War, Supply Chain Disruption And Inflation: Contractual Remedies Under Standard Form Construction Contracts

The construction industry has faced a succession of significant challenges: from unprecedented goods and labour shortages during the COVID-19 pandemic and the war in Ukraine, to widespread supply chain disruption, through changes in law, governmental action and sanctions. With the outbreak of armed conflict involving Iran and the effective closure of the Strait of Hormuz — a waterway through which roughly 20% of global oil and gas supply normally transits – a new and acute phase of supply chain disruption has emerged. Construction projects across the globe are experiencing the consequences: increased cost of raw materials, ongoing disruption to procurement routes, delayed material deliveries, rising freight costs, energy price volatility and increased insurance premiums.

In light of such supply chain disruption, parties may be giving renewed consideration to force majeure and similar provisions in their contracts, and to the potential for time and cost relief.

This article examines the contractual remedies that may be available to parties under the principal standard form construction contracts — including the FIDIC Red Book (1999 and 2017 editions), the NEC4 Engineering and Construction Contract, and the JCT 2024 Design and Build Contract — where they may be affected by:

• A shortage of goods and labour caused by war.
• Increased costs and inflation affecting the continuing performance of the contract.
• The impossibility of continuing performance due to existing or new geopolitical conflicts.

Force majeure and similar provisions across standard forms

Under English law, the term "Force Majeure" – which has its origins in French law and is codified in many civil law systems – has no settled meaning. Its effect and meaning will therefore be a question of interpretation and will depend on the wording of the relevant contractual clause. The principal standard form contracts each approach force majeure differently.

FIDIC Red Book (1999 and 2017)

Under the FIDIC Red Book, an event qualifies as "Force Majeure" or an "Exceptional Event" (the 2017 edition replaced the term "Force Majeure" with "Exceptional Event") if it is "exceptional" and: (a) is beyond a party's control; (b) is one which the party could not reasonably have provided against before entering into the contract; (c) having arisen, the party could not reasonably have avoided or overcome; and (d) is not substantially attributable to the other party. The Red Book sets out a non-exhaustive list of qualifying events, including war, hostilities, natural catastrophes and epidemics, provided the conditions above are satisfied. For more detail on these, see our article.

An affected party may only invoke these provisions if it "is or will be prevented from performing any obligations under the Contract" as a result of the event. The provisions will not be engaged where performance simply becomes more onerous or expensive.

If there is an event of Force Majeure or an Exceptional Event, subject to compliance with the relevant notice provisions, the contractor will be entitled to claim an extension of time for any resulting delay. Again, subject to giving the requisite notice, the Red Book also allows contractors to bring claims for "Costs" (as defined) incurred in relation to certain categories of Force Majeure events or Exceptional Events.

JCT 2024 Design and Build Contract

Under the JCT suite, force majeure is listed as a "Relevant Event" under clause 2.26.14, entitling the contractor to an extension of time. However, critically, force majeure is not a "Relevant Matter" under clause 4.21. Therefore, whilst a contractor may be entitled to an extension of time due to an event of force majeure, it cannot recover loss and expense. Furthermore, force majeure is not a defined term under the JCT forms and will therefore be construed in accordance with ordinary principles of contractual interpretation. This means that the scope of what constitutes force majeure under a JCT contract is inherently uncertain. Parties may therefore wish to consider incorporating a bespoke definition suited to the project's risk profile.

NEC4 Engineering and Construction Contract

The NEC4 ECC does not use the term "Force Majeure" but instead provides for "prevention events" under clause 19.1. A prevention event arises where an event occurs which stops the contractor completing the whole of the works (or stops the contractor completing by the date for planned completion shown on the accepted programme), and which neither party could prevent, and which an experienced contractor would have judged at the contract date to have such a small chance of occurring that it would have been unreasonable to have allowed for it. The project manager is required to give an instruction to the contractor on how to deal with the prevention event.

A prevention event constitutes a compensation event under the NEC4 form, entitling the contractor to both additional time and money — provided it complies with the requisite notice requirements. This is a significant distinction from the JCT approach discussed above.

