PWC) do not provide an entitlement to Contractors to an extension of time or to recover any costs that may arise as a result of the introduction of the Protocol and/or the implementation of the Protocol Measures.”
I do not agree with the OGP’s stated position that the implementation of the measures to comply with the Protocol on construction sites does not give rise to any entitlement under the Contract.
My view is that the compliance with the Protocol is, at its most basic, an additional constraint on the works that gives rise to an Event 1 under Part K of the Tender and Schedule (a Change Order) which entitles the Contractor to both time and money.
Notwithstanding its stated position, the OGP also notes that the ex gratia payments agreed under the proposed framework for dealing with the implementation of measures pursuant to the Protocol are to help to “ease the financial burden on Contractors”. This is, again, a cynical statement, given that any ex gratia payments will be limited to a maximum of 50% of the Contractor’s actual costs, but ‘only’ on the basis that the Employer’s budget allows it to pay out even that.
Consequently, the absolute best that Contractors can even hope to obtain is 50% of their costs, but will likely get far less with Employer’s seeking to rely on restricted budgets as the reason for not being in a position to pay out.
OGP Overall Strategy
The ex gratia payment reliefs, taken together, are no more than the OGP seeking to support Public Sector Employers in attempting to get a better deal by agreeing to make payments to Contractors at a lower level than those to which Contractors’ are actually entitled.
It is the difference is between charity and entitlement, and prudent Contractors should seek to exercise their entitlement if as good as, or a better deal, is not on the table under the ex gratia payment procedures.
Furthermore, Contractors need to bear in mind the additional barbs included in the ex gratia payment mechanisms, which would make it unattractive to bring claims after agreeing to take ex gratia payments – these include the Employer obtaining “open-book” access to Contractor’s costs and records, and the ability to claw back any ex gratia payments made should the Contractor be successful in a claim.
The OGP’s ex gratia relief and payments are, on the one hand, a proactive initiative to restart works and get back to work safely, whilst on the other, an initiative to reduce the Government’s potential exposure, by creating the ‘lesser of two evils’ option, inducing Contractors into agreeing ‘settlement payments’ in exchange for a waiver by the Employer to imposing Liquidated Damages for delay.
This OGP initiative may suit some Contractors who have substantially weathered the storm, with the assistance of the Covid-19 weekly wage subsidy to their staff, and now simply want to get back to work, but to other contractors these ex gratia relief charitable offers will simply not be enough to cover the shortfall and losses. As a result, they will have no choice but to pursue their full compensation entitlement.
6 August 2020