"This is the biggest and most complex ebola outbreak in history."Tom Frieden, Director U.S. Centers for Disease Control
Does the outbreak qualify as an event of Force Majeure under any key contracts?
Key questions to consider in the construction of the Force Majeure clause
- Definitions - Is the definition of Force Majeure closed or open-ended?
- Claims - What impact is required to claim? Is the threat of an impact sufficient?
- Compensation - Is there pure delivery relief, or can financial compensation also apply?
- Mitigation - What obligations to mitigate apply?
- Parties - Can any parties walk away from the contract? If so, after what period?
Best practice guidance – some things to check
We would advise considering the following guidance:
- Information undertakings – Check the information undertakings and keep the lenders informed.
- Events of default - Check whether the event has potential to trigger an event of default:
- Is Force Majeure expressly provided to be an event of default under the loan agreement?
- Do the abandonment/suspension provisions ensure a departure of employees would not be construed as abandonment?
- What is the impact of a Force Majeure event on project documents? Might this cause an event of default?
- Consider the Material Adverse Effect drafting.
- What is the impact of a government announcement on curtailment of travel/transport or shut down? Will this trigger government intervention defaults?
- What project milestones are in the loan agreement? Do the finance documents have milestones that need to be achieved in the near future and any long stop date?
- Draw stop conditions - Check your conditions to utilization. A continuing default or failure to make a repeating representation often constitutes a drawstop. A Force Majeure under the project contracts is sometimes included as an express drawstop.
- Project contractors - If there are direct agreements with the project contractors check the provisions to see if there are any information obligations on the project contractor to inform the lenders of a Force Majeure or suspension.
- Estoppel - Direct agreements may contain estoppels on termination or suspension of works by the project contractors. Lenders may have the right to step in and participate in discussions with the project counterparties.
- Security documents - Check your security documents for any additional information or other obligations in respect of the mine or the project assets.
Mining Development Agreement & Government Concessions
- MDAs - Check the terms of your mining development agreement or licence to assess key milestones. Verify if there are Force Majeure provisions that cover events outside the control of the company and establish how long the works can be suspended before the government can initiate the termination of the mining agreement or withdrawal of the licence.
- Government concessions - Check any associated concession agreements (for example, in relation to rail or port infrastructure) to see how Force Majeure applies in those documents. Can a Force Majeure affecting one part of the overall project be used to argue that relief should apply on a different part?
Construction & Operation Contracts
- Contract definitions - Check whether the event is covered under specific heads of Force Majeure or might only be covered under general catch-all wording. If the latter, there will be more risk for contractors/operators in acting upon it, as if relief does not apply then there may be a case to argue abandonment or deliberate breach, with potentially uncapped liability.
- Mitigation - Contractors will usually have to demonstrate that they are taking all reasonable steps to mitigate the impact before relief is granted. This can be somewhat subjective. The question of causation may also be unclear. Can the contractor stop works where there has been no direct impact, but only the threat of an impact?
- FIDIC - Under unamended FIDIC, contractors can not only claim relief from delay Liquidated Damages, but can also claim additional costs arising from Force Majeure, such as demobilization and remobilization costs.
- Walk away rights - Check the walk-away rights. Under unamended FIDIC the contractor can walk away without penalty after 84 days. If the project then restarts, the mining company might have to re-negotiate/re-tender from scratch or otherwise risk being held to ransom by the contractor. Where the contract has uncertainties (as noted above), this could give the mining company greater leverage in negotiations with contractors, in response to any threat to suspend the works or abandon site.
- Performance securities - There may also be performance securities that can be called. Until the contractor has formally established that a Force Majeure exists under the dispute resolution process, it may be reasonable for the mining company to call the bonds on the basis that the contractor’s actions constitute a breach of contract. There will be an obligation to account to the contractor for any excess amount called but it will have the benefit in the meantime (and the contractor will face the pressure of having to counter indemnify the issuing bank).
- Project documents - Where Force Majeure affects the project revenue stream (by delaying construction or impacting operations), contractors and offtakers may be relieved from Liquidated Damages or take-or-pay obligations under their contracts. It is worth noting that Delay in Start Up or Business Interruption insurance only typically pay out where there has been a claim under the associated CAR or material damage insurance, so project insurance will likely not assist in Force Majeure scenarios without damage to project assets. Extensions for non-damage issues like infectious disease are possible, but rarely taken out in practice.
- Lenders’ insurances - Check if lenders have any PRI/ECA cover. Review the terms of the cover to see if the events in the country are covered or excluded. Consider whether any government actions taken in response to the event amount to expropriation and what waiting periods may apply before a claim can be made.