The force majeure clause is a well established clause in most construction contracts. Although often considered as a part of the standard ‘boiler plate’ drafting near the end of the contract conditions, it is in fact an essential ‘cog’ in the mechanics of such contracts.
In recent years many owners and contractors in the Asia Pacific region have turned to these clauses in attempts to seek relief from the consequences of natural disasters, political turmoil and even the global financial crisis. They have sometimes found that the clauses do not provide the relief that they hoped for.
This newsletter highlights the key features of force majeure clauses, how one might consider drafting a clause and explores the grounds for relief and one particularly controversial aspect – ‘economic force majeure’.
A force majeure clause relieves one or both parties from liability to perform contract obligations (sometimes it merely suspends those obligations) when performance is prevented by an event or circumstance beyond the parties’ control. Typical force majeure events may include fire, flood, civil unrest or terrorist attack.
The commercial importance of these clauses is obvious. Contractual parties might be exposed to massive liabilities if they remain legally obliged to perform a contract which is in fact impossible to perform. The performing party will therefore wish to include a widely-drawn force majeure clause that relieves liability in a broad range of circumstances. Conversely, the party entitled to receive performance will be reluctant to allow the other to avoid liability too easily or in too many circumstances. The exact scope and application of these clauses is therefore often hotly negotiated and debated. If not, the impact can be dramatic.
It is important to stress that these clauses do not suspend or excuse performance or liability where the effects of the force majeure event could reasonably have been anticipated and/or avoided.
Given the potential importance of force majeure clauses, and given the wide range of possible wording, these clauses deserve more careful attention in contract negotiations than they usually receive. The following paragraphs suggest some important considerations.
What events will trigger the force majeure clause?
Some legal systems provide a specific definition of force majeure. For example, section 8 of Thailand’s Civil and Commercial Code states: ‘“Force Majeure” denotes any event the happening or pernicious results of which could not be prevented even though a person against whom it happened or threatened to happen were to take such appropriate care as might be expected from him in his situation and in such condition.’ Other legal systems do not have anything similar; for example, there is no definition of force majeure in English law.
To avoid uncertainty, most force majeure clauses therefore prefer to state expressly what events are covered, i.e. what events will trigger the operation of the clause. The contents of that list should be a matter for careful negotiation. Commonly listed events include acts of god (fire, flood, earthquake, tsunami etc), war, terrorist acts, riot, strike, civil unrest, epidemic, critical shortage of key materials and government and judicial orders. However, these events may not all be appropriate in every case, while other possibilities may be included in suitable circumstances.
Therefore, when drafting and negotiating a force majeure clause it is important to consider what events are intended to be covered. The importance of defining trigger events carefully is well illustrated (although in a different context) by current legal disputes in Bangkok about whether the major damage caused by political violence last year can be classified as terrorist activity (which would trigger certain insurance exemptions) or civil unrest (which would not).
Force majeure clauses often also include a general phrase such as ‘other exceptional events which the contractor could not reasonably provide against or avoid’. Such provisions may be vigorously opposed by employers for the obvious reason that they introduce uncertainty and spread the ambit of the clause much more widely. Even if general words of this kind are included, the exact wording should receive particular attention to ensure that it does not extend the relief from liability to circumstances where liability ought not to be excused.
Finally, the clause must identify what impact the event must have in order to trigger the clause. For example, will a flood qualify as force majeure if it merely delays the works, or must there be actual prevention of the works? Is additional cost a sufficient impact, even without any schedule impact? A well drafted force majeure clause defines trigger events both by the nature of the event and by the required extent of impact.
Having defined the trigger events, the clause should state the consequences if such events occur.
For example, under the FIDIC Silver Book a Contractor who is prevented from performing any of his obligations under the Contract by Force Majeure shall be entitled to appropriate additional time and money. This is subject to a long-stop date: where performance is prevented for a continuous period of 84 days or multiple periods totalling more than 140 days, either party will be entitled to terminate the contract without any right to pursue the non-performing party for breach of contract.
