Transformation in the construction industry: Keeping pace with change
Three pillars are at the heart of global efforts to boost sustainability and make our built environment cleaner, greener and more socially responsible: construction, energy and technology. These three industries have come to be intricately connected in an era of transformation on a scale never seen before.
Across the world, leading construction industry players are developing innovative projects and deploying new technology to transform the way we live and work.
Meanwhile, energy and mining & metals companies in rural Africa are increasingly installing generating assets and distribution facilities to ensure continuity of energy supply for their operations.
The predicted increase in flexible working may well result in a more widespread move to the development of "smart cities," with technology built into the heart of daily life.
All this is happening amid the fallout from the COVID-19 pandemic, which has shifted perceptions of how the world may look in the future.
But the pandemic has also forced project owners, developers and contractors to look at their contractual terms more closely, as budgets are cut and works are interrupted due to government restrictions.
This compendium of articles, written by colleagues from offices across the world covers a wide range of issues, examines some of the key topics relating to the shifting relationship between the construction, energy and technology sectors in our rapidly changing world.
It looks at the role the construction industry is playing in the development of distributed energy projects in the US and battery storage in the UK.
In the Middle East, the boom in the construction of smart cities has led to the use of new project structures to embed energy -saving measures within the developments. In Africa, renewable energy projects driven by public procurement programs have attracted investors and developers from around the world, drawn by the vast opportunities on the continent.
Increasing work in a volatile environment, however, means that risk allocation and mitigation are more important than ever. Courts in regions as diverse as Russia, India, Latin America, the Middle East and the UK have all been examining force majeure and risk clauses within contracts. Industry players would be wise to take note of these decisions and trends as markets are beginning to return to post-coronavirus normality.
Insolvency can also be another resultant risk, with recent reforms in the UK, Australia and Singapore affecting the construction sector if contracts are not carefully reviewed and, potentially, redrafted to reflect the new rules.
Although the current environment may have raised awareness of risk in construction projects, there is no doubt that the recent disruption and focus on innovation, new technology and sustainability is bringing immense opportunity to the industry around the world with a real chance of lasting impact.
“Focus on innovation, new technology and sustainability is bringing immense opportunity to the construction industry around the world”
Construction considerations in the US distributed energy market
The commissioning and startup phase of any energy project—liquefied natural gas, power, renewables, petrochemical—represents an important, and potentially perilous, transitional period during the construction process.
The coronavirus pandemic has had, and will continue to have, profound effects on the global construction industry. There have been and will continue to be substantial delays and cost impacts as a result of labor shortages, disruption to supply chains and financial pressure.
Delays in construction projects are common and even more so at the moment, and so the question of ensuring that there is a mechanism for the prompt payment of damages in the event of a contractual breach is arguably now more important than ever.
In 2020, the UK courts heard two significant cases with an impact on the way construction contracts and subcontracts are drawn up and carried out, affecting employers, contractors and subcontractors to major projects.
Increased battery storage capacity can and is being encouraged in order to facilitate the move towards the decarbonisation of electricity generation and can contribute to greater resilience and efficiency of integrated grids.
COVID-19 has had a significant effect on construction projects around the world, delaying work and forcing many parties to go back to their contracts and examine whether there is scope for a claim, and Saudi Arabia was no exception.
Where large projects exist, disputes will often arise. The Indian construction sector is no exception, but the lack of a standard form contract and the option of several forms of dispute resolution means that resolving disputes can be complex.
Changes to insolvency laws in the UK, Australia and Singapore may affect how parties deal with the termination of construction contracts where one party to the agreement is insolvent.
Construction contracts commonly contain provisions which entitle a party to terminate the contract if the other party becomes insolvent. These provisions are sometimes referred to as 'ipso facto' clauses, because it is the fact of insolvency which gives rise to the right to terminate.
The purpose of ipso facto clauses is to enable a contracting party to end a contractual relationship if the insolvency of the other party is likely to have a real impact on the counterparty's performance of its obligations.
The motivation for the recent insolvency law reforms, however, is to give insolvent companies breathing space to try to reorganise their affairs and allow viable businesses to continue to trade. One of the ways that this is done is to curtail the operation of ipso facto termination provisions.
The theory applied here is that permitting a contract to be terminated for a party's insolvency may prevent that company from being able to reorganise its business.
Although the relevant insolvency laws in the UK, Singapore and Australia have much in common, there are some noteworthy differences between them.
