Force Majeure in International Construction Contracts 2

Force majeure is a widely used concept in international construction contracts. The rationale behind the concept is the understandable commercial concern of a contracting party that it should not be held to its obligations if performance is prevented by unexpected (or sometimes unforeseen) circumstances outside its control. But, what does force majeure really mean?

Force Majeure in FIDIC Contracts

Many European systems of law recognise the concept of force majeure. This is reflected in the most recent form of FIDIC contracts. There, force majeure is defined as an exceptional event or circumstance which is beyond a party’s control, which that party could not reasonably have provided against before entering into the Contract, which that party cannot reasonably overcome, and which is not substantially attributable to the other party. It specifically includes:

• war, hostilities, invasion;
• riot, commotion, disorder, strike or lockout by persons other than the employees of the Contractor and Sub-Contractors;
• natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.

Subject to giving notices, a party who is prevented from performing any of its obligations by force majeure is excused performance for so long as the force majeure prevents it from performing. If the Contractor is delayed by force majeure, he is entitled to an extension of time. If the force majeure occurs in the country where the site is located, the Contractor may also be entitled to reimbursement of additional cost.

If the execution of the works is prevented for a continuous period of more than 84 days, or for multiple periods which total more than 140 days, then either party may give notice terminating the contract. On termination, the Contractor is entitled to be paid the value of work done, the cost of materials delivered, the cost of removal of plant and equipment and the repatriation of staff, and any other cost to which the contractor was committed in respect of the works.

The FIDIC force majeure definition is not limited to specified situations. On the contrary, the definition is wide but it has to be an “exceptional” event beyond the control of a party. What constitutes “exceptional” in any given circumstances is open to debate.

For example, if a sub-contractor defaults in the performance of its contract and the Contractor could not, by exercising skilful management, have prevented the default, the sub-contractor’s default could fall within the force majeure clause if exceptional and such as to make it impossible for the Contractor to perform.

Similarly, if the Employer engages a consultant to provide design services and the designer defaults in a major way, the Employer may be relieved of responsibility for providing information in a timely manner. The clause might also apply if an Employer were to encounter exceptional difficulties in providing access to the site; thus relieving the Employer of responsibility, but without compensating the Contractor.

The FIDIC clause could also cover matters such as third party interference or default, for example, refusal of a consent by a neighbouring property owner, withdrawal of a statutory approval or a delay in completing essential work by a utility provider. In these cases, the party responsible for obtaining or maintaining the relevant consent or approval or for securing performance by the utilities provider may be relieved of responsibility.

Projects

Where FIDIC is to be used in the context of a limited recourse financed project with high gearing and a single purpose project company, it is likely that the standard wording will be modified to reflect the terms of the project agreement. Often force majeure clauses in project agreements will be detailed and carefully drafted. Frequently they divide force majeure events into two categories:

1. Political force majeure: risks that generally relate to changes in the political environment (embargoes, riot, insurrection and blockade, terrorist actions and sometimes war) or legal environment (changes in law, or licences, permits and consents necessary for the project) in the country where the project is located.

2. Non-political force majeure: physical risks that might affect a project (such as storm, tempest, earthquake, flood, and other natural catastrophic events), and events which would fall within the definition of political force majeure but which occur outside or do not directly involve the country where the project is located.

On the occurrence of a non-political force majeure event, the project company will be entitled to an extension of the time for completion and relief from termination. However the project company will not ordinarily receive compensation in respect of the delay to its revenue stream by virtue of a delay in the works. Hence, the project company may have no alternative but to look to liquidated damages from the Contractor to meet that shortfall. This means that the occurrence of a non-political force majeure event will not entitle the Contractor to any extension of time under the construction contract; so, while the Contractor might be given relief from termination, it would remain liable to the project company for liquidated damages.

By contrast, in the case of political force majeure, the project company will generally be entitled to both an extension of time and compensation. As the project company no longer needs the cashflow of liquidated damages to service its debt, the Contractor will in turn be entitled to an extension of time and its loss and expense under the construction contract.

Non-political force majeure can place the Contractor in a very difficult position. Sometimes the project agreement provides for the concession period (rather than the date for completion of construction/commencement of operation) to be extended where delay is caused by such an event. However, this represents only a partial solution because, although it gives the project company an additional opportunity to generate revenue from the project at the end of the concession period, it does not solve the project company’s immediate cashflow problem at or near completion of construction.

Insurance may provide a partial solution. If the non-political force majeure event is insurable (eg, fire, flood) then it may be possible to insure the losses resulting from the delay under an advanced loss of profit policy, although cover will inevitably be subject to deductibles. If non-political force majeure events are not insurable then it will be necessary to specify the circumstances in which either party can terminate. If the event is a catastrophic one, the period of delay before termination should be short, but for lesser events the period should be longer.

Conclusion

The need for a carefully worked out force majeure clause is essential for the success of a long running project. The drafting in the project agreement should be reflected closely in the construction contract. In many jurisdictions the force majeure clause will be central to the allocation of the risk between the parties. An alternative is to define force majeure narrowly, so that the clause is of less importance, but to include separate provisions dealing with other risks and responsibilities using different terminology. The result should be the same, but one thing is for certain; the risks need to be allocated and the consequences clearly spelt out.

For further information on this topic, please contact John Uwins at jtu@cms-cmck.com or on +44 (0)20 7367 3000.