Shortage of goods and labour caused by war

Where a party is prevented from performing any of its obligations due to the outbreak of war, it may — depending on the standard form in use — be entitled to an extension of time and, in some cases, cost relief, provided the applicable contractual test is satisfied and the requisite notices are given. This could encompass, for example, the inability to procure goods from suppliers due to the outbreak of war either in the country of the project or in another country. Under the FIDIC forms, war (unlike other "Exceptional Events") is not required to occur in the "Country" to give rise to an entitlement to cost relief.

A critical distinction must be drawn between the inability or impossibility of procuring goods — for example, where goods were to be supplied by manufacturers who were prevented from shipping due to the outbreak of war or the closure of a maritime corridor — and the difficulty of procuring goods because they are in short supply or more expensive following the outbreak of war.

Difficulty procuring goods would generally not constitute an "Exceptional Event" or a "prevention event", since the fact that performance is delayed, or becomes more difficult or onerous, does not equate to being "prevented from performing" or render performance legally or physically impossible. Whether relief is available will depend on the precise wording of the clause in question as well as the factual circumstances – including accurately identifying the causal event in question (which may not be the event of war itself, but its consequences).

In the context of the current conflict, parties should also carefully consider the question of foreseeability. The affected party's knowledge of events at the time of formation of the contract will be relevant when assessing whether an event qualifies for relief. A party that entered into a contract after the escalation of tensions may find it difficult to demonstrate that it could not reasonably have provided for such risks before entering into the contract.

Civil Law hardship and impossibility provisions

The governing law of the contract may be a source of further relief. Mandatory provisions of many civil law codes, in the Middle East for example, contain hardship or impossibility doctrines including:

In the UAE, Article 249 of the Civil Code allows a court to reduce an obligation to a reasonable level where exceptional public events of an unforeseeable nature make performance excessively onerous in a way that threatens the obligor with grave loss.

In Qatar, Article 171 of the Civil Code codifies the doctrine of hardship, and empowers the court to reduce an obligation where exceptional and unforeseeable events make performance excessively onerous. Article 188 also addresses the concept of force majeure: providing that where performance of an obligation by one party is extinguished by reason of impossibility of performance due to force majeure beyond the control of the obligor, such obligation and correlative obligations shall also be extinguished and the contract deemed rescinded.

In Saudi Arabia, Articles 110 and 125 of the Civil Transaction Law now explicitly recognise and codify force majeure. Further, Article 97(1) of the CTL provides, “in case of extraordinary events which were unforeseeable at the time of contracting and which make the fulfilment of a contractual obligation excessively onerous on the part of the debtor in such a way that it may cause heavy losses, the debtor may […] invite the other party to negotiate". If negotiations fail the courts may intervene and are empowered to reduce or rebalance the obligation (but not extinguish it in its entirety).

In Oman, Article 159 of the Civil Transactions Law empowers the court to provides comparable relief in circumstances where exceptional public events that could not have been foreseen make performance, although not impossible, excessively burdensome and threaten the obligor with serious loss.

These hardship regimes differ from the force majeure provisions examined above in that they do not all require impossibility, but rather may apply where performance has become excessively burdensome. However, relief is not automatic and the courts will assess each case on its own facts. The affected party will need to consider how it can demonstrate causation, scale, duration and impact.

The key point to note in relation to these types of provisions is that they generally only apply where there is an existing contractual obligation, which the court or tribunal is asked to adjust.

Inflation and price fluctuation

Perhaps the most pressing concern arising from the current geopolitical landscape is the dramatic escalation in the cost of raw materials, energy and freight.

In general, inflation and increased costs will not amount to force majeure or an equivalent event under any of the standard forms, since cost escalation does not generally result in the contractor being prevented from performing its obligations. It simply makes performance more expensive or onerous.

Each of the principal standard forms makes provision — although on an optional basis — for price adjustment mechanisms:

FIDIC: The optional price adjustment provisions in SC 13.8 (RB 1999) / SC 13.7 (RB 2017) allow for adjustment of the contract price by reference to price indices linked to specified goods and labour elements. However, even where such clauses are included, they do not necessarily fully de-risk inflation: if the index does not rise in line with actual inflation, the contractor bears the remaining risk. Under the 2017 edition, SC 12.3(b) also provides for re-rating in limited circumstances, such as variations where certain thresholds are met.

