ISIS Update: Force Majeure and Frustration

By Jonathan More, Senior Associate, Fenwick Elliott

We wrote on this topic at this time last year. Unfortunately whilst it appears that West Africa is finally (almost) Ebola-free, the threat posed by ISIS (or “Daesh”), far from easing off, remains not only current but at risk of escalating. What was originally an insurgency into Iraq has spread into Syria and become what appears to be a longer-term claim to permanent territory as the so-called Islamic State.

The recent attacks in North Africa, Paris and on the Russian passenger jet have only served to intensify the geopolitical situation and places another risk on this area: the escalation of military action by countries from outside the region.

All of this makes the construction of projects in the region increasingly difficult and fraught, especially where the delivery of projects needs to be balanced with ensuring the well-being of staff and security of the works.

It is therefore timely to revisit the relevant legal implications that may arise in affected areas, covering both a reminder of how force majeure will operate, and also when the principle of frustration might apply.

What is force majeure?

In general terms, a force majeure event is one that relieves the parties from performing their obligations under the contract. Such events are usually exceptional occurrences 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-contractors,
(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.”

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 has 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 sub-paragraphs (ii) to (iv), occurs in the Country, payment of any such Cost….”

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 for demobilisation.

Establishing force majeure

Is it a true force majeure event?

An event within one of the definitions in Sub-clause 19.1 (or which is similar in nature) must have occurred, and the contractor must have been prevented from performing his contractual obligations because that performance has become physically or legally impossible, as opposed to more difficult or unprofitable.

It is possible that the Daesh situation has become clearer over the past year or so. Many might argue that Daesh is no longer simply an insurgency. It controls large areas of Iraq and Syria which are now under continual military attack from a variety of sources. This should assist in establishing that the continued actions of Daesh, and the military action of others against it, constitute war, hostilities, terrorism and invasion, and so the existence of a force majeure event ought to be able to be satisfied.

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?

There are two issues here. First the extent to which it can be said that the party entering into the contract ought to have been aware of the potential threat posed by Daesh. However, the longer Daesh retain a foothold in the region, and with “territory” under its control, there is an argument that each Party to the contract in question will have had more time and more knowledge with which to take appropriate measures to prevent events happening in and around relevant project sites. This fact will also impact upon matters of foreseeability as discussed below.

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 subcontractors 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 Daesh 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 whether 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.

Contractors who have entered into contracts which were connected with areas that were previously secure, but which have subsequently fallen into turmoil, should have less difficulty in establishing the foreseeability element of force majeure.

That said, for contracts entered into since the original Daesh insurgency, against the backdrop of the very turbulent history of Iraq, the contrary argument is that it was foreseeable that once Daesh gained ascendancy in Iraq and encroached into Syria, the region would remain, and probably become increasingly, unstable.

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.

Frustration under the FIDIC form

Immediately after those clauses referred to above that deal with force majeure, sub-clause 19.7 provides that the parties will be released from performance if required by governing law, or if any event beyond the control of the parties (including but not limited to force majeure) renders it impossible or unlawful for the parties to fulfil their contractual obligations.

In effect, Sub-clause 19.7 acts as a fall-back provision for events which render performance impossible or illegal, but do not fall within the definition of force majeure. In addition, Sub-clause 19.7 entitles the party seeking relief to rely on any applicable principle prescribed by the law governing the contract.

Accordingly, in relation to contracts governed by English law, the affected party will be able to invoke the concept of frustration, which2:

“occurs whenever the law recognises that without the default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract”.

It can be seen, therefore, how this may be a very relevant consideration for projects affected by Daesh. There is clearly increasing risk that relief from time-related damages provisions becomes secondary to issues such as the viability of projects themselves.

Whilst frustration is a difficult test to fulfil, it is not as difficult as the concept of impossibility (or illegality) referred to in Sub-clause 19.4 and the first limb of Sub-clause 19.7.

Another difference between force majeure and frustration is that notice of force majeure, for example under Sub-clause 19.2, can be given if a party is prevented (or will be prevented) from performing any of its obligations under the contract, and not just where a party is prevented from performing the entire contract as would be the case under the common law doctrine of frustration.

Labour shortages and bad weather were not sufficient in the case quoted above (Davis Contractors v Fareham). Similarly, changes in economic conditions, for example a sharp or sustained recession, will not frustrate a contract.3 Where the parties have made provision for the event within the contract, frustration will not apply,4 and similarly where an alternative method of performance is possible.5

For frustration to apply, what is required is a radical turn of events completely changing the nature of the contractual obligations.

An example of a contract that was frustrated is found in Atwal & Anr v Rochester6 where a building contractor suffered a heart attack and was unable to complete the building work. The judge held that the contract was a personal contract which had been frustrated by the builder’s illness. The consequences of that illness were such that it significantly changed the nature of the obligations between the parties such that it would be unjust to hold them to the contract. Other examples where it has been found include destruction of the subject matter of the contract by fire7 and landslip.8

Destruction due to some act of war or military action is the most likely relevant event in the circumstances we are considering. However, it may be that the “destruction” will have to be more fundamental than simply some or all of the civil works being destroyed, as these can be rebuilt. Destruction of all required infrastructure supporting the project might be one such case, as might destruction of the ability to extract oil from an oil field being constructed.

It is likely, however, that the option of frustration will be explored increasingly as the situation in Iraq and Syria intensifies.

Conclusion

Despite the recognised and known difficulties associated with Daesh in Iraq and Syria, two of the key principles that, in theory, might need to be utilised by contractors working in the region are inherently difficult to successfully pursue.

Force majeure can prove to be problematic, and difficult issues of causation and foreseeability can arise. Frustration is only slightly less difficult to establish.

As suggested last year, a possible solution in respect of force majeure 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 Contractor 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.

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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.
• 3. See Gold Group Properties Ltd v BDW Trading Ltd [2010] EWHC 323. A drop in the anticipated proceeds of sale did not frustrate the contract.
• 4. Jackson v Union Marine Insurance Co Limited [1874] LR 10 CP 125.
• 5. The Furnace Bridge [1977] 2 Lloyds Rep 367.
• 6. [2010] EWHC 2338.
• 7. Appleby v Myers [1867] LR 2 CP.
• 8. Wong Lei Ying v Chinachen Investments Ltd (1979) 13 BLR 86.