Force Majeure in International Construction Contracts

http://bitterrootriver.org/wp-json/oembed/1.0/embed?url=http://bitterrootriver.org/brpa-amicus-brief-in-exempt-wells-case/ Force Majeure – An excuse for non performance

The term “Force Majeure” originates from the French Code Napoleon (now the Code Civil) which states “There is no place for any damages when, as a result of Force Majeure or an accident, the debtor has been prevented from conveying or doing that to which he was obliged or has done what was forbidden to him”.

This term is generally used in construction contracts to refer to catastrophic events outside the control of the parties. The most obvious of these events are Acts of God1See Tennents v. Earl of Glasgow (1864) 2 Macph HL 22 where the English House of Lords defined it as “a circumstance which no human foresight can provide against and of which human prudence is not bound to recognize the possibility.” such as earthquakes, volcanic eruptions and hurricanes2There are many definitions of that force majeure event. For example, in the case of Atlantic Paper Stock Ltd v St Anne-Nackawic Pulp and Paper Co, [1976] 1 SCR 580, Dickson J in the Supreme Court of Canada said that:
“An act of God or force majeure clause generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.”
. The aim of the force majeure clause is to exempt a party from performance on the occurrence of a force majeure event. Commercially, the clause is there to address risks which cannot necessarily be economically insured and which are outside the control of the parties to the contract. In its simplest characteristics, force majeure refers to those situations outside the control of parties and which prevent them (or one of them) from performing the obligations assumed under the contract3See Treitel, G. H., Frustration and Force Majeure (London: Sweet and Maxwell, 1994), p. 13.. This differs from events which create economic unbalance or make performance unprofitable4Thames Valley Power Limited v Total Gas & Power Limited (2006) 1 Lloyd’s Rep 441.

Under Clause 19 of the FIDIC 1999 Red Book, the term “Force Majeure” is principally identified as being an “exceptional” event or circumstance, beyond the Parties’ control, and something that could not have reasonably been provided against before entering into the Contract. Further, the event cannot be one that the Party could have reasonably avoided nor is it allowed to be “substantially” attributable to the other Party. For Clause 19 to apply, the force majeure event must prevent a Party from performing any of its obligations under the Contract5In Fairclough Dodd & Jones Ltd v J.H. Vantol Ltd [1957] 1 WLR 136, the court held that the word “prevented” meant that relief was only available where shipment remained impossible up to the end of the contract period. The Contractor will be entitled to an extension of time for delays arising from being “prevented” from performing the Contract in respect of all categories of Force Majeure events6Under Sub-Clause 19.4 the Contractor is entitled to claim if it incurs additional costs or suffers delay on account of being prevented by Force Majeure from performing “any of its obligations”. Either party may give notice terminating the Contract in the event of prolonged Force Majeure7Clause 1.6 allow either party (upon notice to the other party) to terminate the contract if the execution of substantially all the Works in progress is prevented for a continuous period of more than 84 days for one event, or more than 140 days in total.

Sub-Clause 19.7 further provides that notwithstanding any other provision of the contract (including Sub-Clauses 19.1 to 19.6), if performance of the contract becomes illegal or impossible, or the parties are released from performance under the applicable law, then upon notice by either party to the other party, the parties are discharged from further performance of the contract, implying that the contract comes to an end forthwith. Upon encountering a force majeure, the Contractor is required to give notice thereof to the Employer. The Contractor, in this circumstance, will be excused from performance for as long as the condition exists.

There is no specific force majeure clause in the Red Book FIDIC 4th Edition (1987). However, the Contractor is afforded some protection by Clause 65, which deals with special risks including the outbreak of war, and Clause 66, which deals with payment when the Contractor was released from performance of its contractual obligations. Sub-clause 65.1 starts with the statement that the ‘contractor shall be under no liability whatsoever in consequence of any of the Special Risks referred to in sub-clause 65.2.

