As sanctions are imposed due to the military action in Ukraine, there will be impacts on performance of construction contracts in Europe but also elsewhere as supply chains are disrupted. This threatens to compound existing upheaval on the supply of essential construction materials required for projects in Australia and elsewhere caused by Covid-19.
Parties who may be affected by the escalating developments in Europe and are concerned about potential flashpoints elsewhere will likely have cause to freshly consider force majeure and other contractual provisions providing for potential relief under construction contracts. We provide a refresher on some key issues to consider below.
Background
During the last couple of years there has been significant focus on whether the Covid-19 pandemic and orders, declarations and other responses by Governments provide a basis for excusing performance and recovering time and cost under impacted contracts.
For construction contracts, the particular focus has been on whether Covid-19 and its effects fall within the definition of force majeure or change in law (or similar commonly included provisions), and so provide a basis for relief of some kind.
Key contractual bases for seeking relief
Force Majeure
Construction contracts commonly expressly address the relief available in the event of a force majeure. While a matter of risk allocation, a party will usually be required to identify an event falling within a definition of force majeure as a first step to seeking any relief.
The events falling within the definition of force majeure will depend on what the parties have agreed, even if the widespread use of amended standard form contracts creates some level of consistency in terms of the kind of events likely to be caught.
The second edition of the Conditions of Contract for Plant and Design-Build (Yellow Book) published by the Fédération Internationale des Ingénieurs-Conseils (FIDIC), for example, defines force majeure as an exceptional event or circumstance which, among other things, is beyond a party's control. It also includes, within its non-exhaustive list of events which may satisfy those requirements, war, rebellion, and munitions of war. The inclusion of war and rebellion in a definition of force majeure is common.
Where an event falling within the definition arises, various different entitlements will arise depending on the circumstances and the impact, and what has been agreed in the contract. Often, the event will provide a basis for seeking an extension of time (and sometimes associated delay costs) to the date for completion where it causes critical delay to the progress of the works.
If performance of all or a substantial part of a party's obligations are affected, this may provide a basis for excusing performance for as long as performance is prevented, and potentially enlivening a right to terminate if performance is prevented for a specified period of time (like six months, for example).
Change in Law
Construction contracts generally also expressly address the circumstances in which relief will be available if legislation changes during project delivery. Sometimes things like changes in standards applicable to the work will also be contemplated.
As you would expect, any change will commonly be required to the law governing the contract, and the contractual provision will often contain exclusions (such as legislative change anticipated before the contract date). Again, the question of what falls within the definition of change in law (or similar) depends on what has been agreed between the parties.
The FIDIC Yellow Book again provides an example, with Sub-Clause 13.7 allowing the contract price to be adjusted where there is increase or decrease in cost resulting from a change in the laws of the contract made after the contact date affecting the contractor's performance. Sub-Clause 8.4 is similar, providing a basis for an extension of time to be claimed where completion is or will be delayed by 'unforeseeable shortages in the availability of personnel or Goods caused by ... governmental actions.'
Where a change in law contemplated by the contract arises, this commonly entitles the affected party to seek additional cost arising from the change. The contract may also allow an extension of time (and associated delay costs) to the date for completion.
Key issues to consider
Basis of claim or notice
Areas of disagreement can quickly emerge in relation to claimed entitlements for events of this kind.
A common area of disagreement is whether an event is a force majeure or a change in law. In relation to Covid-19, issues arising from whether or not Covid-19 falls within force majeure definitions which do not squarely provide for a pandemic or its effects (such as whether it is an 'act of God') are common.
More common are disagreements about causation, and whether or not, or the extent to which, the alleged event impacted performance in the manner required for relief to be available. In relation to Covid-19, for example, often a party will point to the pandemic or to an order or declaration and assert a broad range of impacts.
Those same common areas of disagreement will similarly likely arise in relation to the direct and indirect impacts of conflict and war.
With contracts often including strict requirements around giving notice (and time-bars where not given), notices and claims will be given to seek to preserve entitlements and avoid claims from being barred. This can lead to notices or claims being light on detail, and create difficulties assessing whether a notice or claim has a proper basis or gives rise to entitlement to relief. Where rejected, these notices and claims often linger until they are added to the list of outstanding issues or disputes to resolve at the end of a project.
Where an event of the kind above does arise, a best for project approach will often require a constructive dialogue between the parties about managing any impacts, with notices and claims properly given and assessed or otherwise resolved in a timely way in accordance with the contract.
Notice requirements
Often construction contracts will include prescriptive requirements detailing what a notice connected with the kind of events described above must include, and the timeframe within which it must be given. Commonly, a failure to give notice on time or in the required form will be expressed to be a condition precedent to seeking relief.
It is therefore necessary to consider not only the timeframes for giving notices of force majeure and change in law, but also the timeframes for giving notices relating to claimed entitlements arising from them, such as notices of delay, claims for extensions of time, variations, and so on.
These timeframes can be extremely short and the clock can start to run from a date before the party actually became aware of the event – if the party ought to have become aware sooner.
The short timeframes can be particularly problematic for a party sitting somewhere in a contracting chain, who receives a claim from a downstream party where equivalent entitlements may be claimable from an upstream party (such as a head contractor or project company on a PPP project). In that scenario, extra care and management of downstream contractors is required to ensure that claims and notices are reviewed and appropriately actioned promptly on receipt, and that steps are taken to preserve entitlements where claims and notices do not arrive on time or are insufficient to pass on.
What this means for you
Parties delivering construction projects which are, or may be, impacted by the conflict in Ukraine should consider those impacts, the entitlements that may be pursued, what notices and claims need to be given and when to preserve those entitlements, and how or when such notices or claims need to be assessed.
Those parties should be proactive, and engage early with stakeholders about any potential impacts and how best to manage them on a best for project basis.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
