We anticipate that many parties may attempt to rely on the diplomatic restrictions to justify why they are unable to perform in accordance with their construction contracts. In this context, there are a number of possible avenues which those facing non-performance issues, as a result of the restrictions which have escalated rapidly, may wish to explore.
In this article, we consider (1) whether the recent event/restrictions could be treated as force majeure under your contract (using FIDIC as an example) or at law; (2) what parties may do to protect their positions; and (3) other courses of action which may excuse non-performance.
Are parties able to rely on the force majeure provision in their contract?
Force majeure provisions are commonly included in construction contracts to address certain risks where neither party is culpable or are difficult to manage (e.g. insurers will not cover the risk in question).
Whether the diplomatic restrictions constitute force majeure depends upon whether the events or circumstances which give rise to the same are risks that the other party expressly assumes under the contract. Accordingly, your contract should be the first point of reference.
Generally, a force majeure event is an event beyond the parties' control that renders performance of their obligations under the contract "impossible" rather than more difficult, time-consuming or expensive. A contract becomes "impossible" to perform if a party has no way to perform its obligations.
Force majeure clauses commonly use terms such as "impossible" or "prevent". In the GCC countries there is limited authority on how these terms are construed, however, in our experience force majeure is likely to cover not only "strict impossibility" but also situations where performance is so onerous that, on any objective view, the affected party could not be expected to perform.
Under the FIDIC 1999 Red Book, force majeure is defined as being an "exceptional" event "or circumstance" that is beyond a party's control that could not reasonably have been provided against, avoided or overcome and which is not substantially caused by another party.
FIDIC provides a broad definition of force majeure events and a non-exhaustive list of examples of potential events which include natural disasters, war, rebellion, riots and natural catastrophes.
Under FIDIC, relief is only available where you have been prevented in some way from performing your obligations. Actual prevention must be demonstrated rather than just increased difficulty and/or cost in performing the works. Courts in the UK consider that prevention must be physical or legal. Therefore, a sharp increase in the cost of performance will not give rise to force majeure. In our experience the Courts in many civil law jurisdictions are inclined to apply a similar test.
This is a high threshold to meet.
Whilst each case must be viewed on its own facts and merits, we are of the view that in most cases the current diplomatic restrictions in the GCC are unlikely to meet the threshold of preventing a party's performance.
A more likely result is that the restrictions will mean that manpower and materials are difficult to procure and will be procured from or directed through countries which the restrictions do not affect. This is likely to cause an increase in the price of manpower and materials together with the potential to cause delays.
You have identified a force majeure event – what next?
If you are able to meet the criteria for a force majeure event under your contract, then you should consider the entitlement which arises. Under FIDIC, a party will be entitled to not only an extension of time but also the costs it incurred as a result of the force majeure event.
In order to protect your entitlement, you should promptly notify the other party of the event, ensuring that you comply with any notice requirements under your contract. If you fail to do so you may lose your entitlement.
In order to protect your position, you should keep detailed records demonstrating how the force majeure event has prevented performance and the consequences / impact of the event.
You will also likely be under an obligation to mitigate the impact of the force majeure event and should take reasonable measures to effect the same. For example, you could reduce any idle manpower and re-negotiate your supply contracts.
Force majeure provisions in a construction contract usually provide that the parties may suspend performance of their obligations or, in extreme cases, terminate the contract if the force majeure event persists for a prolonged period.
Parties should be aware, however, that if they suspend performance of their obligations in circumstances where they are not entitled, they are exposing themselves to a claim for breach of contract and their performance bond could be at risk.
Can the law help if you are unable to meet your contractual criteria for force majeure?
Absent a contractual right, the civil codes of the GCC countries provide a party to a construction contract with a right to terminate the contract if an event occurs that prevents it from complying with its obligations under the same:
"If any cause arises preventing the performance of the contract or the completion of the performance thereof, either of the contracting parties may require that the contract be cancelled or terminated as the case may be." (Article 893 in the Muqawala section of the UAE Civil Code, Article 402 and 704 of the Qatar Civil Code)
The above provision will capture force majeure events which prevent a party from performing its obligations under a contract; however, the above only applies in circumstances where it is "impossible" to comply with your obligations. In our experience, this is not concerned with "strict impossibility" but where performance is extremely or unreasonably difficult. Even so, it is unlikely that the diplomatic restrictions in their current form would give rise to an entitlement under the above.
Having said that, it should also be noted that if a party is able to demonstrate that it is "impossible" for it to comply with its obligations under a construction contract then the law entitles it to payment for the work completed up to the force majeure event:
"If the Contractor commences performance and then becomes incapable of completing it for a cause in which he played no part he shall be entitled to the value of the work he has completed and to the expense he has incurred in the performance up to the amount of the benefit the employer has derived therefrom." (Article 894 of the UAE Civil Code and Article 704 of the Qatar Civil Code)
What if I am unable to rely on force majeure under my contract or at law?
If the recent events affect you and you are unable to rely on the force majeure provisions in your contract or the governing law you should consider whether the doctrine of "changed circumstances" may apply to your situation:
"If exceptional events of a public nature which could not have been foreseen occur as a result of which the performance of the contractual obligation , even if not impossible, becomes onerous for the obligor so as to threaten him with grave loss, it shall be permissible for the judge in accordance with the circumstances and after weighing up the interests of each party, to reduce the onerous obligation to a reasonable level if justice so requires, and any agreement to the contrary shall be void." (Article 249 of the UAE Civil Code and Article 171(2) of the Qatar Civil Code)
In essence, the doctrine of "changed circumstances" provides a party with a right to submit an application to the Court or arbitral tribunal which seeks an amendment to their construction contract to rebalance the risk of an exceptional event, such as a substantial increase in the price of construction materials.
The following four conditions are necessary for the application of this doctrine:
- an exceptional event must occur;
- the event must be of a public nature not just project specific;
- the event must be unforeseeable; and
- it must result in an excessive loss but not making performance impossible.
It is a matter of high probability that a Court or arbitral tribunal would consider the current diplomatic restrictions in the region as exceptional and of a public nature. In this context, the restrictions were not reasonably foreseeable and may result in excessive loss to parties that are reliant on the free movement of labour and materials within the region.
Given the above, if you find that the current restrictions do not render your performance "impossible" but they cause an excessive increase in costs which alters your contract's commercial risk it would be wise to consider the possibility of applying to the Court or arbitral tribunal requesting an order which returns the contract's risk profile, including its commercial risk, to its initial position.
Finally, it should be noted that the above articles of the law, pertaining to the doctrine of "changed circumstances", are mandatory provisions and will apply notwithstanding any contractual provision to the contrary.
As we have highlighted, there are number of avenues which may assist you in managing the consequences of recent events. If you are affected, instigating a dialogue with the employer may be a good starting point. Even then, understanding how the impact of the event may affect your obligation to perform is vital.
For further information please contact a member of our team in Dubai: