Impact of war on construction project in Ukraine implemented under FIDIC contracts

During the last few years, use of International Federation of Consulting Engineers (FIDIC) suite of contracts for large infrastructure projects has become increasingly widespread in Ukraine.

Among the most prominent public projects that have been implemented under FIDIC conditions of contracts in Ukraine are:

• construction of the Beskyd rail tunnel in the Western part of Ukraine
• construction of a metro line in Dnipro
• construction of M-05 Kyiv-Odesa road, and various other large road construction projects financed by international banks

FIDIC contracts have been also progressively used in private projects, especially for construction of renewable energy facilities.

The most commonly used FIDIC books for the projects in Ukraine are 1999 editions of Red or Yellow Book, as well as Pink Book 2006.

Following Russia’s invasion of Ukraine on 24 February 2022, the majority of the ongoing construction projects have been placed on hold.

Safety and security concerns, shortage of labour, rising energy prices and supply chain disruptions, among other reasons, impede the progress of works and in some cases even force the employers and contractor to abandon their projects.

In these circumstances, the parties to a construction project implemented under FIDIC contract may choose to rely on a force majeure (exceptional event) relief.

Force majeure (exceptional) event under FIDIC contracts

FIDIC contracts define force majeure (1999 suite) or exceptional event (2017 suite) as an event or circumstance:

• which is beyond a party’s control
• which such party could not reasonably have provided against before entering into the contract
• which, once arisen, such party could not reasonably have avoided or overcome, and
• which is not substantially attributable to the other party

Since war is specifically mentioned in the identified force majeure (exceptional) events in FIDIC books, the parties are allowed to claim such event existence.

Notice requirements

When a force majeure (exceptional) event occurs, the party that is or will be prevented from performing any of its obligations under the contract due to it, shall give a notice to the other party.

Such notice:

• should clearly refer to the force majeure (exceptional) event and specify the obligations, the performance of which is or will be prevented by such event and
• should be given within 14 days after the party has become aware or should have become aware, of the relevant event or circumstance constituting force majeure (exceptional) event

In Ukraine, the parties frequently include a provision in the Particular Conditions that requires the affected party to provide a certificate of force majeure event. Such certificate shall be issued by the Ukrainian Chamber of Commerce and Industry and provided together with the notice.

Force majeure (exceptional event), however, does not apply to the parties’ payment obligations.

Under 2017 suite of contracts, if the exceptional event has a continuing effect (such as war), the affected party is required to provide a further notice every 28 days with the event description.

Ukrainian regulations

On 28 February 2022, the Ukrainian Chamber of Commerce and Industry announced the occurrence of force majeure and published the letter on its web site. The letter confirmed that the military aggression of the Russian Federation against Ukraine, which led to the imposition of martial law from 5:30am on 24 February 2022 for 30 days, should be considered “extraordinary, unavoidable and objective circumstances”, i.e. force majeure circumstances.

This letter has been used by the parties to the FIDIC and other construction contracts to certify the force majeure circumstances and be excused from performance of their obligations under the contracts.

The initial 30–day term of the martial law had been subsequently extended several times on 14 March 2022, 18 April 2022 and 17 May 2022. As of today, the martial law in Ukraine is in force until 23 August 2022.

Consequences

Once a notice of the force majeure event is served, the following consequences may follow:

• excuse from performance of obligations

The affected party will be excused from performance of the prevented obligations for the whole duration the force majeure (exceptional) event. As such, contractors will be able to suspend the works without facing penalties under the contract.

• additional time

The contractor will be entitled to the extension of time if it suffers delay as a result of the force majeure (exceptional event), subject to serving a notice (claim for EOT) within the time limit provided in the contract (e.g. 28 days).

• additional cost

The contractor will be entitled to reimbursement of cost incurred due to the force majeure (exceptional event). This consequence only applies to certain force majeure (exceptional) events, including war. As with the additional time, to be entitled to the additional cost, the contractor should provide a notice (additional money claim) within the time limit provided in the contract.

• termination of contract

Under certain conditions, either party may terminate the contract and the contractor will be entitled to termination payments.

Termination

Under FIDIC conditions of contracts, either party has a right to terminate the contract where the force majeure (exceptional) event prevents execution of substantially all works in progress (i) for a continuous period of 84 days, or (ii) 140 days in aggregate due to the same notified force majeure (exceptional event).

The termination takes effect after seven days from the date of the notice.

If the contract is terminated, the contractor is entitled to (subject to engineer’s or employer’s approval, as the case may be):

• amount payable for the work carried out for which the price is stated in the contract
• cost of any plant and materials ordered for the works, and which have been delivered to the contractor or of which the contractor is liable to take delivery. The plant and material shall become the property of the employer when paid for by the employer
• any cost or liability which was reasonably incurred by the contractor in expectation of the completion of works
• cost of removal or temporary works and contractor’s equipment from the site and the return of these items to the contractor’s country (or to any other destination at no greater cost)
• cost of repatriation of contractor’s staff and labour

Conclusion

Given that war is classifiable as a force majeure (exceptional event) under FIDIC contracts, contractors involved in FIDIC-based projects in Ukraine may use the available contractual mechanism to be excused from performance of the prevented obligations, as well as to seek extension of time due to the delay and additional costs incurred as a result of the war.

Both employers and contractors may potentially also choose to terminate the contract, given that the military actions have already been ongoing for more than 84 days. Obliviously, specific terms and factual circumstances of the contract/ project in place shall be carefully considered.

It is important, however, to serve appropriate notices in the defined format and within the agreed period of time, as well as consider local regulatory requirements, to ensure that the contractual exception is available to the relevant party.

Additionally, the Particular Conditions of the contracts should be carefully examined for any additional requirements or deviations from the standard conditions on the relevant rights and obligations of the parties.

Any disagreements with respect to notices, payment, termination and other issues in connection with the force majeure (exceptional event) should be settled by the parties in accordance with the dispute resolution mechanism provided in the relevant contract.