NEC4 ECC: Secondary option X1 – which must be selected in the contract data –provides a mechanism for the employer to agree to take on the risk of inflation. It has wide application but can be restricted to prices of specific raw materials only. Under NEC4 Option C (target cost), the cost saving or overrun is calculated and split between the parties through a "pain/gain share" mechanism, and under Option E (cost reimbursable option), the employer bears the risk of inflation and other cost increases.

JCT: The JCT forms include fluctuation provisions that allow the contract sum to be adjusted after execution to reflect changes in the market cost of labour and materials. The fluctuation provisions must be expressly selected in the contract particulars. The JCT has also recently launched its first Target Cost Contract 2024, which – similar to NEC4 Option C – contains mechanisms for cost sharing, and operates on the principle of reimbursing actual costs plus a fee, compared with the target cost, with a pain/gain share mechanism.

Performance becomes impossible

There may be instances where the execution of the works by the contractor and subsequent use or operation by the employer is no longer viable. For example, an inability to procure materials may make it impossible to complete certain aspects of the construction on time, or the effective closure of a maritime corridor may fundamentally alter the assumptions underpinning the contract.

In such circumstances, the parties may wish to consider their termination options, although caution is critical: incorrectly invoking force majeure, frustration or termination rights can itself amount to a repudiatory breach, and result in exposure to significant damages claims.

The standard forms contain a number of options that parties may wish to explore, e.g.

• FIDIC Red Book: if an event of "Force Majeure" / "Exceptional Event" prevents "execution of substantially all of the Works in progress" for a continuous period of 84 days or multiple periods exceeding 140 days, either party may terminate the contract.
• NEC4 ECC: clause 91.7 permits the employer to terminate following a prevention event where the forecast delay exceeds 13 weeks.
• JCT 2024 D&B: clause 8.11.1 entitles either party to terminate the contract if substantially the whole of the uncompleted works has been suspended for a continuous period (the length of which is to be agreed in the contract particulars) by reason of force majeure.

Practical steps and key recommendations

Geopolitical instability poses significant risk to projects, ranging from delay and cost overrun to suspension or even termination. Whilst there are various remedies and courses of action available as outlined above, parties should bear in mind the following:

Compliance with notice requirements. A failure to comply with the notice requirements under the contract — whether as to timing, content or form — may result in the loss of contractual entitlements. Parties should issue protective notices early to preserve any entitlement to time and cost relief, even if delay has not yet crystallised or its impact is not yet clear.

Mitigation. Parties will usually be under an express contractual obligation to mitigate their loss, which may include sourcing materials elsewhere, rerouting shipping, or adjusting schedules. A force majeure clause typically imposes an obligation on the affected party to take all reasonable steps to mitigate the event's consequences.

Contemporary records. Maintaining accurate contemporary records where entitlement to time and money arises is paramount. This includes retaining insurer notifications, carrier advisories, documented mitigation attempts and evidence of the causal link between the event and the impact on performance.

Governing law. The governing law of the contract may be a source of further relief — for example, through hardship or impossibility provisions under civil law systems.

Early engagement. Parties should engage early with counterparties where projects are likely to be affected, ideally on a "without prejudice" basis as appropriate. Consider utilising early warning processes (under NEC4) or variation mechanisms to address cost increases proactively and collaboratively.

Drafting considerations. For projects not yet contracted or still at the negotiation stage, parties may seek to mitigate against future uncertainty by:

• Including robust cost fluctuation or price adjustment provisions, linked to objective indices, to safeguard against increasing costs of materials and freight.
• Using provisional sums for certain works to allow greater price flexibility.
• Drafting bespoke force majeure definitions tailored to the project's risk profile, rather than relying on undefined terms.
• Incorporating broader contractual mechanisms alongside force majeure, including variation regimes, change in law triggers, hardship or renegotiation clauses, and relief events distinct from force majeure that pre-define any anticipated risks.
• Considering target cost or cost-reimbursable models to allocate inflation risk more equitably between the parties.
• Reviewing available insurance cover and check that it reflects contractual risk allocation, and verifying marine cargo, war-risk and business interruption policies to confirm that they respond to the current risk landscape.
• Reviewing Incoterms selections to understand who bears routing, freight and insurance risk in the event of disruption.

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