On 24 February 2022, Russia launched a military invasion of Ukraine, which is officially classified as a war. The war in Ukraine is, above all, a humanitarian disaster. The war is also affecting the rest of the world to varying degrees.
The consequences for Swedish contractors are difficult to foresee at present but the war in Ukraine is likely to cause shortages of labour, material, and raw materials, as well as delays in deliveries. Prices for energy and industrial metals have started to rise sharply, while oil prices are fluctuating between record highs and steep declines.
All of this could conceivably result in delays in completion of construction projects and runaway costs for construction works. Under the AB 04 and ABT 06 Swedish standard agreements, the construction client and the contractor have a mutual obligation to communicate with each other regarding circumstances that are significant for the construction project.
Extension of the contract period in connection with obstacles due to war
Chapter 4, section 3, points 3 or 5 of AB 04/ABT 06 , provide that the contractor shall be entitled to any necessary extension of the contract period if it is prevented from completing the contract works within the contract period due to, among other things, war or other circumstances beyond the contractor’s control which it could not have been expected to anticipate and the detrimental effects of which it could not reasonably have eliminated.
In order to be entitled to an extension of time as a consequence of such an obstacle, the contractor must notify the construction client as soon as the contractor becomes, or should have become, aware of the obstacle. For evidentiary reasons, it is best if such notification is in writing, although written notification is not required under AB 04/ABT 06. However, it should be noted that the Administrative Instructions for specific projects usually stipulate that such notification must be in writing.
It is not enough for the contractor to invoke obstacles due to war. The contractor needs to show what the obstacle is and how it relates to the war, and also needs to show that the obstacle has an impact on time and the extent of that impact. In order for the construction client to be able to understand and take a position on the request for an extension of time, it is important that the contractor explains the actual impact of the obstacle on the performance of the construction works. In addition, the contractor has an obligation to try to limit the effects of an obstacle through a rational use of the resources for the affected part of the project.
The right to an extension of time due to war should not only cover war within the country in which the works are performed. War in another country that impedes the performance of the construction project should also be covered. This could mean that indirect consequences of the existence of a war, such as shortages of labour, material, raw materials, and supplies of goods, are included. For example, a significant reduction in the contractor’s capacity because foreign workers are required to report to their home countries for wartime deployment should constitute an obstacle.
Other circumstances which cannot be regarded as obstacles due to war are included in a right to an extension of time due to another circumstance over which the contractor did not have control and which it should not have anticipated and the detrimental effects of which it could not reasonably eliminated. One should be able to rely on this point if it cannot be proven that a circumstance is sufficiently closely connected to the war in Ukraine, for example the bankruptcy of a subcontractor. Accordingly, this requires that the obstacle was unforeseeable for the contractor and the contractor had no reasonable way to handle the consequences.
In this context, it may be noted that the contractor is not entitled to any compensation from the construction client in when invoking obstacles due to war as per Chapter 4, section 3, points 3 or 5. The right to compensation due to an obstacle applies only to a circumstance attributable to the construction client or a circumstance involving the construction client, as stated in Chapter 5, section 4.
Adjustment of the agreed price for the construction project
Chapter 6, section 3 of AB 04/ABT 06 allows for adjustment of the agreed price for the construction project, for example in light of changes in costs resulting from war and which relate to essentials (such as facilities or goods), or a service necessary for the construction project. However, a contractor requesting a price adjustment on this basis must must show a causal connection between the cost change and the war in Ukraine.
The agreed price for the construction project may also be adjusted to take account of changes in costs due to abnormal changes in the price of materials included in the construction project. A contractor wishing to request a price adjustment on this basis instead must, however, demonstrate that the price change is out of the ordinary.
A price adjustment on either of these grounds requires that the cost change was unforeseeable. The contractor therefore needs to show that when it submitted its tender, it neither anticipated nor should have anticipated a change in costs caused by the war in Ukraine. In order for the contractor to price a risk, the risk must be likely. As a result, when preparing tenders in the future, the contractor should factor in the risk of cost changes caused by the war in Ukraine since the risk is now known. This will, in turn, make construction procurement more expensive for the construction client.
Adjusting the agreed price also requires that the cost change materially affects the entire cost of the construction project. Neither AB04/ABT 06 nor any court case offer any detailed guidance on what is required for the cost change to be deemed material. Since there is an explicit requirement that the cost change be material, in practice this probably means that there is a certain percentage change in the cost of the contract price at which it is considered to be material. As a result, it is necessary to determine – bearing in mind what is reasonable – when the risk of cost changes should pass from the contractor to the employer. This means that an assessment of reasonableness may be made in each case and placed into context.
To minimise the risk of disputes arising over price adjustments, the construction client can use indexation in the tender documents, or the contractor can make a reservation for indexation of fixed prices, provided that it is not a public procurement. This also increases predictability in the project.
Are you an construction client or a contractor affected by the above with questions about this? Feel free to contact our construction law team and we’ll help you.
The article is authored by partner Eva Westberg Persson and associate Ragnar Morin.