Ebola & ISIS: Force Majeure under the FIDIC form and Civil Codes

The recent incursion of ISIS forces into Iraq is a matter of considerable concern to many who are involved in projects in Baghdad and Syria, who need to ensure the wellbeing of their staff and security of the works in difficult and often unpredictable circumstances. Ebola is equally problematic in West Africa and beyond, where there are concerns about workforces falling ill, travel being restricted or delayed both domestically and internationally, and the impact of government quarantine measures.

This article aims to consider (i) what events might constitute a force majeure in the international context; (ii) force majeure under the FIDIC form and civil codes; (iii) how to establish force majeure; and (iv) practical tips on how to deal with a potential or actual force majeure event.

What is force majeure?

In general terms, a force majeure event is an event that relieves the parties from performing their obligations under the contract. Such events are usually exceptional events that are deemed to be beyond the control of the parties, and which make performance of the contract physically or legally impossible, as opposed to merely more difficult, time-consuming or expensive.

There is no generally recognised doctrine of force majeure at common law, where force majeure exists as a concept with an unclear meaning. Force majeure will only apply at common law if there is a specific contractual provision which defines the type of occurrence(s) that might constitute a force majeure event. Often, the procedures that need to be followed when a party seeks to declare force majeure, and the consequences of force majeure events are also set out (as is the case in the FIDIC form).

The civil law jurisdictions on the other hand define what is meant by force majeure, and in some cases, have a requirement for force majeure events to be unforeseeable. This raises the force majeure threshold considerably above that which is seen at common law.1

Force majeure under the FIDIC form

Force majeure is widely drawn under the FIDIC form to reflect the greater risk that is inherent in international projects, where parties often contract in jurisdictions that are outside their own. Sub-clause 19.1 of the 1999 Red Book (“the Red Book”) defines force majeure as an exceptional event or circumstance:

(a) which is beyond a Party’s control,
(b) which such Party could not have reasonably provided against before entering into the Contract,
(c) which, having arisen, such Party could not reasonably have avoided or overcome, and
(d) which is not substantially attributable to the other Party.

Sub-clause 19.1 then goes on to provide a non-exhaustive list of the kind of events or circumstances that might amount to force majeure. These include:

(i) war, hostilities (whether war be declared or not), invasion, act of foreign enemies,
(ii) rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war,
(iii) Riot, commotion, disorder, strike or lockout by persons other than the Contractor’s Personnel and other employees of the Contractor and Sub-contactors
(iv) munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio-activity, and
(v) natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.

Sub-clause 19.2 deals with notice, and provides a time bar in terms that:

“if a party is or will be prevented from performing any of its obligations under the Contract by Force Majeure, then it shall give notice to the other Party of the event or circumstances constituting the Force Majeure and shall specify the obligations, the performance of which is or will be prevented. The notice shall be given within 14 days after the Party became aware, or should have become aware, of the relevant event or circumstance constituting Force Majeure.

The Party shall, having given notice, be excused performance of such obligations for so long as such Force Majeure prevents it from performing them”.

The consequences of force majeure appear at Sub-clause 19.4, namely:

“If the Contractor is prevented from performing any of his obligations under the Contract by Force Majeure of which notice as been given under Sub-clause 19.2, and suffers delay and/or incurs Cost by reason of such Force Majeure, the Contractor shall be entitled subject to Sub-clause 20.1 to:

(a) an extension of time for any such delay, if completion is or will be delayed, under Sub-clause 8.4, and
(b) if the event or circumstance is of the kind described in sub-paragraphs (i) to (iv) of Sub-clause 19.1 and, in the case of subparagraphs (ii) to (iv), occurs in the Country, payment of any such Cost….”

Notice of Force Majeure is given under Sub-clause 19.2 and the notice is to be delivered in accordance with Sub-clause 1.3.

Under Sub-clause 19.6, if the execution of substantially all of the works is prevented for a continuous period of 84 days (or for multiple periods that total more than 140 days) by reason of Force Majeure, then either Party can issue a notice of termination, which will take effect seven days later. The Engineer will then determine the value of the work that has been done, and other costs such as demobilisation costs.

The 2008 Gold Book (“the Gold Book”) is also important in the context of force majeure as it represents a more collaborative, risk sharing approach than that which is seen in the 1999 suite of contracts: indeed, FIDIC is likely to follow the Gold Book approach at such time as the 1999 suite is revised.

The Gold Book does not contain the usual 1999 suite Clause 19 force majeure provisions. Instead, it drops Clause 19 completely in favour of a new Clause 18 that is headed “exceptional risks”, and Clause 17 (which was formerly risk and responsibility) has been re-named “risk allocation”. The definition of exceptional risks is very similar to the force majeure definition at Clause 19, but it is Clause 17 that makes the Gold Book stand out from the 1999 suite. Clause 17 sets out the risks that the Employer and Contractor are to bear in a very detailed manner, having separate regard to the Design-Build Period and the Operation Service Period of the contract. The Contractor is entitled to an extension of time and its costs if there are any exceptional risks or Employer risks during the Design-Build Period, but to its costs only if those same risks occur during the Operation Service Period of the contract (to reflect the fact that the Operation Service Period cannot be extended). It is anticipated that FIDIC will follow the form adopted in the Gold Book when it releases its updated version of the 1999 Form.

