How does the war in Ukraine affect UK construction projects?

May 2, 2022

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The conflict in Ukraine is having significant and far-reaching economic consequences. Tom Duncan and Sadia McEvoy of law firm Ashurst examine how it will affect current and future UK construction projects

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

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

Energy price increases are another issue, particularly given the high European dependency on Russian gas and oil. Prices are likely to remain high, meaning that the cost of materials used in projects that require intensive energy input, such as steel, bricks, plastics and ceramics, are going to continue to rise. Transportation costs also look set to increase further.

In effect, the war has exacerbated an already turbulent market, hit by Brexit, Covid-19, shipping disruption, rising energy and fuel costs and spiralling inflationary pressures.

Here, we take a brief look at the legal ramifications for current and future construction projects.

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

The impact of the war on existing projects will vary and the factual position will need to be considered carefully on an individual 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. In terms of costs, some contractual structures (eg fixed price/lump sum) will mean the contractor is on risk for increases. In other structures (eg cost plus/reimbursable), that risk will have been retained by the developer/employer. Either way, the overall cost of completing the works is very likely to increase.

Where the contract provides for potential relief from the impact, it is important to pay close attention to the procedural requirements of the contract, as parties risk losing their contractual entitlements if notice provisions are not complied with in terms of timing and/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 suspension and termination rights on the basis of force majeure will be under scrutiny.

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.

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 and is unlikely to apply in the current circumstances.

Finally, it is important to remember that parties are obliged at law, and often pursuant to the express contractual terms, to mitigate their losses 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.

What affect will the Ukraine war have on future UK construction projects?

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 future contracts.

Equally, parties will not be able to reply on a ‘change in law’ provision (ie a clause that facilitates a claim for more time and/or money in the event of a change in law) because they typically apply to changes after the date of the contract, 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:

Drafting works specifications more widely to give contractors more flexibility when procuring materials in terms of the identity of the supplier and/or type of material.
Re-reviewing the validity and appropriateness of prices and/or work programmes included in bids for projects currently being tendered.
Using provisional sums for certain works, if appropriate, to allow for greater price flexibility.
Inclusion of cost fluctuation provisions to safeguard against cost increases of materials.
Shifting the supply strategy for certain goods or materials from just-in-time delivery to stockpiling – which, in turn, will require more upfront payments from employers (and accompanying security in relation to such payments).
Provide for two-stage tendering so that contractors have longer between the design and construction phase to utilise new construction methodologies and materials that limit exposure to war-related issues.
Contractors will be looking to de-risk their project portfolio by seeking cost reimbursable contracts and avoiding long-term commitments. Employers, on the other hand, may be looking for fixed price tenders to limit their exposure but may find that this comes at a significant cost because it forces contractors to risk price these uncertainties.

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

In this update we have shed some light on how construction contracts will respond. For a more detailed analysis on 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