Sub-clause 65.2 identifies the special risks in terms of the definition given under sub-clause 20.4.

A distinction is made between the risks of war, hostilities and acts of foreign enemies which are defined as special risks regardless of where they occur, and the risks of rebellion, revolution, insurrection, military or usurped power, and civil war which are recognised as special risks only if they occur in the country in which the works are to be executed.

The 1999 “force majeure” language is broader than the 1987 “special risks” language. In this instance, the 1999 contracts allocate more risk to the Employer than what the 1987 version does by encompassing a greater universe of events for which the Employer is essentially liable.

Similar to the 1987 Red Book, there is no reference to force majeure under NEC3. Instead, Compensation Events which include: Employer’s risks, such as loss of or damage to the works, plant or materials due to riots and civil commotion; and events which (a) neither party could prevent and (b) an experienced contractor would have judged to have such a small chance of occurring that it would have been unreasonable for him to allow for it. If a Compensation Event occurs, the contractor will get both time and money.

Clause 19.1 (Prevention) is in effect a force majeure clause according to the NEC Guidance Notes. An event falls within this clause where it is one which (1) stops the Contractor from completing the works8or stops the Contractor from completing the works by the date shown on the Accepted Program , (2) neither Party could prevent it and (3) an experienced Contractor would have judged it at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it.

The first stage in this three-stage test is strict; it is not sufficient for the Contractor just to show that it would be expensive or difficult to make up the delay. The second stage is also fairly strict since if any reasonable steps could have been taken to prevent the occurrence of the event, it would not be an event of force majeure9An act or omission of the Project Manager or Employer is not caught by this criterion. The third test introduces a degree of experience on the Contractor who would only succeed with a claim for force majeure where it would have been unreasonable for an experienced contractor to have allowed for the event.

When such an event occurs under clause 19.1, the Contractor should notify the Project Manager under clause 16 (early warning). The consequences of an event falling within clause 19 are two-fold: either converting it into a compensation event under clause 60.1(19) or giving rise to an event of termination under clause 91.7. The compensation event under Clause 60.1(19) mirrors the language of clause 19 with an additional point that the event “is not one of the other compensation events stated in this contract”. This compensation event only operates if no other compensation event is applicable.

enter site Conclusion

In sum, under the three forms of contracts discussed above, force majeure is an important and effective tool to allocate risks of contractual non-performance between parties. It is crucial therefore to carefully work out a force majeure clause where the risks are properly allocated and the consequences are clearly spelt out.

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References   [ + ]

1. See Tennents v. Earl of Glasgow (1864) 2 Macph HL 22 where the English House of Lords defined it as “a circumstance which no human foresight can provide against and of which human prudence is not bound to recognize the possibility.”
2. There are many definitions of that force majeure event. For example, in the case of Atlantic Paper Stock Ltd v St Anne-Nackawic Pulp and Paper Co, [1976] 1 SCR 580, Dickson J in the Supreme Court of Canada said that:
“An act of God or force majeure clause generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.”
3. See Treitel, G. H., Frustration and Force Majeure (London: Sweet and Maxwell, 1994), p. 13.
4. Thames Valley Power Limited v Total Gas & Power Limited (2006) 1 Lloyd’s Rep 441
5. In Fairclough Dodd & Jones Ltd v J.H. Vantol Ltd [1957] 1 WLR 136, the court held that the word “prevented” meant that relief was only available where shipment remained impossible up to the end of the contract period
6. Under Sub-Clause 19.4 the Contractor is entitled to claim if it incurs additional costs or suffers delay on account of being prevented by Force Majeure from performing “any of its obligations”
7. Clause 1.6 allow either party (upon notice to the other party) to terminate the contract if the execution of substantially all the Works in progress is prevented for a continuous period of more than 84 days for one event, or more than 140 days in total
8. or stops the Contractor from completing the works by the date shown on the Accepted Program
9. An act or omission of the Project Manager or Employer is not caught by this criterion