It’s the topic at the forefront of many construction contract negotiations and disputes – as the UK ‘unlocks’ and industry activity surges, demand for certain key materials (perhaps most notably steel, cement and timber) is outstripping supply. Parties who have entered into contracts without suitable drafting to address the issue head-on could well find themselves at the wrong end of a bad, or at least contractually uncertain, bargain. In this article, we explore the position under some of the leading standard form contracts.
Under the JCT suite of contracts, the Contractor’s relief entitlement for unforeseen issues is broadly covered by ‘Relevant Events’ (which permit additional time to complete the Works) and ‘Relevant Matters’ (which allow for the reimbursement of direct loss and expense). None of these expressly cover materials shortages.
There may be limited scope for a Contractor to argue that one of the Relevant Events is applicable but this is likely to be the exception rather than the norm. For instance, the ‘force majeure’ Relevant Event will not be engaged unless the issue in question is truly exceptional and could not have been contemplated by the parties at the time the contract was entered into. This might be the case for, say, a contract entered into before the outbreak of SARS-CoV-2, if materials shortages can reasonably be linked to the associated global fallout from the pandemic. For more recent contracts, however, it is highly questionable whether the force majeure threshold will be met. The mere fact that contract performance has become more onerous or expensive will not be sufficient on its own.
In the absence of a clear route of recovery via the Relevant Event and Relevant Matter provisions, Contractors will need to opt for a more creative (and uncertain) approach. One potential solution is to rely on the language in some (although not all) of the JCT contracts requiring the Contractor to use materials and goods which, “so far as procurable”, are of the kinds and standards described in the Contract Documents. This suggests that a Contractor should not be penalised if those materials, through no fault of its own, cannot be realistically procured. In such circumstances, the Contractor could request an instruction from the Employer team as to how to deal with the unavailability (e.g. by a change in the specification, resequencing of works or deferment of possession – all potential grounds for an extension of time and payment of direct loss and expense). Any refusal or failure by the Employer to deal with that request would arguably be an act of impediment or default, again amounting to both a Relevant Event and a Relevant Matter.
As mentioned, this argument would not be available under all of the JCTs - and it is only an argument, not a clear-cut contractual entitlement. The best way to protect against delays is to include express terms from the outset dealing with the time implications of materials shortages. In relation to cost increases, the JCT Fluctuations provisions are likely to be the preferred solution for a Contractor, but this may well encounter resistance from Employers pressing for fixed price tenders. If the Fluctuations option is not possible, then Contractors may wish to explore the strategic use of Provisional Sum items or seek to negotiate bespoke amendments to the Relevant Matters clause.
The NEC standard contracts offer a favourable risk profile for the Contractor, in the sense that any ‘compensation event’ will permit an application for both time and money. This is in contrast to the JCT suite, where most ‘neutral’ delaying causes appear only in the Relevant Event list, giving rise to an extension of time but not additional payment. Even under NEC, however, Contractors still face the same hurdle of establishing that a compensation event has been triggered in the first place.
As with the JCT Relevant Events and Relevant Matters, there is no express compensation event for materials shortages. The Contractor’s rights of recourse are likely to hinge on the following:
- Under clause 60.1(1), an instruction from the Project Manager changing the Scope is a compensation event. The Contractor may be able to force such an instruction if:
- the materials shortage in question renders the Scope requirements ‘impossible’ to perform. Under clause 17.2, the Project Manager must give an instruction in such circumstances to change the Scope appropriately; or
- the materials shortage prevents the Contractor from completing the works by the date for planned Completion, neither party could have prevented the issue, and an experienced contractor would have judged it at the Contract Date as having such a small chance of occurring that it would have been unreasonable to have allowed for it. Under clause 19.1, the Project Manager must give an instruction in such circumstances stating how the event is to be dealt with. The event is also a compensation event in its own right under clause 60.1(19).
Both of these potential routes of recovery are likely to present challenges. In relation to clause 17.2, ‘impossibility’ is an extremely high threshold to establish. As with the concept of force majeure, performance becoming more difficult or costly will not be enough. With reference to clauses 19.1 and 60.1(19), the foreseeability element may prove equally problematic if the contract in question was entered into after the industry-wide shortages became apparent.
- The NEC suite incorporates a range of pricing options for the parties to choose from, together with an optional clause X1 for inflationary adjustments. Depending on which of these have been selected for the contract in question, the Contractor may have further scope to claim an adjustment to the Prices for market volatility relating to goods and materials.
In the same way as the JCT suite, the standard NEC text does not necessarily hold definitive answers as to who bears the time and cost risk of materials shortages. In the current climate, Contractors should press for the issue to be expressly dealt with in any NEC-based contracts still under negotiation. The NEC4 suite provides a very simple means of facilitating this; helpfully including a specific section in the Contract Data for the parties to add extra compensation events to reflect their commercial agreement on risk allocation.
Relief entitlement under the FIDIC Red and Yellow books is likely to be limited (at best) to an extension of time (EOT) – and even that may be out of reach depending on the date of the Contractor’s bid.
EOT relief is available where completion is delayed due to the following:
- Unforeseeable shortages in the availability of Goods caused by epidemic or governmental actions (Sub-Clause 8.5(d)). As a recognised worldwide pandemic, the outbreak of SARS-CoV-2 should easily be caught by the lower medical threshold of ‘epidemic’. Related government measures to control the spread of the virus will also potentially lead to EOT entitlement. Importantly, ‘governmental actions’ may relate to governments other than the UK executive, which may be particularly relevant in the context of Goods being imported from overseas.
The term ‘Unforeseeable’ is defined as “not reasonably foreseeable by an experienced contractor by the Base Date” (being the date 28 days before the latest date for submission of the Contractor’s Tender). This ‘Unforeseeable’ requirement could well thwart the Contractor’s claim if the project in question was tendered for relatively recently.
- Exceptional Events, being an event or circumstance which is beyond a Party’s control, could not reasonably have been avoided, overcome or provided for, and is not substantially attributable to the other Party (Sub-Clause 18). In a similar way to Sub-Clause 8.5(d), the main stumbling block for Contractors here is likely to be the foreseeability element. In order for the Exceptional Event provisions to be triggered, the contract requires that the affected Party “could not reasonably have provided against [the event] before entering into the Contract”. If the contract is a fairly recent one, then the Employer’s inevitable counter-argument to a claim under Sub-Clause 18 will be that everyone already knew about the issues with materials availability when the agreement was signed. The Contractor (the Employer will argue) should have priced and programmed accordingly, or drafted for the ongoing effects of the shortages in the written terms. Having failed to do so, it is not for a judge or adjudicator to step in and rescue the Contractor from what is nothing more than a bad bargain.
Contractors, in particular, should be very wary moving forward of relying on existing standard form provisions to safeguard against the time and cost impacts of materials shortages. As the world continues to grapple with the fallout from the pandemic, it is essential to carry out full risk assessments and negotiate express drafting amendments setting out in clear and unambiguous terms how the effects on programme and price will be allocated between the parties. Directly engaging with the issues pre-contract signature may well lead to some testing negotiations, but it could also save the parties a far more difficult discussion later if the final contract is silent or unclear on the matter.
If you require advice on any of the issues raised in this article, please contact our Construction & Infrastructure team.