Facing the increase

Construction cost inflation in 2021/2022 is unprecedented, and after decades of price stability in the supply of materials, labour and plant, construction costs have skyrocketed together with shortages of all resources.

Construction cost increases and shortages bring two problems; firstly, trading losses as contracts become under-priced, and secondly, costly delays to the works. That inevitably leads to demands for more money, which might be ignored, and walkouts by contractors, which is repudiatory breach of contract, and it follows a liability to crippling damages.

Most construction contracts are fixed price ones with no provision for price increases; indeed standard forms have optional clauses such as the JCT fluctuations clause, which is an option only and rarely used.

How can a claim be made when faced with a strict fixed price commitment to a contract that is no longer tenable on price?
Each case will have different circumstances and merits, an analysis of the case will hopefully reveal a strategy. That outcome might be a claim for loss and expense if the payer is culpable for delays or there may be an opportunity to recover losses in the valuation of variations. There might also be a case for price adjustment based on an argument on mistaken contract intention. However, the easiest solution is to renegotiate contract prices and get an amicable outcome, but any financial pressure must not amount to economic duress as this will make any price increase void.

Renegotiation is not likely to be straightforward if an alternative contractor can be found easily after walkout/repudiation or a refusal to continue. The payee should also beware of any ‘supplement the labour’ clause, which is legal and likely to be fatal to any profits. If the works are specialised, where there is no choice but to continue with the contractor, that might amount to economic duress, which if held will mean the price increases will be unenforceable and the agreement set aside. It might be that certain normal materials are in short supply with a long lead time, the threat of walkout and no hope of engaging others for months might leave the payer with no choice but to agree to the price increase. Again, this could be held as economic duress.

So, what amounts to economic duress?
One of the most familiar situations is Carillion Construction Ltd v Felix (UK) Ltd (2000). Felix were a cladding subcontractor engaged in the design, manufacture, and supply of cladding for an offices construction project. Disputes arose in the contract on the prices for the works and variations. Felix proceeded to refuse to make deliveries until an agreement was reached. Carillion were worried about significant liability for liquidated damages that could result from the delay. Carillion valued the work as £2.75m, after Felix’s demands the parties agreed the sum of £3.2m in full and final terms. On completion, Carillion reverted to their original figures. Felix brought an action to enforce the settlement agreement and it was held that it was unenforceable as the pressure applied by Felix was illegitimate and without justification. However, now consider the case of Williams v Roffey Bros & Nicholls (Contractors) Ltd (1990), where a carpentry subcontractor under-priced the works, part way through the work, the
subcontractor ran into financial difficulties and threatened to stop work unless an increase in price was agreed. The main contractor considered that engaging a replacement would cost considerably more so there was an agreement to pay the extra. The contractor then reneged on the agreement, proceedings were issued, but this time the Court held that the agreement was enforceable as the contractor had derived a benefit by avoiding paying more to finish the work. In this case it is financial pressure but not economic duress. The principle in this case is important where an alternative can be obtained and it would cost more to complete.

Each case thus turns on the facts and merits involved. In summary, financial pressure leading into a negotiated price increase agreement must be illegitimate to be void, meaning where the paying party has no choice nor a practicable alternative but to submit to the financial pressure.

What are the options if you are affected by construction cost inflation?
Faced with a seriously under-priced contract due to the unprecedented construction cost inflation, the payee should not walk out or put their business at risk without professional consultation. If the payer has not been approached yet, there are politics involved or the payer has refused to negotiate there will be a strategy. If the payee has not been progressing the works and suffered threats to engage others or others have been engaged, the payee needs to act quickly to check on the options and to see if there is a repudiatory breach of contract. Employing others without a ‘supplement the labour’ clause is normally repudiation. If there is repudiation by the payer, the payee will be entitled to the sums due for all work done to that point in time, plus all retention and damages for losses and expenses incurred, including loss of profit.

Arbicon are a Construction Claims Consultancy with a team of highly qualified Chartered Quantity Surveyors and experts in construction contracts, claims, payment issues and adjudication. As construction claims consultants specialising in dispute resolution, we provide personal, individual and tailored expert advice on a wide range of contractual issues to both help set up your construction project to identify, assess, and avoid commercial disaster, and also manage and resolve construction claims quickly, effectively, and commercially should they arise, typically through adjudication and Expert Witness services.
For more information please see: www.arbicon.co.uk