Force majeure is back under the spotlight following recent global events such as Ebola, ISIL attacks, the Ukraine crisis and associated sanctions, and falling oil prices. In this newsletter, we consider the extent to which force majeure provisions in international construction contracts, such as the FIDIC 1999 suite of forms1 ("FIDIC ") and the ENAA forms2, might provide relief to contracting parties for each event. We also consider the extent to which other common contract mechanisms might provide alternative solutions to parties.
FORCE MAJEURE UNDER FIDIC AND ENAA
Sub-Clause 19.1 of FIDIC includes a non-exhaustive list of categories of exceptional events or circumstances that might constitute Force Majeure, so long as the requirements of (a) to (d)3 are also met. The list expressly includes matters such as war, hostilities, invasion and acts of foreign enemies (Sub-Clause 19.1(i)), as well as terrorism and military or usurped power (Sub-Clause 19.1(ii)), which would suggest that terrorism, such as the ISIL attacks, and the hostilities in the Ukraine might in principle constitute events of Force Majeure. The list is non-exhaustive so, as long as (a) to (d) are met, an epidemic such as Ebola might also fall within the scope of the definition.
However, even if the above criteria can be met, relief is only available if the affected party has been prevented from performing any of its obligations by reason of the Force Majeure event. Such prevention must be physical or legal, and not merely economic unprofitability4. This is a high threshold which might not be met in many cases. Where, however, a contractor is so prevented from performing by Force Majeure, and proper notice has been given, then the contractor will be entitled to not only an extension of time but also additional costs incurred by reason of the Force Majeure (Sub-Clause 19.4). There is also the option for early termination of the contract in the event that the execution of the Works is prevented for a prolonged period by reason of the Force Majeure.
Sub-Clause 19.7 of FIDIC might provide an alternative avenue for relief where performance of the contract is affected by newly imposed sanctions. This provides that the parties will be discharged from further performance under the contract if any event or circumstance outside the control of the parties (including, but not limited to, Force Majeure) arises which makes it impossible or unlawful for either or both parties to fulfil its or their contractual obligations or which, under the law governing the contract, entitles the parties to be released from further performance of the contract. This might therefore apply to a situation where, for instance, difficulties have arisen in obtaining financing for the project or key project insurances become unavailable due to the effect of post-contract sanctions on the project or a project party. Ultimately, however, whether Sub-Clause 19.7 can afford relief will depend on the severity and scope of the relevant sanctions and the extent to which the project and parties are actually impacted.
General Condition ("GC") 37 of ENAA deals with force majeure. Similar to FIDIC, this also sets out a non-exhaustive list of categories of events that might fall within the definition of Force Majeure. ENAA cites usurpation of civil or military government and terrorist acts (GC 37.1(b)) and war, hostilities, invasion and act of foreign enemy (GC 37.1(a)). It also expressly refers to epidemics (GC 37.1(e)).
However, the major difference between FIDIC and ENAA is that under ENAA, relief is also available where the affected party has been "hindered or delayed" from or in performing any of its obligations under the contract by the Force Majeure event. "Hinder" has been interpreted as meaning to make performance more difficult, but not impossible5. Therefore, while the same types of events might fall within the definitions of Force Majeure in both contracts, it is conceivable that relief will be more widely available under ENAA than under FIDIC.
That said, while the contractor under ENAA will always be entitled to an extension of time for completion if it is prevented, hindered or delayed in performing the contract, it will not always be entitled to additional cost. The contractor will only be entitled to additional sums in the event of loss or damage to the Works caused by nuclear reaction, radiation, radioactive contamination, pressure waves or unforeseeable or uninsurable risks (GC 32.2), and damage or destruction caused by "War Risks". The owner is also obliged to pay to the contractor any increase in the cost of executing the Works that is in any way caused by or connected with War Risks (see GC 38.4).
