Construction Contracts In A Changing World

I attended a very interesting webinar hosted by Gleeds and Freeths on 14th July 2021 on the topic of Construction Contracts In A Changing World, which was attended by delegates from various countries around the world.

The hosting was led by Chris Soffe PPCIOB FRICS FAIC MCIArb. MCMI CEnv, Non-Executive Director Construction contracts, Global Supervisory Board at Gleeds, Vice Chairman Gleeds Americas who was located in Atlanta, Georgia, USA. Other panellists were located in the UK (Alex Johnson Partner, Engineering and Construction Contracts at Freeths LLP), and Egypt (John Refaat Director of Gleeds Egypt, BSc, MRICS, MCIArb) and other panelists also in Melbourne, Australia.

Chris Soffe set the scene of a changing world with numerous additional project risks as a result of global warming and climate change and terrorism and increased instability, experienced in the current world post Brexit, post covid pandemic and with various political changes throughout the world.

Chris posed the question to the audience of attendees noting that the FIDIC suite of construction contracts was more than 20 years old:

“How Well Do You Think Construction Contracts address the unforeseen, in the current environment?”

The poll returned by the audience on-air, concluded that the answer to this question was: “Not Very Well“. This confirmed the thinking of the Gleeds Freeths panel before the webinar was held, and explained why the discussion and debate was needed.

The most commonly used forms are those developed by the American Institute of Architects (AIA) and the American Society of Civil Engineers (ASCE), or are state-specific in the US. In the UK there were primarily the JCT suite of contracts (and NEC forms). FIDIC forms of contract tended to be preferred in the Middle East.

The Covid Pandemic Since February 2020

During the last 15 -18months since the start of the covid pandemic, there has been an unprecedented situation where there has definitely been an effect on construction contracts in terms of labour impact, materials impact, lead times impact and productivity impact, which was agreed by the audience of attendees to be still ongoing. However, most contracts did not seem to have a mechanism for dealing with the implications of these impacts under the contract.

FIDIC covers such an event as the covid pandemic only as a Force Majeure, and there was a note of the effect possibly being on the contractor´s time and money (not just the binary effect either time or money). Generally, it was agreed there was not adequate provision within the contract(s) being used in practice to deal with the effects of the covid pandemic.

The Egyptian  Situation As An Illustration Of A Changing Contractual Environment

John Refaat gave a very helpful presentation which explained the situation in Egypt where there had been a series of events that were introduced by Government initiative and enacted in different ways, such as:

• Changes owing to Finance
• Increased Customs Duties (on 2 occasions since 2016)
• The Introduction of Value Added tax
• Increased fuel prices
• The Egyptian Central Bank Announcement of the Floating Of The Egyptian Pound

It was noted that the FIDIC standard form allows the contractor to claim an Extension of Time to his contract for changes in the Law. However, in most circumstances, there is no mechanism for contractual recovery of additional costs.

John explained that there was a distinct difference between the likely inflationary material cost increased that a contractor would have anticipated owing to normal inflationary pressures, and the additional significant burden that arose on project costs as a result of the above factors.

It was also noted that there was a clear contractual situation as defined by the Contract in place between the Client and the Contractor, and the real world situation where the Client needed the delivery of the project and the benefits that it gave him. If the Contractor failed to deliver the project (as a result of not being reimbursed for unforeseen additional costs) then it would be a problem for the Client.

How Do We Think Contracts Are Set Up To Deal With Specific Risks?

The panel thought that the answer may vary depending upon which risk is being considered.

Some risks were not known until they happened.

Covid Pandemic

Covid was now a known risk, but the effects of the covid pandemic are still continuing and evolving. Although a contractor may claim for an extension of time this need not include associated payment of the contractor additional costs.

Would a more equitable arrangement be a risk share for the covid pandemic related risks?

The contracts are usually inflexible regarding changes that may be agreed upon post contract award. Such amendments to the contract would have to be agreed upon between the parties to the contract, sometimes side agreements are a pragmatic way of approaching this issue.

Climate Change Related Risks

These are usually not dealt with substantively. Gleeds noted that on their Chancery Lane project they had introduced climate change clauses and that there were net zero obligations on the contractor to offset carbon consumption.