The UK's Corporate Insolvency and Government Act 2020 (CIGA), which took effect on 26 June 2020, applies to any contract 'for the supply of goods or services' to a company that becomes insolvent, including construction contracts with limited exceptions.
For these purposes a contractor performing work for an employer will be treated as a supplier, as will a subcontractor performing work for a main contractor.
The legislation prevents reliance upon an ipso facto clause, or a clause allowing it to do 'any other thing' as a result of the insolvency. There is, however, no prohibition upon the buyer of the goods or services from exercising rights which arise due to the supplier's insolvency.
CIGA will prevent a supplier from terminating a contract when the counterparty is insolvent, where the right to terminate arose when the counterparty became insolvent. It also prevents a supplier, during the insolvency period, from making its continued supply of goods or services conditional upon the payment of outstanding charges, or doing 'anything' which has the effect of making continued supply conditional upon payment of outstanding pre-insolvency charges.
On these issues, there are two points to note in particular. Firstly, the legislation permits a supplier to apply to the court to relieve it from continuing to perform its contractual obligations in circumstances where this would cause it 'hardship'. 'Hardship' is not defined by the legislation, but it will inevitably take account of the potential financial detriment to a supplier if it is forced to continue performing a contract with an insolvent counterparty.
Secondly, while CIGA would prevent a party from exercising a right to suspend its supply of goods or services as a result of insolvency, it seems unlikely that this prohibition will cut across the right of a party to a construction contract to suspend its works in the event of non-payment of a 'notified sum' as provided for under the Housing Grants, Construction and Regeneration Act 1996 (HGCRA) section 112(1).
However, the prohibition on doing 'anything' which would have the effect of making continued supply conditional on payment of outstanding charges is not expressly limited to the exercise of contractual rights, and may affect a party's rights under section 112(1) of the HGCRA. As CIGA does not expressly address this statutory interfacing issue, the matter will not be free from doubt until resolved by a court.
Insolvency reform in Singapore and Australia
Singapore's insolvency law reforms took effect through the Insolvency, Restructuring and Dissolution Act 2018, which came into force on 30 July 2020. Australia's reforms saw amendments to the Corporations Act 2001, which came into effect in 2018.
Singapore's and Australia's revised insolvency laws prevent, subject to limited exceptions, the use of ipso facto clauses, but in ways which differ from the UK legislation.
Firstly, unlike the UK law which imposes a one-way ban on ipso facto clauses, the Singaporean and Australian legislation creates a two-way prohibition. In the construction context, this means that neither an employer nor a contractor may rely upon an ipso facto provision to terminate each other due to insolvency.
The Singapore and Australian legislation prevents the use of ipso facto clauses in circumstances where a company has become insolvent but has not gone into liquidation. In contrast, the UK insolvency laws prevent reliance upon an ipso facto clause where a company has gone into liquidation and has no prospect of reviving its fortunes. This approach may be questionable, given that the purpose of the prohibition on ipso facto clauses is to give companies some breathing space to restructure.
Thirdly, whereas the UK legislation precludes the termination of a contract during the period of a company's insolvency for any reason arising before the insolvency that would otherwise give rise to a right to terminate, the Singapore and Australian legislation does not preclude termination during this period for grounds other than insolvency.
The impact on construction contracts
These insolvency law reforms will certainly have an impact on the drafting of construction contracts and market practices to address insolvency concerns.
Parties to existing construction contracts need to be aware of the impact of the legislation on those agreements. An express right to terminate for insolvency may no longer be valid, meaning that any attempt to terminate in reliance upon the provision may be ineffective, and amount to a repudiation of the contract.
In future construction contracts, termination provisions will need to be drafted to reflect the restrictions on ipso facto clauses in the applicable jurisdiction. Those drafting contracts will have to give closer attention to the possibility of termination for reasons other than insolvency—for example by terminating for convenience.
To mitigate insolvency risks, contracting parties may bring greater focus to requiring their counterparties to procure forms of security which will be available in the event of that party becoming insolvent, for example performance bonds or undertakings from a parent company or financial institution, or through insurance.
That said, the new reforms may also restrict parties' rights to call on such securities—CIGA, for example, will render ineffective a clause allowing a supplier to do 'any other thing' as a result of an insolvency, which could include utilising certain forms of security, depending on the wording of the contract and the relevant security.
Clear drafting and consideration of the law is essential to protect parties. Project owners and contractors alike would be wise to make sure their contracts reflect the new insolvency reforms.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.