We held our third webinar with Freeths LLP on construction contracts in a changing world earlier this year. We were overwhelmed by the many interesting questions raised by our audience during the webinar, but were unable to answer them all live. Our panellists have rounded up the questions representing the majority views of our audience. See the answers below.
In relation to Covid-19, the client agreed on the extension of time but not on additional payment. How can we protect ourselves against future pandemics?
Unless the contract specifically refers to pandemics as a force majeure event, there will always be a debate about whether a pandemic qualifies as force majeure. Few standard form contracts specifically refer to pandemics—the IChemE form being a notable exception. Given the impacts on construction resulting from Covid-19, it is prudent to ensure, as a minimum, that future epidemics and pandemics are specifically listed as force majeure events.
How can a contractor be protected in the event of a disproportionate increase in raw material prices where there are no remedies provided for in the contract?
If the contract does not include a fluctuations clause (sometimes called a ‘rise and fall’ clause) then the contractor can only claim for increased materials prices if it has a contractual entitlement to do so. For example, if the employer delayed access to the site for 6 months, which meant that by the time the contractor procured material the prices were significantly increased compared to 6 months ago, then the contractor may be able to claim the increase in materials prices as a result of the employer’s prevention. Otherwise, the contractor is likely to bear the risk of material price increases. In our experience, parties commonly delete fluctuations clauses. In today’s changing world we question whether that is correct and we urge parties to reconsider including fluctuations clauses to protect the project against the impact of increased material costs.
Is climate change a force majeure event in the FIDIC contract?
Climate change is neither a specific “Force Majeure” event (1999 FIDIC) or an “Exceptional Event” (2017 FIDIC). The FIDIC contracts may deal with some impacts of climate change—for example, clause 8.4(c) of the FIDIC Yellow Book 1999 provides an extension of time for “exceptionally adverse climatic conditions”. Clearly what is exceptional will be a question of fact in each case—for example, 50-degree heat for a project site in Riyadh is unlikely to be exceptional but it would be in central London. We suggest parties consider whether the contracts they use offer adequate protection against the potential effects of climate change in the part of the world where the project is located - whether that is a risk of extreme heat, forest fires, or flooding, etc. Recently for example we have seen exceptionally hot conditions in the Western USA and Canada, and serious flooding in north-western continental Europe. As events such as this become more frequent, they may no longer be “exceptional” and so attention needs to be given to protect the project against the impact of events driven by, and/or made more frequent by, climate change.
Can you see contracts specifying to contractors that supply chains need to be within certain distances, to ensure less risk due to delays (for example the Suez canal blockage)?
Yes, we see there is some force in the argument that contractors should ‘buy local’ instead of using long international supply chains. Some contracts do require the use of local labour, for example, so using local materials is not a substantially different concept. Buying local not only may avoid delays such as that caused when the Ever Given blocked the flow of vessels through the Suez Canal earlier this year. It also has the potential to mitigate the effects of climate change by reducing the distances covered throughout the supply chain. That said, there are parts of the world where buying local is less viable where construction material always need to be imported (the Gulf states, for example). There seems an apparent benefit to the project in buying local where possible so we can see that certain contracts may specify this for certain products.
Can the pandemic still be considered force majeure?
The pandemic is unlikely to be considered force majeure for contracts entered into today. A key component of a force majeure event is that it was unforeseeable—i.e. it was an event the parties could not have provided against at the time of entering into the contract. Clearly, Covid-19 is now a known risk and parties are urged to ensure that a ‘Covid clause’ is included in contracts entered into today to regulate the time (and possibly money) consequences should the pandemic impact upon progress of the works. Force majeure may still be relevant for contracts entered into before approximately February 2020 when the pandemic first took hold.
When do we think collaborative contracts will actually happen? The construction industry is very much the stone age for implementing change.
We do not disagree that the pace of change in the construction industry is usually fairly slow. That said, the industry is currently in a process of potentially significant change—digitisation, advance work packaging and assembly led construction are just some of the current innovations. While innovation in the parties contract with one another is also hoped for, it seems a change in mindset is needed. Recent events have shown this to be possible. At the onset of the pandemic many clients we advised discovered that the contract they had did not deal with the effects of the pandemic in a satisfactory way (if at all). Many parties chose to put the contract to one side and agree on alternative arrangements to deal with the effects of the pandemic on the project. If in a time of extreme crisis parties are able to take a more collaborative approach that gives us some hope that in the near future a more collaborative approach may become the default rather than the exception.
How can we consider the changes arising out of ministerial decrees relating to Covid under FIDIC contracts, if such decrees are impacting the progress of construction works?
This depends on whether the change in law clause is engaged—for example, clause 13.7 in the FIDIC Yellow Book 1999. This clause allows adjustment of the Contract Price to take account of increase or decrease in Cost resulting from a change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws) or in the judicial or official governmental interpretation of such Laws made after the Base Date. A new ministerial decree issued after the Base Date (assuming it has the status of Law) should engage clause 13.7 if it affects the Contractor’s performance of obligations under the Contract. Similarly, a change in the interpretation of existing ministerial decrees after the Base Date may engage clause 13.7.