Claims and Damages in EPC/Construction Contracts: Impact of the Russia-Ukraine War

The Russia-Ukraine War in 2022 has had a profound and wide-ranging impact on Engineering, Procurement, and Construction (EPC) contracts globally. The conflict has presented significant challenges in various aspects, including health and safety, personnel shortages, supply chain disruptions, changes in laws and costs, responsibility and liability, risk allocation, force majeure, claims and disputes, and termination. This article aims to provide a comprehensive analysis of these implications, exploring the complexities faced by the construction industry in the aftermath of this conflict.

Health and Safety:

The Russia-Ukraine War has brought heightened security concerns and increased risks to personnel working in the construction industry within the affected regions. To ensure compliance with relevant laws and regulations and safeguard the well-being of workers, EPC/Construction contracts must prioritize the establishment of robust health and safety measures. Contractors shall face substantial claims and damages if they fail to provide a safe working environment or adequately address security risks associated with the war.

Unforeseeable Shortages in Personnel and Supply Chain:

A significant consequence of the war is the disruption it has caused to the availability of skilled personnel and the supply chain. Contractors have been grappling with difficulties in sourcing qualified personnel, materials, and equipment necessary for project execution. These unforeseen shortages may result in project delays, increased costs, and potential claims for damages. It becomes imperative for stakeholders to develop comprehensive contingency plans and incorporate contractual provisions that address alternative sourcing strategies, enhance supply chain resilience, and mitigate the impact of personnel and material shortages.

Extension of Time (EOT):

The Russia-Ukraine War's impact on project schedules may necessitate extensions of time (EOT) for completion. Construction projects affected by the war may encounter delays, disruptions, and cost overruns. Contractors may seek compensation for additional expenses incurred due to the extended project duration, increased labor costs, escalated material prices, and any necessary project rescheduling. Project owners, on the other hand, may assert claims against contractors for liquidated damages arising from delayed completion. Resolving these claims requires a thorough examination of the contract terms, schedule impacts, and supporting documentation. EPC/Construction contracts typically include provisions to cater to EOT claims arising from exceptional circumstances. Contractors may be entitled to seek EOTs to compensate for war-related disruptions, subject to compliance with the contractual notice requirements and establishing a direct link between the war and the resulting delays. Careful documentation and communication are essential to support such claims.

Changes in Laws:

The conflict has triggered changes in laws and regulations within the affected regions, significantly impacting EPC/Construction contracts. These legal developments can have far-reaching implications, including changes in project requirements, approval processes, permit obligations, and compliance measures. It is crucial for all parties involved to closely monitor and assess these legal changes, engage legal experts when necessary, and ensure ongoing contractual compliance to mitigate any adverse consequences.

Changes in Cost:

The Russia-Ukraine War has brought about fluctuations in labor costs, material prices, and transportation expenses. Contractors may have encountered challenges in adhering to the original contract prices, leading to claims for additional costs. Contractual mechanisms such as variation orders, change orders, and cost escalation provisions should be effectively utilized to address cost fluctuations resulting from the war. Clear documentation and communication between parties are vital to substantiate and resolve such claims.

Responsibility and Liability for Care of the Works:

With the war's impact on project site security and integrity, the allocation of responsibility and liability for the care of the works becomes crucial. Clear and unambiguous contractual provisions must define the allocation of these responsibilities among the parties. Contractors may be required to implement additional security measures to protect the project, and failure to do so could result in significant liability claims. It is essential for parties to diligently fulfill their obligations and fulfill duty of care to mitigate potential disputes and damages.

Risk Allocation:

The Russia-Ukraine War has introduced new risks and uncertainties into EPC/Construction contracts. Parties must conduct a thorough review and reassessment of the risk allocation provisions to determine responsibility for war-related risks such as supply chain disruptions, labor shortages, and project delays. Contractual mechanisms, including force majeure and indemnification clauses, should be carefully evaluated to ascertain the extent of risk allocation and potential claims for damages. Engaging legal professionals in drafting or reviewing contracts becomes crucial in ensuring the adequacy of risk allocation measures.

Force Majeure / Exceptional Events:

The war falls under the category of force majeure or exceptional events, which may excuse parties from their contractual obligations. EPC/Construction contracts typically incorporate force majeure provisions that outline the rights and obligations of the parties during such events. Contractors may invoke force majeure to seek relief from performance or claim compensation for additional costs incurred due to the war. Compliance with contractual notice requirements and the burden of proving the direct impact of the war on the contract performance become vital elements in successfully invoking force majeure.

Claims and Disputes, in particular Dispute Avoidance Provisions:

Given the complex and multifaceted consequences of the Russia-Ukraine War, the likelihood of claims and disputes arising from EPC/Construction contracts significantly increases. Parties should prioritize the inclusion of robust dispute avoidance mechanisms, including negotiation, mediation, and early dispute resolution procedures, to mitigate the escalation of conflicts. Clear communication, comprehensive documentation, and strict adherence to contractual obligations become paramount in resolving disputes efficiently and reducing the risk of escalating into costly litigation.

Termination and Release from Performance under the Law:

In extreme cases, the Russia-Ukraine War may render performance under EPC/Construction contracts impossible or commercially impracticable. The law may provide termination rights and release from performance for parties facing such circumstances. It is crucial for all parties to conduct a thorough assessment of the legal implications, contractual provisions, and any applicable termination procedures before considering termination as a last resort. Early engagement with legal advisors and adherence to contractual termination procedures become imperative to avoid potential claims for wrongful termination or breach of contract.

The Russia-Ukraine War has presented unprecedented challenges and complexities to EPC/Construction contracts on a global scale. From health and safety concerns to personnel and supply chain shortages, EOT claims, changes in laws and costs, responsibility and liability issues, risk allocation considerations, force majeure provisions, claims and disputes, and termination rights, there is a wide array of aspects that demand careful attention and proactive measures. By gaining a comprehensive understanding of these implications and adopting appropriate contractual and risk management strategies, stakeholders can navigate the impact of the war and mitigate potential claims and damages effectively, fostering the continued success of EPC/Construction projects in a challenging geopolitical landscape.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal advice or political position. Given the rapidly changing nature of the situation and the specific legal frameworks involved, every contract is typical and it is essential to consult with qualified Claims Experts/Legal professionals and stay updated on the latest developments before making any decisions or taking any actions related to EPC/Construction contracts in the context of the Russia-Ukraine War.