Other contracts may take a different approach. For example, some contracts state that all performance by both parties is suspended for as long as the effects of the force majeure event continue, i.e. the non-performing party is relieved of all liability for non-performance and the other party can neither sue for damages nor terminate the contract because of the non-performance. Occasionally contracts provide for the contract to be discharged altogether upon the occurrence of a force majeure event, although this drastic outcome is unusual. Occasionally too we have seen contracts that will award the contractor additional time but no additional payment.
Again, these are matters for negotiation and agreement in each case. As a general point, however, it is just as important to define the consequences carefully as to define the events that act as triggers in the first place.
A party should not be entitled to rely on an event which is has caused itself, or which it could have avoided. It is therefore common for force majeure clauses to require that an affected party must have taken reasonable endeavours to avoid or mitigate the consequence of the event. Alternatively, though with the same effect, the clause may define force majeure in terms of delay or failure in performance which could not reasonably have been avoided.
Notices are always a bugbear and force majeure clauses will normally impose an obligation on the affected party to report the alleged force majeure event to the other party. A well drafted clause should therefore address the following points:
- To whom the report is to be made?
- How soon is the report to be made?
- What form is the report to take?
- What are the consequences of a failure to report (for example, is service of a valid notice a condition precedent to claim relief, so that a failure to notify will bar any claim)?
Relief under general law in Asia
It is important to remember that even if there is no express contract term which addresses force majeure, there may be relief available under the general principles of law governing the contract. For example, this would include:
- Singapore, Hong Kong, Malaysia, Australia – the common law doctrine of frustration;
- Indonesia – sections 1244 and 1245 of the Indonesian Civil Code
- Thailand – sections 205 and 219 of the Thai Civil and Commercial Code
However, while most legal systems include ‘safety valves’ of this kind, they are usually rather limited in scope and less clear and certain than a well drafted contract clause. Where it is possible to agree a contract clause, it will be unwise to rely instead on general principles of law as the only source of relief from force majeure.
Economic Force Majeure
It is not uncommon for contractors to argue that even though performance is technically possible, it has become so massively more expensive that it is ‘economically’ impossible due to matters such as a massive unforeseen rise in material or labour costs, unforeseen rises in operating costs (e.g. oil prices, rig hire rates) or other similar reasons.
A much publicised case of this kind was Donald Trump’s claim that the global financial crisis constituted an event of force majeure that relieved him of liability under a US$40 million personal guarantee of loans for construction of the Trump International Hotel and Tower in Chicago. When the credit crisis led to slower sales of units in the property and consequent repayment difficulties, Trump tried to avoid his guarantee liability by relying on a comment by Alan Greenspan (former Chairman of the US Federal Reserve) that ‘We are in the midst of a once-in-a-century credit tsunami’.
The case was settled before the court ruled but it is widely thought that Trump’s argument would have failed. In most cases where similar arguments have been run, ‘economic force majeure’ has been rejected unless there was an express financial hardship clause in the contract or unless the contract addressed the issue separately through a price fluctuation or price escalation arrangement. Otherwise, courts and arbitrators tend to say that parties to a contract are deemed to accept commercial/financial risk, so that economic hardship (even severe hardship) is not ‘impossibility’: ‘The fact that it is much more expensive [for contractor to perform], even very greatly more expensive for it to do so, does not mean that it cannot do so’.1
So what can you do when performance on a project is hit by a major external event?
- Check whether there is a force majeure clause in the contract and establish whether it applies.
- If not, consider whether the event is:
- beyond the reasonable contemplation and control of the parties; and
- so severe that performance is rendered impossible (or fundamentally different).
If the above is the case then the applicable law may provide a remedy but it’s not an easy route and if the claim is based upon changes in economic circumstances then expect it to receive short shrift from the judge.
- Above all, prepare prudently in advance by agreeing a contractual force majeure clause which is properly drafted to cover relevant risks and to provide the appropriate relief.