Ukraine, pandemic and rising inflation pose practical impacts for construction

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As firms keep working in Ukraine, post-pandemic financing proves challenging and governments  suppress inflation data, industry leaders outline some of the real-world consequences. 

As construction law experts gathered in London at the FIDIC International Contract Users’ Conference, Polish CEO Adam Bialachowski set out how companies were trying to maintain their activities in a warzone, JICA director Keisuke Fukui warned that the pandemic limited government financing and Corbett & Co’s Edward Corbett noted that government decisions were not clear-cut for industry.

Keeping working in Ukraine

Bialachowski, CEO of B-Act Quantum Vintage, set out the highly unusual situation for companies in Ukraine. “The day the war started we were involved as consulting engineers on contracts worth €270m, including the single largest road infrastructure project the Ukrainian-Moldovian bridge. We had more than 100 personnel involved on more than ten projects and despite ‘Force Majeure’, we have not cancelled any of our contracts and none of the contractors have done so either,” he explained.

Bialachowski continued: “The context for that is that we have had to delay some projects, we have had invoices go unpaid for long periods, we have some issued claims for some costs and I have had to make decisions I never imagined I would have to make. Those include sending military protective clothing to our people in Ukraine. Some of this is not covered by details in contracts but it is what we consider ‘the soul of the contract’ – the right thing to do,” he said.

“We must also look forward to reconstruction and we know the government there is looking for money to continue past projects and to rebuild with new projects and we do not want to abandon relationships there,” said Bialachowski.

Financial challenges are widespread

Keisuke Fukui, director, loan procurement policy and supervision division at the Japan International Cooperation Agency (JICA), highlighted the financial challenges being faced in the developing world.

Fukui said: “JICA lends significant funds to governments to help finance infrastructure projects. Covid-19 has led to significant disruption and costs for projects and for contractors. But at the same time, executing agencies and lenders are also short on finances following the pandemic and are struggling to provide extra payments to help contractors overcome that.”

All this has been made worse by rapid inflation. As Fukui explained: “No one could foresee the extent of inflation around the world right now, so there are sometimes inadequate measures in place to manage inflationary impacts on projects. The governments we provide finance to are themselves governed by their own laws and processes and these vary from country to country.

“There are no easy solutions to these challenges or to the management of wider risks. However, JICA continues to work with international contract providers at FIDIC to promote use of standard contracts, collaboration with stakeholders and to train people on how to manage contracts best.”

Fine legal lines

Turning to some difficult contractual aspects, Edward Corbett of Corbett & Co stressed that many fine lines have made things difficult in recent years.

Regarding the pandemic, he explained: “A line that needs to be drawn in many cases, is this – did the emergency legislation in the country in question already give to the government the powers to do what governments did during Covid – such as closing building sites, airports, etc – or not? This became a very fine question because a cabinet decree might not be a change in the law, if it were just an expression of the will of the government not ratified in new law.”

This was a question that had big implications for ‘change of law’ clauses in contracts and it was not the only such challenge, said Corbett.

“Worse still, if looking at a change in law when a country closes a border, can one demonstrate that this has caused loss if the country on the other side of the border had closed its border and thus it couldn’t have been crossed anyway? This all led to very different outcomes in different countries for very similar cases,” explained Corbett.

Turning to inflation, he warned that similar contractual challenges are being faced, albeit for some rather different reasons.

Corbett said: “There are accusations that some governments have attempted to suppress the extent to which price increases are documented in official statistics to save money on indexed spending increases. This has major implications for those working on construction projects because government data is the basis of any index in the contract.”

Hosting the discussion at the conference, Peter Collie suggested that “We as an industry have forgotten what it is to deal with high inflation and we need to learn together, share experiences and adapt over the years ahead. And it’s not all about the contract, because the contract is only going to get us so far. They are helpful but we need to look at how we deal with this issue more widely.”