OTHER CONTRACTUAL MECHANISMS
There will always be certain critical events affecting the project that do not fall within the scope of Force Majeure under an un-amended FIDIC or ENAA form of contract. For example, falling oil prices, or other changes in economic or market circumstances, that either affect the profitability of a contract or make the contract harder to fulfil. While ideally such matters should be expressly dealt with by amendments to the standard form wording, in many instances parties may simply not have anticipated the event in question prior to signing the contract. There may, nonetheless, be other provisions that might provide alternative (but in some cases only temporary) solutions:
Letters of Intent
In some cases, in advance of committing to signing a construction contract, the parties will agree that the contractor provides a limited scope of works for a certain price under the terms of a 'Letter of Intent' (sometimes called a 'limited notice to proceed'). This gives the employer the benefit of having the contractor undertake certain early work, e.g. off-site design and engineering work, or placing orders for long-lead items, without committing to the full cost of the project, at a time when it is not certain whether the project will be financially viable. However, letters of intent must be carefully drafted in order to fully protect the parties' respective positions (see our October 2010 newsletter). Further, contractors will no doubt seek to negotiate a "termination fee" if ultimately the project does not go ahead by a long-stop date. If the project does go ahead, it is essential that the parties conclude the final contract negotiations and sign the contract as a matter of priority.
Delaying access to Site, or Suspending the Works (Sub-Clauses 2.1 and 8.8 of FIDIC and GCs 10.2 and 41.1 of ENAA)
Another provision commonly found in construction contracts is the right for the employer to suspend the works at its discretion at any time. If work on site has not commenced, the employer could also defer giving the contractor access to the site, pending any decisions as to whether or not to progress with the project. Exercising these rights would, however, only be appropriate as a temporary measure; for example, if suspension is prolonged, the contractor may become entitled to request the suspended work to be omitted or even to terminate the contract (e.g. Sub-Clause 8.11 of FIDIC and paragraph 2 of GC 41.1 of ENAA). Further, both delayed access and suspension will typically entitle the contractor to an extension of time and additional cost (and, potentially, profit) incurred as a result (e.g. Sub-Clauses 2.1 and 8.9 of FIDIC and GCs 40.1(e) and 41.3 of ENAA).
Variations/Changes (Sub-Clause 13.1 of FIDIC and GC 39.1 of ENAA)
Construction contracts typically include a mechanism which allows the employer to vary the contractor's scope of works or services. A variation mechanism can be a useful tool to address changes in the employer's needs, for example arising as a result of a change in economic circumstances. However, employers cannot use the variation provisions to remove work from the contractor and award it to a, perhaps cheaper, third party, or unilaterally decrease the scope of the whole project, without compensating the contractor (see Sub-Clause 31.1 of FIDIC and Abbey Developments Ltd v P.P. Brickwork Ltd (2003) C.I.L.L. 2033). Some contracts will impose a maximum decrease (and increase) on the value of variations ordered (e.g. GC 39.7 of ENAA).
Change in law (Sub-Clause 13.7 of FIDIC and GC 36 of ENAA)
A change in law clause might provide alternative means for a contractor to secure time and cost relief for the impact of a change in economic conditions. For example, where a change in economic conditions has led to the implementation of legislative or regulatory changes affecting the costs and expenses of the contractor (e.g. financing options). Depending on the scope of the clause, a contractor might make such claim on the basis of changes not only in the laws of the country in which the site is located (FIDIC), but also in any country where the plant is manufactured (as is the position under ENAA).
A change in law commonly gives rise to an entitlement to an extension of time and additional cost, but rarely termination (unless the circumstances fall within a provision such as Sub-Clause 19.7 of FIDIC).
Termination (Sub-Clauses 15.5 and 16.2 of FIDIC and GC 42.1 of ENAA)
Where a decision has been made to terminate the project, the employer could then invoke a termination for convenience clause (if available). However, exercising such right will usually require the employer to compensate the contractor for its costs including those that it has incurred in the expectation of completing the works, removal of temporary works and repatriating staff and equipment (Sub-Clause 19.6 of FIDIC). Under many contracts, and as is provided in ENAA, the contractor will also be entitled to payment of a reasonable amount of profit for the work that it was unable to complete (see GC 42.1.3(e) of ENAA). Under some bespoke contracts, termination may also be automatically triggered by the termination of key project agreements (e.g. a concession agreement).
For contractors that are concerned as to the availability of future funds for the project, FIDIC also provides a right of termination if the employer does not provide reasonable evidence of the financial arrangements in place (see Sub-Clause 16.2(a)).
There are a number of contractual mechanisms that might enable parties to deal with changed circumstances due to matters outside their control or making. The extent of relief available will depend on the circumstances and the express wording of the contract, as well as of course commercial and practical considerations concerning the parties and the project at that time.