March 04 2000
'Force majeure' is a concept which is widely used in international construction contracts. However, its meaning and effect can differ significantly between one contract and another, and between one jurisdiction and another. This article examine some of the features of force majeure provisions in construction contracts.
Underlying the concept of force majeure is a contracting party's concern that it should not be held to its obligations if performance is prevented by unexpected or unforeseen circumstances outside its control. Under English law, force majeure has been held to apply:
It includes the following events:
Subject to giving notices, a party who is prevented from performing any of
its obligations by force majeure is excused performance for as long as
the force majeure prevents it from performing. If the contractor is delayed
by force majeure, he is entitled to an extension of time. If the force
majeure (i) is any of the above events with the exception of natural catastrophes,
and (ii) with the exception of wars and hostilities, occurs in the country where the site
is located, the contractor is also entitled to be reimbursed for any additional
If the execution of the works is prevented for a continuous period of more than 84 days, or for multiple periods which total more than 140 days, then either party may give notice terminating the contract. If the contract is terminated the contractor is entitled to be paid for the following costs:
The FIDIC force majeure definition is wide. It must be an 'exceptional'
event beyond a party's control, but what constitutes 'exceptional' is open to
debate. The list of events included is illustrative only and does not necessarily
limit the general words of the definition.
Thus, if a sub-contractor defaults in the performance of its contract and the contractor could not have prevented the default through skilful management, the sub-contractor's default could fall within the force majeure clause if it is exceptional and makes it impossible for the contractor to perform.
Similarly, if the employer retains the services of a designer to provide design information on his behalf and the designer defaults in a major way, the employer may be relieved of responsibility for providing this information on time. The clause may also apply if the employer encounters exceptional difficulties in providing access to the site, relieving the employer of responsibility, but without compensating the contractor.
The clause could also cover matters such as the following:
In these cases, the party responsible for obtaining or maintaining the relevant
consent or approval or for securing performance by the utilities provider may
be relieved of responsibility under the force majeure clause.
The potential effect of the FIDIC force majeure clause is significant. However, where FIDIC is to be used in the context of a limited recourse financed project with high gearing and a single purpose project company, it is likely that the clause will be modified to reflect the terms of the project agreement. This agreement governs the project company's rights and obligations relating to the construction and operation of the project.
Force majeure clauses in project agreements are often detailed and carefully
drafted. They frequently divide the force majeure events into two categories.
The first is political force majeure, that is, risks that generally relate
to changes in the political environment (embargoes, riot, insurrection and blockade,
terrorist actions and sometimes war) or legal environment (changes in law or
licences, permits and consents necessary for the project) in the country where
the project is located.
The second is non-political force majeure. These events are (i) physical risks that might affect a project (eg, storm, tempest, earthquake, flood and other natural catastrophic events) and (ii) events that fall within the definition of political force majeure but which occur outside or do not directly involve the country where the project is located.
On the occurrence of a non-political force majeure event, the project company is entitled to an extension of the time for completion and relief from termination. However the project company is not usually compensated for any delay to its revenue stream that results from this delay in the works. The project company may thus have no alternative but to seek liquidated damages from the contractor to meet the shortfall. This means that the occurrence of a non-political force majeure event does not entitle the contractor to any extension of time under the construction contract. Thus, while the contractor may be given some relief from termination, it remains liable to the project company for liquidated damages.
By contrast, in the case of political force majeure, the project company is generally entitled to both an extension of time and compensation. Since the project company no longer needs the cashflow of liquidated damages to meet debt service the contractor is in turn entitled to an extension of time and its loss and expense under the construction contract.
Non-political force majeure can place the contractor in a very difficult position. Sometimes the project agreement provides for the concession period (rather than the date for completion of construction/commencement of operation) to be extended where delay is caused by a non-political force majeure event, but this is only a partial solution. Although it gives the project company an additional opportunity to generate revenue from the project at the end of the concession period, it does not solve the project company's immediate cashflow problem at or near completion of construction.
Insurance may provide a partial solution. If the non-political force majeure event is insurable (eg, fire or flood) then it may be possible to insure the losses resulting from the delay under an advanced loss of profit policy, although this cover will be subject to deductibles. If non-political force majeure events are not insurable then it is necessary to specify the circumstances in which either party can terminate. If the event is a catastrophic one, the period of delay before termination can occur should be short. For lesser events, the period should be longer.
The need for a carefully drafted and thoroughly worked-out force majeure clause is essential for the success of a long-running project and this clause will be followed very closely in the construction contract. In many jurisdictions the force majeure clause will be central to the allocation of the risk between the parties. An alternative is to adopt the approach of the PFI in the UK. This is to define force majeure very narrowly so that the clause is of less importance, but to include separate provisions dealing with other risks and responsibilities using different terminology.
In all cases, however, these
issues should be clearly addressed and their consequences specifically provided
For further information on this topic please contact Caroline Cummins at CMS Cameron McKenna by telephone (+44 20 7367 3000) or by fax (+44 20 7367 2000) or by e-mail (email@example.com). The CMS Cameron McKenna's web site can be accessed at www.cmck.com.
The materials contained on this web site are for general information purposes only and are subject to the disclaimer.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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