Legal limitations as infrastructure industry manages turmoil

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Contract clauses, onerous obligations and challenges indexing inflation are highlighted by experts at global conference. 

International construction experts have come together to discuss the challenges faced across industry. With inflation, war and the legacy of the pandemic, these challenges are significant.

Viliam Koprda, head of contracts management, PORR, told the FIDIC International Contract Users’ Conference in London that the pandemic created huge challenges for maintaining project activity and managing resulting risks. Worse still, he pointed out that even before this was fully resolved, the industry was hit by fast rising materials costs as inflation escalated around the world and war in Ukraine spiked energy prices.

To manage these issues, Koprda said the Federation of European International Contractors had issued documents to emphasise that it was unreasonable and unacceptable to allocate the resulting financial burden for execution of contract solely to the contractors. However, some measures to mitigate this had proven problematic.

Koprda said: “Attempts to connecting costs to the consumer price index would be catastrophic for projects because a suitable index would need to reflect the materials and energy costs specific to construction.”

And because cost escalations should be focused on where the costs were incurred, he suggested a targeted approach, saying: “There should be different indexes for different stages of the project to reflect the costs that are specific to each part of a project. For example, the design phase should not be linked to the cost of concrete and steel, which is relevant only to the construction phase.”

Ellis Baker, partner at White & Case, then warned that many jurisdictions like the UK do not recognise ‘Force Majeure’, and as result, companies should not rely on that as a way of mitigating their risks. Instead, he said the matter can only be determined on the basis of contractual provisions because tough economic circumstances would rarely be sufficient cause for courts to nullify contractual obligations.

Then he explained that where civil law could intervene was where appropriate contractual provisions are in place. These would be enforced regardless of national law, and courts would decide based on their specific terms. “So the criteria for an exceptional event needs to be set out in the contract, though these also set out numerous requirements on the contractor, with notices to be issued and regular updates provided and a final claim to be provided at the time the exceptional event has ceased,” he explained.

Vincent Laloup, chair of the FIDIC contracts committee, agreed that contractual provisions were more reliable than Force Majeure. He explained that “The Force Majeure clause was the first response for many affected in the pandemic, though it proved to be of value only for a limited time.”

He then added that “Contractual clauses covering price escalation can mitigate project inflation risks well, but these are dependent on cost formulas, so anything not covered by such a formula remains a contractor risk and this can still be a significant cost challenge that must be managed.”