Guidance on ’force majeure’ and the proper steps to take if you need to exit contracts
Back in November last year Norton Rose provided an update on infrastructure and urban development in Libya, highlighting the exciting opportunities and the challenges to be faced. The political landscape has now changed dramatically, and those currently involved in projects in Libya face unforeseen challenges.
It is too early to speculate what the long-term outcome might be. In the short term, Libya is violent and unstable. Looting has reportedly affected Turkish, Serbian and South Korean contractors. Turkey has evacuated thousands of its citizens, many of whom are employed in the construction industry. Labour and material supplies will inevitably be affected. While the welfare of employees will be companies’ primary concern, certain legal issues should not be forgotten.
Following news that companies long-established in Libya have shut down oil production facilities, traders will reportedly be inundated by “force majeure” notices from oil producers unable to maintain supplies. Contractors may be well-advised to follow suit.
Conceptually, force majeure (FM) clauses cater for situations where performance has become impossible (or occasionally merely more onerous) due to unexpected circumstances outside the control of the parties.
There is no fixed definition of FM (under English law at least), leaving it to the parties’ contractual definition. Usually FM will release one or both parties from liability to perform contractual obligations, often with a right to terminate if there is prolonged FM.
If such provisions do not apply and an exit strategy is desired, contractors may need to rely on rights to terminate, to the extent present, or to argue that the contract is frustrated. Equally important is the risk of suspension or termination by the counterparty. The contractual terms should be examined carefully before a strategy is formulated and to establish the consequences of any steps taken. For example, what is the allocation of risk and what events entitle the contractor to time and/or money?
Looking beyond contractual terms, what happens if there is a regime change? Will the entity acting as employer still exist and if so will it be feasible to carry on working under the same terms once activities resume?
Protection under bilateral investment treaties
The current events may trigger protection under one of the number of bilateral investment treaties (BITs) that Libya has signed. For example, the ability to transfer capital out of the country may be affected and the risk of expropriation may be of concern to some. Companies should also consider whether their political risk insurance might be triggered. Difficult issues which cannot be explored here could arise in these respects.
However, direct recourse to and enforcement against Libya, for example, through international arbitration, may be limited. Other countries facing political upheaval - Tunisia, Egypt and Bahrain in particular - are signatories of the New York Convention and the ICSID/Washington Convention. Both of these provide, in principle at least, some comfort that an award obtained in a neutral foreign arbitration will be successfully enforced. Libya, however, is a member of neither of these Conventions.
Irrespective of what law governs any contracts, there may nonetheless be local Libyan legal issues to bear in mind, particularly in relation to health & safety and employee issues. Equally, international contractors will need to be mindful of any duties owed to employees in their country of employment.