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Mon 14 Mar 2011 12:00 AM

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Force majeure

Stopping construction work in countries affected by the current Middle East uprising poses important issues to contractors over their legal agreements

Force majeure
Work Stoppage: unrest situations pose contractual issues for contractors.

The ongoing instability in North Africa
has been disruptive to many Gulf contractors that may have started 2011 with
plans to capitalise on the opportunities in the region. In an online poll last
week, almost half of Construction Week readers said that they had removed their
employees from the affected areas, which at the time of writing included states
as far east as Oman and Saudi Arabia. More than 28% said their customers had
suffered significantly.

At the start of March it was reported that AECOM, the
US-based consultancy, had removed its expatriate workers from Libya, the
scene of some of the most intense civil unrest. The company had been working on
a number of road and infrastructure projects that would help modernise the
historically insular country, and since 2008 had been playing a vital role as
program manager for the Libya Housing and Infrastructure Board. Executives told
Reuters, the news service, that it did not know when its projects would resume.

Stopping construction projects and removing workers during
dangerous circumstances is a big operation for companies. Beyond the costs of
repatriation, lawyers say that it is not as simple as contractors informing
clients that they will leave and heading to the airport.

The contractual issue revolves around the invoking of a
clause in the contract between parties called force majeure. Essentially this
clause states that in extreme circumstances where an event cannot be expected
or controlled and prevents the execution of contracted work, then a suspension
of that contracted schedule is justified. Occasionally, say lawyers, contracts
are cancelled outright.

“Force majeure is when a party has no control over the
circumstances and the construction is on hold or terminated,” says Walid
Jaafar, partner at Dubai-based Fichte & Co. “You see it in real estate
where, for example, the clause is invoked if a project has no power or
electricity. It is when the company has fulfilled all possible obligations and
the circumstances are beyond the company’s control.”

Though rioting on the streets in Libya has been generally accepted
to be within force majeure – which typically is associated with natural
disasters – counterparties must still follow a protocol. The contractor must submit details to their
client that they intend to suspend operations in line with the uncontrollable
circumstances. But the client still has grounds to appeal against the
invocation of force majeure, and the contractor will still need to present a
strong case.

“Any interested party, before working on a project, must
make sure that force majeure is in place,” explains Stephen Hunt, regional head
of Al Tamimi & Company’s construction and engineering division in Dubai. “They need a
complete case, as they do not want to face the accusation that it is used as an
excuse to stop work. Where it is resolved depends on the jurisdiction: if it is
to be settled in court, then it will be a court; if arbitration, then
arbitration.”

Jaafar says he is currently advising a client wishing to
pull out of one of the countries that has seen unrest by using the force
majeure argument. There are a lot of details to cover in these discussions as
the client “might want to contest, as the acceptance of force majeure is not a
given”. The situation is rife with potential ambiguities that will be debated
in court.

Hunt explains that both contractor and client would usually
agree at the outset of the contract to cover their own costs in cases of force
majeure. But the money situation is made more complicated by the fact that the
key investors in a project – typically banks – will not accept the force
majeure risk. Instead, they may claim money from the developers in order to
secure a portion of their return, particularly if their investment in a project
will come in instalments in line with construction milestones.

“Certain banks will not accept force majeure risk when they
loan money to a project, as they would like to see their return and might have
some provision where they will still get paid,” he says. It very much depends
on the contract. Any force majeure is typically in favour of the banks, and
also perhaps other equity investors.”

Even before the series of uprisings that began in Tunisia,
contractors seem to be paying more attention to risk management when assessing
projects. Saleh Muradweij, executive director at Gulf Technical Construction
Company, the UAE civil contracting entity that is part of Drake & Scull
International, says the company has strengthened its risk management team.

“Usually the higher the risk, the higher the reward, so the
risk management to make a decision whether you want to take that risk and can
you manage it or not.”

Lawyers at ConstructionWeek’s Abu Dhabi conference last November emphasised
that the clauses of contracts must be carefully attended to at the outset of
business. Steve Garbe, contracts and commercial manager at Faithfull &
Gould, said that early discussion “introduces the problem before it
occurs”.

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Hal-Luke Savas 9 years ago

I think, in practical terms, you have to draw a line when streets are alight with rioters' fire bombs and bullets whizzing by and the contractors is trying to find someone at the Ministry to lodge his papers to invoke force majeure... In my view, banks not happy with force majeure clauses in construction contracts should not be in the market place! it is not in any body's interest to cherry pick risks!

In today's Europe, where economies are ravaged but banks saved at all cost, we should be ready for paradigm shift in banks-contractors relationship for logic and balance.