Rebuilding Ukraine Part 1: Contract ConditionsMay 2023
Following the recent invasion of Ukraine, the industry has now started to turn its focus to the rebuild of Ukraine. Whilst the war still continues, the overall needs for reconstruction are not fully known. However, assessments are currently being carried out and plans put in place to begin the rebuild of Ukraine and their economy.
A new joint assessment by the Government of Ukraine, the World Bank Group, the European Commission, and the United Nations, released 23 March 2023, estimates that the cost of reconstruction and recovery in Ukraine has now grown to US $411 billion. This figure is expected to continue to rise and will also likely be compounded by the current issue of inflation.
Given the scale and urgency of the re-building process, many businesses in the construction, engineering and infrastructure sectors will increasingly find Ukraine to be a source of opportunity for potentially lucrative contracts on high-profile projects.
However, wherever there is contractual opportunity, there is contractual risk; and that maxim applies even more profoundly in the context of a country such as Ukraine, at least parts of which may still be at war at the time some of these re-build projects take place.
We set out below some of the key risks which those businesses will have to look out for, deal with, or otherwise allow for in their contractual arrangements for projects forming part of the re-build of Ukraine:
- Insurance & Limitations on Liability: Amongst the first considerations for businesses will be how they insure their employees, assets and the Works (if so required) when military conflict is still a live proposition. This topic is covered in more detail in Part 2 of the Rebuilding Ukraine Series.
Nevertheless, businesses will want to ensure that appropriate insurance is in place and all exclusions and other limitations in their insurance policies are reflected in the contracts they sign.
- Ground Risk & Site Conditions: Many sites that will need to be cleared and worked on will have been subject to intense shelling during military operations. Therefore, the prospect of unexploded ordinances on or under the ground is a very real possibility and a risk which will need to be dealt with pro-actively in contracts. Typically, liability for adverse ground or site conditions is a risk that sits with the contractor.
Businesses adopting the role of contractor (or similar) will need to ensure that risks of adverse ground or site conditions are identified and allocated as between the parties and where risk cannot be avoided or transferred to the employer or client, the contractor must ensure he has fully investigated and priced for the risk which remains (either directly or through the right to claim additional fees).
- Suspension and termination: Suspension and termination provisions in contracts will need to be carefully considered. Whilst ideally a right to suspend or terminate for convenience should be included in the contract, this may well be a difficult provision to negotiate. It will be imperative for businesses to secure the right to suspend provision of their services/works if the conflict recommences or if anything related to the ongoing conflict causes the business (in whole or in part) not to be able to deliver its services/works (or the costs of the same are inordinately increased).
- Delay & Loss & Expense Relief Events: Businesses will want to ensure that conflict (and circumstances related to conflict) are events which the contract expressly classes as criteria which the business can rely on to secure extensions of time to completion and reimbursement of any loss and expense. Special attention will need to be paid to ensure that the contract provides such relief either in its standard form terms or by way of bespoke amendments (for example, including acts of war as a Relevant Event and Relevant Matter under the JCT).
Given the above, the businesses will have to take a pro-active and considered approach to negotiation of relief events and be prepared to argue for robust but precise amendments in order to secure entitlements they require.
- Choice of pricing mechanism and programming: Businesses may wish to consider other mechanisms in order to mitigate the impact of the ongoing conflict, which may be more palatable than inserting conflict-specific relief events. For example:
- Some key elements of the pricing should be amended to include a fluctuation provision (shared via a pain/gain regime), the use of provisional or contingent sums or building in a “cost-plus” element to the price.
- Taking a more realistic approach to programming by building in float for the benefit of the contractor to mitigate possible delay or disruption caused by supply chain materials issues.
- Seeking to agree lower liquidated damages or ‘breaks’ from liquidated damages for certain types of delay events.
- Design obligations and innovative design: If the conflict’s resurgence causes a project to be delayed between design and construction, the businesses responsible for design and specification will want to ensure that their obligations to, for example, avoid specifying materials that are deleterious, are appropriately drafted to apply at the point of specification only (rather than at the potentially much-delayed point of use). If that cannot be negotiated, the businesses should seek to price and programme for a checking of their specification just prior to the point of use if that point is delayed due to the conflict.
Businesses should also consider innovative designs solutions (for example prefab-modular units), as this may allow for a reduction of time on site and at risk in Ukraine because the bulk of the construction can occur off-site and away from the risks of the conflict. Subject always to the requirements of client briefs, designers may be called upon to propose and/or use new innovative design and construction methods.
- Dispute Considerations: It is likely that international arbitration will be the favoured form of dispute resolution method for contracts in the Ukraine. However, the provisions as to choice of law and jurisdiction are more than likely going to be decided by the source of funding on a project-by-project basis. Businesses will have to be prepared to consider these aspects on a deal-by-deal basis.
- Collaborative Approach: An alternative solution to seeking contractual safeguards through amendments may be to focus on collaboration. The recent occurrence of exceptional events such as the Covid-19 pandemic and now the conflict in Ukraine have driven an increased focus on collaborative behaviours up and down the supply chain. Whilst there are numerous advantages of collaboration, parties should tread with caution when suggesting a collaborative approach to a client or employer who is insisting on a fixed price lump sum contract with a rigid or challenging programme.
The specific parameters and nature (including the funding, structure, and client/employer identity) of the contracts for the re-build of Ukraine are yet to be fully revealed. However, it is likely that the issues raised above will be relevant to those businesses who may be engaged on projects in the Ukraine in the coming months and years.Download PDF