We speak with White & Case partners Ellis Baker (EB) and David Robertson (DR) about the legal position as the industry faces geopolitical and megaproject challenges.
IG: The world is facing a series of unusual challenges right now. The consequences of the war in Ukraine, the ongoing legacy of the pandemic and the end of an era of consistently low inflation all have implications for major infrastructure projects. How are existing legal contracts adapting to this?
EB: “It’s important to remember that, particularly in common law jurisdictions, parties cannot afford to rely on general legal principles to address issues like these, and their effects on projects. There is no doctrine of Force Majeure in the English legal system and frustration only applies in very extreme situations, such as where the site itself has been completely destroyed.
“The parties must therefore ensure that there is express contractual provision, dealing with major changes in the circumstances under which the project is delivered, including the consequences in terms of time and money.
“The FIDIC contracts in the still widely-used 1999 editions contained a Force Majeure clause (Clause 19) dealing with ‘an exceptional event or circumstance’ and the current 2017 editions have replaced this with an Exceptional Events clause (Clause 18) which is broadly similar in concept and in the allocation of risk between employer and contractor.
“Both the pandemic and the Ukraine war could be regarded as meeting the criteria for an Exceptional Event, but the consequences of each would differ because of the detailed provisions: whereas a contractor prevented from performing any of its obligations by the war might be able to claim both an extension of time and additional cost, if the cause was the pandemic the Clause 18 entitlement would be limited to time only.
“By contrast, the FIDIC contracts contain no mandatory provision dealing with inflation. FIDIC 2017 does offer (at Sub-Clause 13.7) an optional provision for the Contractor’s compensation to be adjusted in accordance with a schedule of cost indexation, but if none is included, this provision would not apply and English law, at least, would not imply the existence of any relief. The overall message is that parties must plan and provide in their contracts for the kind of challenging circumstances which can have a very significant impact on performance, as we have seen.”
“the start of the pandemic was almost three years ago and it has become common to see arguments being advanced in infrastructure disputes related to consequences.”
IG: Is there a risk that the present turmoil will lead to a ‘long tail’ of disputes lasting several years as projects progress (or stall)?
EB: “It is necessary to draw a distinction between the different events being considered here. We are indeed starting to see issues relating to the Ukraine conflict and cost escalation coming through, but these are at an early stage because of their relatively recent occurrence, set against the typical time-frame for the delivery of a major infrastructure project, which is, of course, measured in years.
“There is little doubt that disputes involving these factors will continue to increase in 2023 and beyond. By contrast, the start of the pandemic was almost three years ago in most parts of the world and it has become common to see arguments being advanced in infrastructure disputes in relation to its consequences.
“Claims are being based not only on Force Majeure clauses or their equivalents, which may only offer the contractor an extension of time, depending on the contract selected, but on failure to give access to the site and change in law, relating to governmental responses to the crisis, which, under the FIDIC contracts, may offer the possibility of financial relief too.”
“A complementary trend is a growing interest in the use of collaborative forms of contracting.”
IG: The expanding size and complexity of projects around the world represents a rise in the number of participants and the diversity of risks across a project. How are contracts adapting to this and is a construction contract able to help drive a much-needed move towards building trust early in a project to avoid tensions later on?
DR: “Contracts for the delivery of mega-projects are evolving in a number of ways to facilitate the avoidance and early resolution of disputes and to better align the interests of contractors and owners. Approaches being deployed, and lessons learned, are equally relevant to the delivery of projects which may not be ‘mega’ in scale.”
Dispute avoidance and early dispute resolution
“One of the most significant trends is continued growth in the use of tiered dispute resolution clauses. These offer parties interim methods by which to avoid escalation of their disputes and to facilitate their resolution at an early stage. We also see a widening range of alternative dispute resolution techniques being used on international projects.
“Our consistent experience acting as counsel in arbitrations arising out of the construction phase of mega-projects is that the intractability of disputes, and their adverse cost and schedule impacts, are amplified by parties’ failure to engage with available dispute resolution mechanisms. Growing familiarity with such mechanisms and an increasing willingness to engage properly is a positive development and one which offers the prospect of better outcomes.”
Early contractor involvement
“A second, and complementary, trend is a growing interest in the use of collaborative forms of contracting. Procurement models which seek to share risk and reward in a more dynamic and transparent manner have long been in use in particular sectors and jurisdictions. The market conditions currently impacting international energy and infrastructure projects appear to be spurring interest in the use of so-called ‘relational contracts’ in a wider range of projects.
“Early contractor involvement (ECI) is a sub-species of collaborative contracting; a procurement model under which a contractor (or multiple package contractors) become involved at an earlier stage in the development of the project than would be the case in a traditional lump sum fixed price model. The objective of early contractor involvement is the identification and elimination of design and buildability risks, amongst others, which might otherwise become causes of delay and cost overrun and flashpoints for future disputes.
“ECI is one of the features of a fully-fledged partnering style contract. However, even where parties may not have a long-standing relationship of the type which is characteristic of these types of contract, ECI nonetheless offers significant potential benefits. Where the ECI is not intended to ripen into risk-sharing arrangement, parties will need to agree on a methodology for transferring their risk identification and elimination inputs into a more traditional fixed price and schedule risk allocation at the conclusion of the ECI period.”