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Sat 5 Dec 2009 04:00 AM

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Economic Hardship Claims: Contractor’s sword or developer’s shield – Part 1

James Bremen, in the first of a two part series, compares the civil law concept of economic hardships in different jurisdictions and how they may apply in those respective areas.

Economic Hardship Claims: Contractor’s sword or developer’s shield – Part 1

The Middle East experienced an unprecedented boom between 2004 and 2007, which resulted in a huge number of construction projects being undertaken in a short space of time. As many of these projects near completion, times have changed. Boom followed by potential bust is a lethal combination resulting in contractors looking to recover, as much as possible, out of their existing and completed projects.

Many construction contracts in the Middle East have been drafted on a lump-sum basis, making it difficult for contractors to raise claims for additional money under the terms of the contract. In these circumstances, a number of contracts are instead, seeking to raise extra-contractual claims at law under the civil law concept of economic hardship. A claim for economic hardship may entitle a party, which would not otherwise have a legal/contractual claim, to raise a claim in the courts or arbitration on the basis that unforeseeable events have rendered the contract economically unsustainable.

Where the boom in construction led to considerable shortages of key construction materials and a huge rise in the cost of labour over a short period, it is hardly surprising that contractors who agreed lump sum contracts with no escalation provisions are actively looking for other basis, which to recover these additional costs from the developer. These claims are not, however, an easy panacea for contractors in financial difficulty and there are a number of important hurdles to overcome in order to succeed in a claim of this type.

This article outlines the doctrine of economic hardship and its application in various civil law jurisdictions, particularly the Middle East, and it considers the extent to which it might apply in conditions where a change in economic circumstances exposes a party under a fixed price contract to substantial loss. It is important to note that whilst the majority of these claims may be brought by contractors, in certain circumstances the remedy can also be used by developers who suffer increased project costs as a consequence of price escalation. The doctrine of economic hardshipThe doctrine of economic hardship developed under French civil law and is generally understood to apply, where an extraordinary and unforeseeable event of a general or public nature renders performance of a contract by one of the parties excessively onerous. In those circumstances, a party may be relieved from its contractual obligations.

The doctrine is similar to another, better known as, French civil law concept, ‘force majeure’, which allows a party to escape liability for failing to perform the contract as a result of human acts or acts of nature. Whilst common law jurisdictions have adopted the concept of force majeure, English law has not recognised the doctrine of economic hardship. Why? Because the doctrine goes against the principle of the sanctity of the parties bargain on which the law of contract is based, where under English law, in the absence of an express term, a party can only terminate on the grounds of frustration or impossibility.

The civil law countries of the Middle East have based their civil codes on the Egyptian civil code, which itself is based on French law. Thus the modern civil codes of many Arab countries are a blend of both Islamic Shari’ah, with its strong emphasis on justice and fairness, and the French law, where relief may be given for unforeseeable events. As a result, rules reflecting the doctrine of economic hardship can be found in many of these countries’ civil codes.

James Bremen is a partner in King & Spalding’s London office and a member of the Global Transactions Practice Group. Bremen has practised exclusively in construction law for more than a decade. He has significant experience in project development and dispute resolution both in the UK and internationally.

The opinions expressed in this column are of the author and not of the publisher.

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