As the UK’s flagship HS2 rail scheme faces more delays, Beale and Co chairman Antony Smith considers the implications for businesses currently engaged on the project.
In November last year, in an article in Infrastructure Global, I posed the hypothetical question, What happens next if the UK government cancels or curtails HS2?
Whilst we have not reached the point of outright and express cancellation of the much-reduced project, last week saw further delays to the project announced. The decision to delay fundamentally undermines the UK government’s stated ‘commitment’ to the already much delayed and reduced project.
All indicators suggest there will be further attempts to cut costs and change (reduce) the scope of the scheme. For example, just last month it was reported that ministers are considering cutting the number of trains from 18 to ten an hour and further reducing the trains’ maximum speeds to 360kmh (down from an initial designed 400kmh).
Arcadis, in its latest quarterly market view report (Spring 2023) predicts that infrastructure inflation is set to be double that of building inflation, with tender price inflation for infrastructure projects predicted to be between 6 and 7%, whilst tender price inflation for building projects stood at 3%.Therefore, the current market conditions are only likely to encourage those managing HS2 to further reduce its scope and make changes in materials or design with the aim of cutting costs.
As a response to confirmed delays and/or changes (or in anticipation of further delays and changes), it is imperative that those businesses currently engaged on the HS2 project review their contracts to understand how best they can respond to the government seeking to impose delay and changes. A number of key issues will need to be considered and I’ve outlined them below.
Suspension Rights: Does the contract permit the employer or client to suspend the business performance of the contract? If so, under what circumstances? Or does the contract permit the client or employer to suspend for mere convenience?
Termination Rights: Does the contract permit the employer or client to terminate the contract for convenience?
De-scoping/Power to Omit: Some contracts permit a client or an employer to unilaterally (and without any performance-related cause) omit part of the contracted works and/or services. If the relevant contract contains such provisions, the business will be powerless to stop a client or an employer from de-scoping if further reductions to the HS2 project are instigated by the government. The business will hope that such provisions (to the extent they feature at all) can only operate if there is fault on the part of the business or, if the business is fully compensated for any omission by full reimbursement of its costs and committed spending and (if possible) for loss of anticipated profit.
Pricing, Inflation and Fluctuations: Is the contract a lump sum or remeasurable contract? Does the contract’s pricing mechanism take account of inflation (i.e. are there fluctuation provisions)? The business, particularly in the current market with high rates of inflation, would be best served by a contract which allows it to pass on to the client/employer any material increase in its costs. If the works or service period is a short one, provisional sums or advance payments may be easier to negotiate. However, on most contracts relating to HS2, the works or service period is likely to be significant and may be protracted by delays (as described above) or simply a long period between design/specification and actual construction. As a result, the business would benefit from being able to pass on any price changes that may occur.
Design Changes: Design Responsibility and Intellectual Property: The government have already sought to change the parameters of the entire HS2 line by reducing the speed and number of trains. Whilst those changes are reductive in nature and so would presumably not result in a more onerous design or specification, other changes the government may seek to introduce in the name of costs cutting (such as less lines, a narrowing of floor space or changes to the position and ground-level of the lines) may impose considerable design constraints and require careful design amendments to be made.
In addition to relying on the contract to ensure it can receive full payment of additional fees for such additional work (see below ‘Variations & Additional Fees’), it will be important for the business to consider the extent and limits of its design responsibility, especially if any of the re-design elements means relying upon or taking responsibility of designs produced by others (who may have been removed from the project as a costs-saving exercise). The business will want to ensure that its contractual arrangements provide it with full intellectual property rights (by assignment or license) over any design it takes responsibility for as well as recourse to another (backed by insurance) for any element of design responsibility for another’s design it takes on in relation to the client/employer.
Variations & Additional Fees: The business needs to be aware of the circumstances when variations arise and when it can recover additional fees in respect of them (e.g., does this cover reductions in scope or changes to the project?). Most clients and employers will seek to keep the circumstances when a variation can arise under a contract to be strictly limited to instructions given to the business by the client or employer. The danger in agreeing to this for the business is that a variation is never formally instructed (notwithstanding that the nature of the business’ work or performance has been changed by outside factors) and so additional fees can never be recovered. Ideally, the contract will specify several circumstances (beyond a mere client or employer instruction), the occurrence of which will be treated as a payable variation under the contract. The wider these circumstances are in the contract, the more likely changes to the HS2 project occasioned by forces other than the client or employer will be regarded as a payable variation. Any requirement to notify the client of a claim and/or give an early warning notice within a specified period of time of becoming aware of an event (as are common in NEC contracts which have been used on HS2) should also be considered and the time for providing such a notice may have started ticking.
Delays, Liquidated Damages, Extensions of Time and Loss and Expense (Prolongation): Consider the circumstances which entitle the business to an extension of time for completion and additional fees/loss and expense. Given the scale and multifaceted complexity of the HS2 project, there may be myriad causes of delay that lie beyond the control of both the business and its client or employer. Nevertheless, you will want to check that the contract deems these causes of delay to be a reason why the business can benefit from an extension of time. Furthermore, the sheer scale of the HS2 project will necessitate the business dedicates considerable full-time resource to the project, even if it is on hold for reasons beyond the control of the parties. The business will therefore want the contract to permit it to recover from the client or employer its prolongation costs for periods of delay that are imposed on it, either by the client or employer, or for any reasons beyond the control of the business.
Are you in a Joint Venture? All the above considerations will be relevant not only in terms of the contract between the business and its client or employer, but may also impact any underlying agreement, for example, if the business is a Joint Venture. The terms of the joint venture agreement will need to be considered to ensure respective obligations of members are met when seeking to enforce the terms of the contract.
The above issues will also be relevant to businesses seeking to negotiate the terms and conditions of future contracts on HS2. It is clearly important to have a good understanding of your position contractually and your rights and remedies in the event HS2 is delayed and/or reduced in scope, as seems likely. You should also consider any steps you can take commercially to reduce your exposure.
Antony Smith is a partner and chairman at international construction law specialists, Beale and Co. Click here to find out more about Antony and his areas of expertise.