Force majeure in international construction contracts 1

United Kingdom
Peter Long and Robert Lonergan provide an overview

Force majeure is a concept which is widely used in international construction contracts. However, its meaning and effect can differ significantly between one contract and another, and between one jurisdiction and another. In this article, we examine some of the features of force majeure provisions in construction contracts.

Force majeure in English law

The rationale behind the concept of force majeure 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. Under English law, force majeure has been held to apply "when performance is hindered or prevented by strikes, lockout, riot, war, act of God, insurrection, civil disturbance, fire, interference by any Government Authority, or other cause beyond the reasonable control of the party affected". However, there is very little guidance from the courts as to the effects of force majeure.

JCT 98 expressly refers to force majeure as a "Relevant Event" which may entitle the Contractor to an extension of time for completion. The term "force majeure" is not defined but the contract does address other types of event which, in other jurisdictions, would be regarded as force majeure, such as fire, flood, and civil commotion.

The ICE Conditions do not mention force majeure, although they do contain a provision entitling the Contractor to an extension of time if the work is delayed by "any special circumstances of any kind whatsoever", as well as a clause which allows the works to be abandoned "if any circumstance arises which renders it impossible or illegal for either party to fulfil his contractual obligations", or if there is an "outbreak of war".

Force majeure in FIDIC contracts

In contrast to English Law, many other systems of law do recognise the concept of force majeure. This is reflected in the FIDIC contracts, which contain force majeure clauses. "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 includes:

i. war, hostilities, invasion etc.;

ii. rebellion, terrorism, revolution, civil war etc.;

iii. riot, commotion, disorder, strike or lockout by persons other than the employees of the Contractor and Sub-Contractors;

iv. munitions, explosives, ionising radiation or contamination by radio-activity, except as may be attributable to the Contractor's use of them;

v. 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 such 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, falls within items (i) to (iv) above and, in the case of (ii) to (iv), occurs in the country where the site is located, the Contractor is also entitled to be reimbursed any 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. If the contract is terminated 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 wide. It has to be an "exceptional" event beyond the control of a party, but what constitutes "exceptional" in any given circumstances is open to debate. The list of events which follows is illustrative only and does not necessarily limit the general words of the definition.

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

Similarly, if the Employer retains the services of a designer to provide design information on his behalf and the designer defaults in a major way, the Employer may be relieved of responsibility for providing such information in a timely manner. The clause may also apply if the Employer encounters exceptional difficulties in providing access to the site, relieving the Employer of responsibility, but without compensating the Contractor.

The clause could also cover such matters 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 such 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 under the force majeure clause.

Projects

The potential effect of the FIDIC force majeure clause is, undoubtedly, significant. However, 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 very likely that the clause will be modified to reflect the terms of the project agreement, which governs the project company's rights and obligations relating to the construction and operation of the project. Often force majeure clauses in project agreements will be detailed and carefully drafted. Frequently they divide the 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. As the project company cannot fund such repayments from actual cashflow it 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 and, while the Contractor might be given some 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 be generally be entitled to both an extension of time and compensation. As the project company no longer needs the cashflow of liquidated damages to meet debt service 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, but 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 e.g. fire, flood etc. then it may be possible to insure the losses resulting from the delay under an advanced loss of profit policy, although such 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 can occur should be short, but for lesser events the period should be longer.

Conclusion

The need for a carefully drafted and thoroughly worked out force majeure clause is essential for the success of a long running project and such a clause will be followed very 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 adopt the approach of the PFI in the UK. This is to define force majeure very 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; these issues need to be clearly addressed and their consequences specifically provided for.

For further information please contact Peter at pjl@cms-cmck.com or on +44 20 7367 2507 or Robert at rzl@cms-cmck.com or on +44 20 7367 3407.