It was noted that in some cases a client could insist on a right to termination if such clauses were not conformed to. As an observation, this would seem to be a rather extreme measure since the Client would also suffer losses of money and time if such an occurrence were to transpire.

It was noted that under the 99 FIDIC Yellow Book Contract clause 8.4c) provides for contractor entitlement where there are adverse climate conditions.

There was a discussion about what are and how to define adverse climate conditions.

There is the matter of temperature where 50deg would not be considered adverse in Rhiyad, but would definitely be considered so in London.

Is climate change affecting our ideas of what is exceptional – viz forest fires in the Western states of the USA. Certainly they are a seasonal feature, but recently the scale and effects have become magnified.

Even flooding in the UK is becoming more frequent, so it is not exceptional anymore.

However, all of the above climatic events still have the ability to delay or disrupt construction projects.

Terrorism

Terrorism is covered under FIDIC Clause 19.2 Insurrection.

Force Majeure is a term that is frequently used but often not fully understood. What is Force Majeure?

•  An event that is Unexpected.
• An event that you re unable to Control.
• An event the effects of which are unknown.

The Contractor has an obligation under Clause 18.2 to give notice to the Employer of an exceptional event.

What Will Be The Most Profound Impacts Of The Covid Pandemic Going Forward?

Is there a need for a formula for adjustment of risks?

What would be the contractual mechanism for pricing adjustment?

The concept of an agreement or undertaking made “In Good Faith” is not recognised under Enlgish Law and so could end up becoming unenforcable under Law.

What methods of pricing adjustment could be used? Index linking – needs to be defined on what basis. alternatively basic lists of labour and material costs.

Supply chain system rebalance –  local material supplies would ensure carbon footprint sustainability.

What Are The Contracts Of The Future Going To look Like?

Should drafters of contracts do something differently? Plan something which deals better with a more uncertain world?

Identify specific risks such as the covid pandemic or global climate change.

Will such a change in emphasis encourage that construction contracts become more collaborative, that is become more focussed on project outcomes – recognise that all the parties are stakeholders in the project.

The Traditional Master –Servant relationship of the contract is outdated, and does not really fit the current way of procuring projects.

New contracts need to deal with the new technology and different methods of procuring construction contracts, taking into account assembly led construction contracts, taking account of speed of change, and taking into account the need for collaboration in order to overcome the effects of unforeseen events.

Should there be a philosophy of risk sharing in new contractual arrangements?

John Refaat confirmed that in his view the need for change to occur. That a shared reward system should be considered.

The contract should not be one of Master-Slave relationship and it should recognise that there should be an incentive to move contracts forward.

Integrated Project Delivery

There is a FIDIC task group looking at a FIDIC Collaborative Contract.

The PPC 2000 Contract was a Collaborative Form Of Contract, which was not used often and perhaps was ahead of its time.

There appears to be a market for a collaborative contract so we can expect such a form to be issued by FIDIC.

Questions And Answers

In answer to a question from the audience, it was clarified that the Laws of the Government of the country in which the contract is taking place would normally trump or be superior in hierarchy to the conditions of the contract itself.

Under the FIDIC form of contract, this could give the contractor a right to claim if there were a change in the laws applicable since the signature of the contract, which had an adverse effect on the contractor’s performance of the contract.

Collaboration and Collaborative Contracts

There was a discussion about collaboration and a collaborative environment, and the need for fairness and to be equitable, however, this needs to be considered against the background of the applicable laws in the country where the construction contracts is underway.

Conclusion Of the Discussion

What was generally agreed was that Behavioural Change was needed so that things moved beyond the Construction contracts versus Client dynamic, or Master and Servant as it was referred to during the discussion.

The real question to answer was: How can contracts become more even or fair and dynamic considering that both parties (Client and Contractor) want the project to be completed and that the Client wants to receive the benefits as a result of the completion of the project.

The discussion was very worthwhile and really needs to be followed up as although many questions were covered, the real focus of the discussion needs to be perpetuated. How to organize and arrange projects so that all the parties are motivated and incentivised to complete the project within the original parameters established by the client. This is becoming more of a problem with modern methods of design and construction contracts where the specialist subcontractors may be used for detailed design.