Establishing force majeure

Is it a true force majeure event?

In order to establish Force Majeure, the Contractor will have to establish that the force majeure event is included within one of the definitions in Sub-clause 19.1 (or is similar in nature), and that he has been prevented from performing his contractual obligations in that performance has become physically or legally impossible, as opposed to more difficult or unprofitable.

Taking this and applying it to the ISIS insurgency, it should be possible to establish that the actions of ISIS in trying to establish an Islamic State within Iraq constitutes war, hostilities, terrorism, and invasion and so the existence of a Force Majeure event ought to be able to be satisfied. Epidemics are not explicitly covered under Sub-clause 19.1, but it must at least be arguable that the Ebola outbreak is exceptional in its extent and nature, in which case it might be regarded as being a natural catastrophe.

Could the Party have reasonably provided against the Force Majeure before entering into the Contract / is the Force Majeure beyond the Party’s control or attributable to the other Party / could the Party have avoided or overcome the Force Majeure event once it had arisen?

These issues are relatively straightforward and the ISIS insurgency and Ebola threat provide some good examples. ISIS taking control of Bagdad is arguably an event that could not be prevented or avoided despite the exercise of reasonable diligence by either Party; indeed neither the current Iraqi government or the international community has been able to effectively challenge the advance of ISIS. However, if parties were affected by what is happening in Bagdad, then there are probably some reasonable precautions and reasonable alternative measures that could be taken to avoid the ISIS threat.

As far as Ebola is concerned, because it is not an airborne disease, again, there are likely to be various measures that contractors could take to protect against the risks the disease poses. For example, medical checks could be imposed and employees could be excluded from site if necessary. Or materials could be sourced from alternative locations and/or suppliers in the event that the supply chain was affected (the same would apply to any logistical issues arising out of the ISIS threat).

Is the Contractor being prevented from performing any of his obligations under the Contract by reason of the Force Majeure?

Causation issues may arise in circumstances where a Party is concerned that conditions at or outside the site are too dangerous to allow its staff or sub-contractors to continue working. The issue here is that if the Contractor’s response was to evacuate the site, a situation would not be created whereby work would be prevented from taking place. The Contractor’s actions in evacuating the site would stop work, not the ISIS threat, regardless of how strong that threat is, or is perceived to be.

An alternative scenario may arise in relation to causation whereby the Contractor is unable to carry out work that is on the critical path, but he can carry out non-critical path work. Whilst this may cause substantial problems, it would probably not be prohibitive in terms of performance of the Contractor’s obligations.

Foreseeability (under the civil codes)

If foreseeability is an issue under any applicable civil code (foreseeability does not feature in the FIDIC form), then the question that has to be asked is if the force majeure event would have been foreseeable to the hypothetical reasonable party at the time the contract was entered into. This question is likely to create substantial difficulties.

The current security situation in Iraq is seen by some as being entirely different from the problems that have been faced by Iraq in previous years and it is probably arguable that no reasonable party could have foreseen the rapid rise of ISIS in the manner in which it has occurred: ISIS taking control of Bagdad would probably also be unforeseeable. Contractors who have entered into contracts which were connected with areas that were previously secure, but that have subsequently fallen into turmoil should have less difficulty in establishing the foreseeability element of force majeure.

That said, given the very turbulent history of Iraq which includes the Iran-Iraq war, and the deposing of Saddam Hussein and the turbulence that followed, the contrary argument is that it was foreseeable that an insurgency such as ISIS might gain ascendancy in Iraq and that Baghdad might fall into the control of the insurgency and/or occupy sites in the region.

Much would depend on the site, the precise situation that was on foot around the time the contract was entered into, and the extent to which the parties recognised the force majeure event as being a likely risk. If, for example, the site was associated with a strategic energy asset in an isolated location, then it would be more realistic for it to be considered a likely target.

Ultimately, whether the force majeure event is foreseeable to the reasonable party at the time the contract was entered into would be a matter for expert evidence. The political stability of Iraq and the surrounding area, the general security position in Iraq and the surrounding area, and the strength and capability of insurgency groups such as ISIS at the time the contract was entered into would all have to be considered. Whilst the history of Iraq may suggest that it was foreseeable that an insurgency may gain ascendancy, whether that insurgency would have been expected to come from ISIS is a much more difficult issue and the arguments for and against are therefore reasonably well balanced.

If any applicable civil code requires force majeure events to be unforeseeable, then it would probably make it much more difficult for the Contractor to establish force majeure. On a similar note, if the event is foreseeable, then it will be more difficult for Contractors to argue that the impact of the force majeure event could not be mitigated, or alternative arrangements put in place in order to honour their contractual obligations.

Entitlement to additional time and cost

Additional time

Under the Red Book, the contractor would be entitled to an extension of time in circumstances where delay affects completion, subject to the time bar provision at Sub-clause 19.2 in relation to the giving of notice. The entitlement to any additional cost however is slightly more complex.

