Supply chain challenges: Practical advice for housebuilders / developers

30th May 2022

Louise Norbury Robinson and Kathryn Vickers, offer legal and practical solutions for housebuilders/developers facing supply chain challenges.

Extraordinary commercial context

Supply chain and border disruption, and materials and labour shortages, caused by Brexit, Covid, and the 2021 Suez Canal blockage have all been well-documented and are continuing to impact businesses in all sectors. The Russian invasion of Ukraine and the continuing energy crisis are exacerbating existing supply chain difficulties across the UK. The construction industry, in particular, is now becoming more severely affected.

The Office for National Statistics has reported that the UK imported £270 million of material manufactures [1] from Ukraine in 2021. Also in 2021, Russia was the UK’s 12th biggest importing partner globally, with the UK importing £10.3 billion in material manufactures, as well as oil and gas, from Russia. As at May 2022, Ukrainian manufacturing and trade is now largely at a standstill. International sanctions are imposing economic costs on not only Russia directly, but also indirectly on its global trading partners [2]. Even where sanctions may not strictly bite, many UK businesses are weighing the ethical and reputational concerns, and increased investor/consumer scrutiny, now associated with doing business with Russia. It is therefore perhaps no surprise that UK housebuilders and developers, and the contractors and suppliers on whom they rely, are experiencing the impact of these extraordinary times.

Issues for housebuilders/developers

Demand for materials and labour is now frequently out-stripping supply, and cost increases and rising energy prices are impacting projects to the extent that a slowdown on growth is now being forecast amongst some commentators [3]. The socio-political climate and supply chain challenges are, of course, coupled with the subsisting lack of land supply and consequent ‘record’ high land values. In some instances, development appraisals, costings and feasibility studies have become completely out-of-date and it may be that current issues impact the feasibility of future projects altogether. In cases where the figures do still stack up, there nevertheless remains the risk of knock-on effects, such as timing issues/delay and/or delivery of commitments from or to third parties (for example in relation to contractual warranties, third party validations, section 106 agreements, or other legal obligations).

It is anticipated that specialist sub-contractors are already feeling the effects in the immediate term; contractors at all levels will be forced to consider the prices and terms on which they can deliver future projects; and housebuilders/developers will be concerned to see whether the market is resilient enough for price increases to be reflected in ultimate sale prices.

While many of the factors at play are outside the direct control of UK businesses, what are the legal and practical steps that housebuilders and developers can take to mitigate their position?

Legal and practical solutions

As part of a business’ assessment of supply chain disruption on their commercial arrangements and financial viability, whether contracts or common law remedies allow the flexibility to renegotiate, or the ability to terminate, commitments will be key. So too will be the ability to avoid or mitigate disputes.

Housebuilders/developers may wish to consider some or all of the following measures to help manage supply chain difficulties in the short and long term.

• Undertake a review of all key contracts to determine both where contracts (and commercial relationships) might allow for flexibility and the ability to negotiate to ‘ride out’ a crisis, and where pressure points or breaking points arise. Where pressure points do arise, seek specialist advice on the options available, including in relation to termination or suspension of contracts.

• As part of the contract review, ascertain the existence and terms of any force majeure provisions which may excuse one or more parties from contractual performance [4]. Any business wishing to invoke force majeure (or to ascertain the validity of any force majeure claim made against it) should ensure compliance with any notification or other requirements, and any time-scales, specified within the particular contract. It is also important to keep records of all relevant factual and economic evidence as the impact of the supply chain challenge unfolds.

• Where force majeure does not apply, businesses should take specialist advice as to whether the common law doctrine of frustration may assist to effectively terminate a contract.

• Parties should check their various insurance contracts. In some cases, invoking or receiving a force majeure or a frustration claim can impact insurance policies. In particular, parties should ascertain any notification requirements.

• Ascertain the existence and implications of any other contractual provisions which may provide flexibility and/or commercial assistance. These might include (non-exhaustively) price adjustment clauses, variation/no-oral modification clauses, and material adverse change clauses.

• Commercial disruption, uncertainty, financial hardship, and contractual default can all prompt disputes. Businesses should therefore review contractual arrangements and third party commitments to ensure that they understand the extent of their, and their key counterparties’, obligations and liabilities. Key clauses in this context include any guarantees, indemnities, warranties or performance bonds, limitation/exclusion of liability clauses, endeavours obligations, section 106 commitments, and the like.

• Where possible and financially feasible, parties should consider the potential for alternative ways of performing affected contractual obligations and/or for mitigating any loss or damage. Again, parties should keep clear records of all factual and financial evidence upon which they might wish to rely in the event of any dispute.

• Crucially, businesses should ensure that they keep open communication channels with staff, suppliers, customers and other key counterparties. Dialogue can minimise disruption or discord within a business and can often avoid or effectively resolve disputes, saving both commercial relationships and cash. It is worth remembering that today’s supply chain challenges are global – they are affecting all businesses in all sectors, and default is often no-one’s fault. Open, frank, timely communication and a willingness to work together to find solutions could, in this climate, be the difference between a project or business thriving or failing.

• In the short term, plan ahead: produce and implement crisis plans to come into operation where critical supplies run short.

• For the medium to long term, address building-in supply chain resilience. Commercially, that can involve ‘shoring-up’ essential supplies (and not operating a ‘just-in-time’ supply chain), which may have an impact for logistical arrangements and storage capability; reducing or removing over-reliance on any one source or country of origin; and considering ‘on-shoring’ or ‘near-shoring’ supply chain components where possible.

• Where disputes do arise, parties should check whether the relevant contract contains any mandatory dispute resolution provisions. An effective dispute resolution clause requires the parties to follow a pre-agreed route to resolution, which can: prevent any potential secondary dispute about whether and how the primary issue should be resolved; minimise the scope for any tactical game-playing (thereby helping to preserve commercial relationships); and ensure that the time and costs of dealing with formal litigation are only incurred as a last resort.

How we can help

Walker Morris has a broad spectrum of cross-discipline specialists who are ready to help housebuilders/developers navigate the complexities of continuing to do business, and to ensuring the deliverability and profitability of their projects, in these increasingly challenging times.

If you have any queries arising from this briefing, or need advice or training in connection with any of your commercial and/or development contracts (including in relation to any review, drafting issues, termination/suspension or related options, or any dispute), please do not hesitate to contact Louise Norbury Robinson or Kathryn Vickers, , who will be very happy to help.

[1] ‘material manufactures’ include vital raw materials, such as wood, iron, steel, other metals used in batteries, electronic chips and various other key components, as well as larger items such as machinery, and transport equipment, etc.

[2] For more detailed advice on managing sanctions and supply chain risk, see our Walker Morris briefing.

[3] for example, the Construction Products Association has predicted growth of 2.8% in the second quarter of 2022, down from the 4.3% that had been forecast just three months ago; Construction News and Building Magazine have reported that the latest Glenigan Index has found the value of construction project starts is 21% lower than a year ago, underlying work commencing on-site during the three months to April was significantly down on the same period last year and fell 1% against the preceding three months, and the amount of residential work starting in the first month of Q2 was 28% down on 2021.

[4] For further information, please see our recent briefings on force majeure: Force majeure (post-Covid); Force majeure (Apr 22 update).