Conflict in Ukraine - What does it mean for the UK Construction Sector
25 March 2022
25 March 2022
The conflict in Ukraine is having immediate, significant and far-reaching economic consequences. This is partly due to the swift international response triggered by the conflict, with the US, EU and UK (among a number of others) imposing a series of significant sanctions (many joint and coordinated) against Russia. These are increasing daily.
Broadly speaking, the sanctions imposed to date target a number of areas of the Russian economy and particular military and political leaders in Russia and Belarus, and restrict the importation of certain Russian exports. To keep up to date on these sanctions, visit our Russia sanctions tracker.
The Ukrainian conflict and the related sanctions are already having an impact on the price and supply of materials and equipment critical for projects in the construction sector. In the UK, this sector typically operates on small profit margins but requires significant resources for works to be progressed. Accordingly, any impact on supply chains quickly gives rise to financial pressures. The conflict will further exacerbate an already turbulent market, hit by Brexit, COVID-19, shipping disruption, inflation and rising energy and fuel costs.
In particular, Russia is a key global supplier of steel, iron, nickel, chemical products and wood. Critical exports from Ukraine also include steel, iron, nickel and chemical products as well as machinery and transport equipment. Disruption to these supplies caused by the conflict and the sanctions that have followed will add to the increased price volatility in the commodities market putting pressure on supply chains.
The conflict has also had an impact on the cost of fuel, given the high European dependency on the supply of gas and oil from Russia, with prices for both increasing significantly. These prices may remain high and could increase further, meaning that the cost of materials used in projects that require intensive energy input to manufacture and produce such as steel, bricks, plastics and ceramics will likely increase. Transportation costs for equipment, plant and materials used in construction are also likely to go up.
In this article, we consider the potential impact on current projects by reference to three common standard form contracts: the JCT Design & Build Contract 2016 (JCT), the NEC4 Engineering and Construction Contract (NEC) and the FIDIC Red Book (2017) (FIDIC). We also consider the potential impact of these factors on future projects and how these may be procured.
The possible impact of the Ukrainian conflict on existing projects will vary and the factual position will need to be considered carefully on a project by project basis. Impacts may include delay and disruption caused by materials and goods shortages affecting deliveries; cost overruns; changes in the scope or nature of the works (variations); and, possibly, arguments around the triggering of suspension or even termination rights.
Understanding the contractual position and the position under the governing law of the contract, is therefore essential. We set out below how time and cost issues are dealt with under the standard form contracts under English law before addressing two general ways that non-performance risk is allocated – force majeure and frustration.
It's also important to remember that parties are obliged at law, and often pursuant to the express contractual terms, to mitigate their loss where possible and such efforts, for example, to source materials from elsewhere, will need to be considered carefully as part of any assessment of entitlement. Questions of causation should also be carefully considered, including pre-existing issues, which mean the impact of the conflict is not the main problem.
Another factor to bear in mind is that each of the contractual clauses referred to below is subject to a notice requirement and parties risk losing their contractual entitlements if notice provisions are not complied with in terms of timing and/or content.
|Contract||Additional Time?||Additional Money?|
Grounds for an EoT might include:
Neither change in law nor force majeure are listed as "Relevant Matters" so the contractor would not be able to claim for additional loss and expense.
However the contractor may gain relief under other contractual provisions including:
Additional time and money are assessed together to the extent they are caused by a qualifying "compensation event". Grounds include:
Same as entitlement to additional time. Other points to bear in mind include:
The contractor is entitled to an EoT for delays caused by:
The contractor is entitled to additional cost incurred as a result of:
Other points to bear in mind include:
On some projects, entire contracts or certain obligations may not be able to be performed at all, or for a certain period of time, and suspension and termination rights on the basis of force majeure will be under scrutiny.
To determine the parties' rights under English law will be a question of looking at the contract (and, of course, there may be other contractual grounds for suspension or termination that are relevant aside from force majeure, for example, the NEC contains an optional clause giving the Client the right to terminate at will (Option X11)).
Generally, whether the Ukrainian conflict and/or any resulting unavailability or restriction of particular goods or materials constitute a force majeure event will need to be assessed on the particular facts in each case against the relevant contractual wording. However, the fact that contract performance has simply become more onerous or expensive is unlikely on its own be sufficient, meaning that force majeure (that entirely prevents performance) is harder to argue in situations where materials are more challenging to source or prices have increased. Mitigation will also be relevant in this context.
|JCT||Clause 184.108.40.206: Either party may terminate the contract on notice if a suspension for force majeure continues for more than two months.|
|NEC||Clause 91.7: Client has option to terminate the contractor's obligation to provide the works if the force majeure event will prevent completion of the works or is forecast to delay it by more than 13 weeks.|
Sub-clause 18.5: Either party may terminate the contract if an "Exceptional Event" causes a delay of 84 continuous days or multiple delays which total more than 140 days.
Sub-clause 18.6: Either party is also entitled to serve a termination notice if any event arises outside the control of the parties which makes it impossible or unlawful to perform their contractual obligations, and the parties are unable to agree an amendment to the contract. This might be relevant but 'impossibility' of performance is a high threshold.
If a contract becomes physically or commercially impossible to perform, the common law doctrine of frustration may apply to automatically discharge the parties from their obligations. However, the threshold for frustration at common law will ordinarily be significantly higher than the threshold for force majeure.
Frustration is also less likely to be successfully invoked where contracts contain a force majeure clause which addresses the scenarios that may arise as a result of the conflict. In practice, the doctrine of frustration is likely to only be invoked in the most extreme circumstances and when the relevant construction contract does not have the ordinary mechanisms to deal with those circumstances.
The applicability of a force majeure provision will depend on whether a particular circumstance was unforeseeable at the time the contract was entered into. Some, although arguably not all, future impacts of the conflict are now foreseeable, such that a claim for force majeure will no longer be possible in respect of contracts currently under negotiation. Equally, change in law provisions typically apply to changes after the contract has been entered into, so wouldn’t apply to current sanctions or restrictions.
It follows that parties will want to mitigate against future uncertainties by addressing them upfront. Potential ways of doing this might include:
Russia's invasion of Ukraine, and its devastating impact on the Ukrainian people and their homeland, is having far reaching and unprecedented consequences. For the UK construction sector, the conflict has added to a number of other major challenges the industry is currently facing. In this update we have attempted to shed some light on how construction contracts will respond.
Authors: Sadia McEvoy, Stefan Jammes and Carrie Leader