Additional cost

The entitlement to additional cost relates only to those force majeure events listed in Sub-clause 19.1(ii) – (iv). Therefore, taking the ISIS example again, if the site is located near borders with countries that are affected by the ISIS threat, there would be no entitlement to additional costs as ISIS would not physically be in the same country.

The key point to note about claims for additional time and cost is that they are subject to the time bar at Sub-clause 20.1. Under Sub-clause 20.1, claims for additional time or payment need to be made:

“…not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance”.

Any claim for time or money will therefore be lost if it is not made within 28 days after the Contractor became aware of the force majeure event or circumstance, or should have been aware of it. The Contractor should keep such contemporary records as may be necessary to substantiate its claim.

A fully detailed claim needs to be provided within 42 days of the date on which the contractor became aware, or should have become aware, of the event or circumstance, and fully supporting particulars of the basis of the claim, and of the extension of time and/or additional payment claimed must be included. Sub-clause 20.1 goes on to make further provision for a Force Majeure that has a continuing effect.

Practical tips when dealing with a potential or actual force majeure event

• Employers sometimes amend the definition of force majeure at the drafting stage. They may, for example, narrow the definition of force majeure, exclude the right that otherwise exists to payment of costs, or limit the termination provisions. It is always worth checking your contract to see if any bespoke amendments have been made which alter the usual force majeure provisions in order to avoid being caught out.
• As soon as you become aware of a potential force majeure event that may potentially impact the performance of your contractual obligations or the works, serve notice under Sub-clause 19.2. It is better to err on the side of caution and serve a notice that transpires not to be necessary, than to serve a notice too late and lose your entitlement to make a claim. Sub-clause 19.2 is rather draconian in that the time bar starts to run from 14 days from when the Contractor should have become aware of the Force Majeure event, and common and civil law jurisdictions will generally uphold time bar provisions.
• If you find yourself in a potential force majeure situation, you need to reduce the risk surrounding whether an event is a true force majeure event by entering into without prejudice discussions with the other party. Try and agree what will constitute a force majeure event before the event actually arises, and / or agree legitimate steps you can take to mitigate the risk in a given set of circumstances. If all else fails, speak to the other party to see if you can suspend or terminate the works rather than declaring force majeure to avoid any liability that might otherwise arise from a false declaration of force majeure.
• Before making any firm decisions about whether to cease work, obtain as much information as you can about the force majeure event. In the case of ISIS, try and get reports from security advisers and any information that might be published by government agencies to support the existence of your force majeure event.
• If you do have to make a formal declaration of Force Majeure, once you have served notice of Force Majeure under Sub-clause 19.2, you need to present your claim for additional time and/or cost under Sub-clause 20.1 within 28 days of the date on which you became aware of the Force Majeure event or circumstance, or should have been aware of it, and your fully particularised claim should follow 14 days later. Your claim may be subject to a decision of the arbitral tribunal in due course so provide as much documentary evidence as you can.
• If your claim for relief for Force Majeure looks doubtful under the FIDIC form, consider whether any provisions of the relevant civil code might offer you assistance. Most civil codes provide relief for true force majeure events, but a word of warning. Not all provide a clear right to compensation,2 and some require the force majeure event to be unforeseeable at the time the contract was entered into, which can create considerable difficulties in countries such as Iraq that are mired by security and political conflict, as noted above.
• If you do need to demobilise and/or evacuate, prepare an inventory of all equipment and materials on site and secure photographic, video and/or documentary evidence of the physical condition of the site and works, as well as the progress of the works. Be sure to copy any paperwork in relation to progress payments, variations, or any pending claims before you leave. If you are unable to take soft copies, endeavour to transport hard copies to a safe and secure location. This documentation will be invaluable in substantiating future claims or defences that you might bring in due course relating to the Force Majeure, or in circumstances where theft or damage occurs due to the actions of a third party. Most claims and defences fail due to a lack of supporting evidence.

Conclusion

Force majeure can be a mine field, not least because the definition of force majeure can prove to be problematic and difficult issues of causation and foreseeability can arise.

A possible solution may be found in the advance warning procedure that appears in Sub-clause 8.4 of the FIDIC Gold Book which may assist to better manage difficult events. Sub-clause 8.4 provides that each Party shall endeavour to advise the other Party in advance of any known or probable future events or circumstances which may adversely affect the work, increase the Contract Price or delay the execution of the Works or the Operation Service. The Employer’s Representative may require the Contactor to submit an estimate of the anticipated effect of the future events or circumstances, and/or a proposal under Sub-Clause 13.3 [Variation Procedure].

If parties incorporate the provisions of Sub-clause 8.4 of the Gold Book into their contracts, then it is to be hoped that the parties would be able to better manage force majeure type events, and that the formal declaration of force majeure would be the very last resort.

By Lisa Kingston, Fenwick Elliott LLP

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• 1. See, for example, Article 1148 of the French Civil Code which provides that a force majeure event must be unforeseeable, and render performance both impossible and outside the control of the party who seeks to invoke suspension of the relevant contractual obligation.
• 2. See, for example, Articles 168 and 425 of the Iraqi civil code which make no mention of compensation.