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Clifford Chance

Clifford Chance

Construction Insights

Do the Right Thing? Construction and moral hazards

In which the Clifford Chance Construction blog ponders why the industry struggles with ethics and trust issues and wonders if 2020 could yet be Construction's summer of love.

It has been growing for a while, but yet another trend accelerated by the current crisis has been the focus placed on the ethical agenda. Shout, 'cash is king' as loud as you like, but watch your step if you ignore the new moral code, which is being fiercely policed by social media and the Fourth Estate.

It is no coincidence that we see companies being lambasted in the press for taking advantage of Governments' industry interventions while not paying their suppliers and other creditors and for furloughing or making job cuts whilst paying dividends. Contractual and legal entitlements may never have been synonymous with ethical behaviour but it is hard to recall a time when there has been so much scrutiny on the consequences of business leaders' decisions beyond the immediate financial health of their company and its owners.

However, that doesn’t mean we are all having a Jerry Maguire-style epiphany.

In a number of countries, Governments have had to intervene to suspend the exercise of certain contractual rights during this period, particularly termination rights. Other countries have been more cautious about intervening in private contracts and have issued guidance only. Not following that guidance can, of course, be a moral hazard, but without financial or legal consequences, is it any surprise at such a time if parties still make short term decisions based on their own immediate financial self-interest?

I have been giving a lot of thought to this dilemma as we help our clients navigate risk allocation under both existing and new procurement, supply and construction contracts. All too often we are seeing mistrust between parties: "You are using this event as an excuse to cover up bad performance elsewhere" meets "You are acting in bad faith and looking for any reason to deny claims and reduce payments".

Meanwhile the commercial exigencies of the crisis can see corporate values which have not been fully formed or entrenched into organisations, relegated out of the decision-making equation. The so-called triple bottom line concept of 'planet, people and profits' is quickly marginalised when only the latter is actually being measured.

It seems to me that the wisest counsel is often to look beyond the immediate issues, by weighing up:

1) wider supply chain issues and the risk these pose of further delay (and thus, inevitably, further cost overruns and, ultimately, even project failure); and

2) the wider consequences of the decision at hand within projects, including the fomenting of an adversarial culture that may lead to more serious actions and claims that impact on the economic viability of projects.

Perhaps lessons can be drawn from the progress the industry is making on sustainability and environmental issues. Here the 'one planet' mantra has evolved into a more sophisticated model demonstrating the commercial benefits of making the 'right' choices, not just for the here and now, but over the longer term.

In a similar way (but arguably within a much more accelerated time scale), at the start of the pandemic the mantra of "we are all in this together" was everywhere. To avoid that spirit being lost, it perhaps now needs to evolve beyond an abstraction into evidential models showing how wider people-inclusive decision making - not just within corporates but across supply chains and the industry in general - can create more advantageous commercial positioning, reduce risks and provide better returns over the longer term.

My experience has been that the projects which have fared best over the last few months have been those where parties' managers and representatives have realised that they all have 'skin in the game'. This has meant that they have all been willing to contribute to a solution which creates certainty and minimises longer-term risk and damage to the project.

In an environment where social governance reporting requirements are on the increase and most commentators are predicting that lenders, investors and insurers across all sectors will wish to see businesses become more resilient, more agile in their decision making and more adaptable, there appear to be opportunities here for the industry to place people-based values at the heart of decision making.
So maybe not quite the Summer of Love, but the summer where the collaboration penny finally drops?

Tell me if you think that I am being too naïve? We all know that old habits die hard in construction. But even for an old cynical lawyer like me, it is clear that however sophisticated, robust or well-drafted your contract is, it wasn’t really designed with the current situation in mind. And, of course, the contract will not deliver the project. That will, as always, fall to people and the attitude they bring to the table will be key.

It is said that the Covid-19 crisis is going to produce change in every industry and my bet is that, for construction, it will not just be about digitisation and analytics. Let me know what you think comes next.