What is their impact on construction projects and what are the remedies?
The global supply chain plays an important role in Australia’s construction projects, not least because we import construction plant and materials (e.g. façade, mechanical, electrical and joinery products, etc.) from overseas. Events like war and port strikes may occur in the near future, and once they happen, those events could seriously disrupt the global supply chain and have a huge impact on construction activities.
Developers and contractors should be aware of the implications of these events and plan ahead in their contracts.
The impact of war and port strikes
Wars in other parts of the world may not affect Australian soil but they will disrupt the global supply chain. For instance, the supply of construction plant and materials (or their key components) may be blocked directly by the destruction of crucial infrastructure or by blockades and bans imposed by the belligerents and their allies.
Strikes shut down port operations and halt the import and export of goods.
Time implication
Timewise, the direct result of these events is that shipments will be delayed, or that the plants and material will have to be sourced from alternative suppliers from other countries, causing a severe delay to construction programs.
Cost implication
In terms of cost, the price of imported plants and material (or key components used for manufacturing these items domestically), shipping and insurance may rise, which ultimately drives up the construction cost.
Remedies
The existing ‘excepted risk’ regime
Australian Standard contracts like AS 4000 and AS 4902 address the consequences of war and port strikes in a very limited way by an ‘excepted risk’ regime.
In the AS 4000 and AS 4902 contracts, wars and strikes are considered “excepted risk” events. If any excepted risk event causes loss and damage to the work under the contract, the superintendent can direct the contractor to reinstate the work at the principal’s cost[1].
This ‘excepted risk’ regime addresses the direct loss and damage caused to the work by wars and strikes, but not the delays and price fluctuations floating from supply chain issues. The contractor will have to absorb the delays (and associated delay damages) and the buoyed construction cost.
Expansion of the ‘excepted risk’ regime
A possible way to address the delay risk is to expand the ‘excepted risk’ regime by making an excepted risk both a qualifying cause and a compensable cause.
This means the contractor will be entitled to extensions of time and delay damages for delays caused by war and port strikes.
Escalation clause
To address a surge in the construction cost caused by war or port strikes, the parties can consider adding an escalation clause (also known as a rise and fall clause) by which the parties can adjust the material and labour rate for inflation or other fluctuations.
In post-COVID times, we have seen an increase in the use of escalation clauses that allow the parties to adjust the contract sum if material or labour costs abruptly rise beyond a certain threshold for reasons outside the parties’ control. The parties can agree in advance whether the principal will foot the bill, or the parties will share the additional cost caused by the surge in material and labour costs.
Force majeure clause
One further clause that the parties may consider adding to the contract is a force majeure provision that allows the parties to end the construction contract where a force majeure event renders the performance of the contract impossible. This provision is not common in construction contracts in Australia, but in light of the increasing uncertainties over the global supply chain nowadays, it should be given more consideration by the industry.
Note this kind of force majeure clause must be distinguished from the force majeure provision often used in the industry that does nothing more than add a number of force majeure events to the definition of a qualifying clause.
Key takeaway
War and port strikes are not frequently occurring events but their impact, both in terms of time and cost, could derail a construction project and should not be underestimated. Standard construction contracts may not address the implications of these events adequately, so developers and contractors should provide suitable provisions in the contract such as revising the excepted risk clause or adding new force majeure and escalation clauses to address the risk of these events.
If you would like to discuss this article with us, please contact Simon Mok, Partner on (02) 9261 5900.
[1] AS 4000-1997, clause 14.