In times of crisis, such as the recent upheaval in the Middle East, force majeure clauses in contracts come into play. So when and how do they work?
The anti-government protests and general civil unrest to hit certain Middle Eastern countries are already having an impact on live construction projects. While the safety of employees is the number one priority, undertaking risk assessments on affected contracts is a commercial necessity.
At whose risk is such unrest? What impact does it have on the contract and how bad does it need to be before the contractor can walk away? While insurance may cover the direct damage and repair, this is unlikely to deal with consequential losses and what happens to the contract going forward.
The starting point is to determine the applicable law of the contract. For example, under English law there is a principle whereby, if a contract becomes impossible to perform, the contract is treated as at an end (the doctrine of frustration). That may be a concept foreign to other jurisdictions. As a result, most contracts attempt to cover these eventualities in their express terms rather than fall back on what might or might not be available within the applicable law.
FIDIC, one of the more commonly used international standard forms, has a number of detailed provisions regarding force majeure clauses. The effect of a force majeure clause is to excuse one (or both) parties from performance of the contract following a certain event. It covers the kinds of risks that are outside the control of the parties and that often cannot be insured against, such as war and natural disasters.
The FIDIC Red Book has a detailed force majeure clause that deals with what happens to the contract following the occurrence of an event and what rights there are to be paid for the consequences. The definition of force majeure in FIDIC is quite wide. It includes war, hostilities, invasion, rebellion, terrorism, civil war, riot and natural catastrophes. It also includes exceptional events or circumstances that:
- are beyond a party’s control
- such party could not reasonably have provided for, and
- could not reasonably have been avoided when arisen.
If notice of such an event is given, that party shall be excused of such obligations as it has notified, for as long as the event continues. However, this clause is only invoked by giving notice within 14 days after that party becomes aware of the event or circumstances that constituted force majeure.
The party giving the notice must identify which obligations cannot be performed. Any obligations to make payment are unaffected. The contractor is then entitled to further time and more money, except where the event is a natural disaster, when only time will be awarded. If the event continues for more than 84 days or has a cumulative duration of 140 days, an optional right to terminate the contract arises. The contract provides how the final account is valued.
Under English law there is a principle whereby, if a contract becomes impossible to perform, the contract is treated as at an end (the doctrine of frustration). That may be a concept foreign to other jurisdictions
There is also an express “frustration” clause, whereby any circumstance outside the control of either party may result in release from their respective obligations, if it makes it impossible or unlawful for them to comply. So this is embodying the equivalent English law principle of frustration within the contract, regardless of the applicable law.
It is also worth examining domestic building contracts for their treatment of such matters. It was not so long ago that the extent of terrorism cover under such contracts, and who carried these risks, became a real issue.
Under JCT, a suspension of the whole or a substantial part of the works for two months (the default period), or another period that is stated in the contract, as a result of force majeure may lead to a termination of the contract. Time, but no money, is available for such periods of suspension.
Under NEC clause 19, if an event occurs that could not have been prevented or had such a small chance of occurring that the contractor was reasonable not to allow for it and stops the contractor completing the works, then it is up to the project manager to issue an instruction as to how to deal with this. The employer also has the right to terminate the contract.
Both parties have the right to terminate if they have been released from further performance, under the applicable law of the contract - that is, if it has been frustrated.
The provisions in the domestic standard forms are, as you might expect, much less detailed than in FIDIC. This may be the point to test whether, even in a domestic situation, they are robust enough.
Lindy Patterson is a partner in Dundas and Wilson