How is the war in Ukraine affecting UK construction projects?

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The conflict in Ukraine has significant and profound economic consequences. Tom Duncan and Sadia McEvoy of the law firm Ashurst consider how this will affect current and future construction projects in the UK

The impact of the conflict in Ukraine is already being felt on British construction projects. This is partly due to the rapid international response triggered by the conflict and the imposition of a series of significant sanctions against Russia.

The war is also creating uncertainty about the viability of future construction projects in the UK, particularly in terms of the availability and cost of critical materials such as steel, iron, nickel, chemicals and timber.

Rising energy prices are another issue, especially given Europe’s heavy reliance on Russian gas and oil. Prices are expected to remain high, which means that the cost of materials used in energy-intensive projects, such as steel, bricks, plastics and ceramics, will continue to rise. Transportation costs are also expected to increase further.

Indeed, the war has exacerbated an already turbulent market, hit by Brexit, Covid-19, shipping disruptions, rising energy and fuel costs and soaring inflationary pressures.

Here, we briefly examine the legal ramifications of current and future construction projects.

How is the war in Ukraine affecting current construction projects in the UK?

The impact of war on existing projects will vary and the factual situation will need to be carefully considered on an individual basis. Impacts may include delays and disruptions caused by shortages of materials and goods affecting deliveries; cost overruns; changes in the scope or nature of the work (variations); and, possibly, arguments around the triggering of suspension or even termination rights.

Understanding the contractual position, and the position under the law governing the contract, is therefore essential. In terms of costs, some contract structures (eg fixed price/lump sum) will mean that the contractor is at risk of increases. In other structures (cost plus/reimbursable for example), this risk will have been retained by the promoter/employer. Either way, the overall cost of completing the work is very likely to increase.

Where the contract provides for potential mitigation of impact, it is important to pay particular attention to the procedural requirements of the contract, as the parties risk losing their contractual rights if the notification provisions are not respected in terms of timing and/or or content.

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 rights of suspension and termination due to force majeure will be considered.

As a general rule, whether the Ukraine Dispute and/or any resulting unavailability or restriction of particular goods or materials constitutes a Force Majeure Event will have to be assessed on the particular facts of each case against the contractual wording. relevant. However, the fact that the performance of the contract has simply become more onerous or expensive is probably not enough on its own, which means that force majeure (which prevents performance entirely) is more difficult to argue in situations where the materials are harder to find or prices have gone up.

If a contract becomes materially or commercially unenforceable, the common law doctrine of frustration may apply to automatically relieve the parties of their obligations. However, the common law frustration threshold will generally be significantly higher than the force majeure threshold and is unlikely to apply in the current circumstances.

Finally, it is important to remember that parties are required by law, and often under express contractual terms, to mitigate their losses where possible and such efforts, for example, to source elsewhere, should be carefully considered as part of any rights assessment. Causal issues should also be carefully considered, including pre-existing issues, meaning that the impact of the conflict is not the main issue.

What effect will the war in Ukraine have on future British construction projects?

The applicability of a force majeure clause will depend on whether a particular circumstance was unforeseeable at the time the contract was entered into. Some, but arguably not all, of the future impacts of the dispute are now foreseeable, so a force majeure claim will no longer be possible with respect to future contracts.

Similarly, the parties will not be able to respond to a “change of law” clause (i.e. a clause that facilitates a claim for more time and/or money in the event of a change of the law) as it generally applies to changes after the date of the contract, so would not apply to current sanctions or restrictions.

It follows that the parties will want to mitigate future uncertainties by addressing them from the outset. Potential ways to do this could include:

  • Write more broadly the specifications of the works to give more flexibility to companies when sourcing materials in terms of identity of the supplier and/or type of material.
  • Re-examine the validity and appropriateness of prices and/or work programs included in bids for projects being tendered.
  • Use provisional amounts for certain works, where appropriate, to allow for greater price flexibility.
  • Inclusion of cost fluctuation provisions to guard against increases in the cost of materials.
  • Shift the sourcing strategy for certain goods or materials from just-in-time delivery to storage – which, in turn, will require more up-front payments from employers (and related security tied to those payments).
  • Provide for a two-stage tender so that contractors have more time between the design phase and the construction phase to use new construction methodologies and new materials that limit exposure to war-related issues.
  • Contractors will seek to de-risk their project portfolio by seeking cost reimbursable contracts and avoiding long-term commitments. Employers, on the other hand, may seek fixed-price offers to limit their exposure, but may find that this comes at a significant cost as it forces contractors to risk these uncertainties.

Russia’s invasion of Ukraine and its devastating impact on the Ukrainian people have profound and unprecedented consequences. For the construction sector in the UK, the war has added to a number of other major challenges facing the industry.

In this update, we’ve shed some light on how construction contracts will react. For a more detailed analysis of the impact of the war on JCT, NEC4 and FIDIC contracts, read Ashurst’s full briefing here. You can also find Ashurst’s Russian sanctions tracker here.

Tom Duncan

Tom Duncan.

Partner

Ashurst

Tel: +44 20 7859 3262

[email protected]

www.ashurst.com

Sadia McEvoy

Construction projects in the UK
Sadia McEvoy.

Advice

Ashurst

Tel: +44 20 7859 2017

[email protected]

www.ashurst.com

Twitter: @ashurst

LinkedIn: Ashurst

Facebook: ashurstofficial

Instagram: @ashurst_official

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