Construction & Engineering Law 2020 - Acc

2Force Majeure Clauses in Construction ContractsGiven that there is no definition, a tribunal may have regardto case law in which the term “Force Majeure” has been considered. For example, in Lebeaupin v Crispin ([1920] 2 KB 714) itwas said that:“This term is used with reference to all circumstances independentof the will of man, and which it is not in his power to control Thus war, inundations and epidemics are cases of force majeure; it haseven been decided that a strike of workmen constitutes a case of forcemajeure.”Of note, and in contrast to the FIDIC suite of contracts, thereis no entitlement to additional costs as a result of a Force Majeureevent.By clause 2.24.1, if it becomes reasonably apparent that theprogress of the Works or any Section is being or is likely tobe delayed, the Contractor must forthwith give notice to theEmployer of the material circumstances, including the cause ofthe delay, and must identify in the notice the event which, in itsopinion, is a Relevant Event (here, the Force Majeure event). Ifpractical, the notice should include particulars of the expectedeffects of the event, including an estimate of the delay to completion. If it is not practicable to provide that information in theinitial notice, the Contractor must provide such information, inwriting, as soon as possible thereafter.Subject to complying with the notice requirement set outabove, the Contractor will be entitled to an extension of time.Further, both parties have the right to terminate the contractif the works are suspended as a result of a Force Majeure event fora particular period (which is chosen by the parties and specifiedin the contract particulars).NEC3 / NEC4The term Force Majeure is not used in the NEC suite of contracts.However, NEC contracts have a concept of prevention events,which are events:1.that stop the Contractor completing the works or stop theContractor completing the works by the date shown in thelatest programme; and2. which:a. neither party could prevent; andb. an experienced Contractor would have judged at theContract Date to have such a small chance of occurring that it would have been unreasonable to haveallowed for it.If a prevention event occurs, the Project Manager is requiredto give an instruction stating how the event should be dealt with(see clause 19.1).Pursuant to clause 60.1(19), a prevention event is a compensation event (i.e., an event entitling the Contractor to an extensionof time and additional cost). Further, any instruction given bythe Project Manager in relation to the prevention event may alsobe a compensation event (for example, if it results in a changeto the works).The Contractor must notify the Project Manager of an eventwhich it considers is a compensation event and which the ProjectManager has not notified to the Contractor (see clause 61.3). Ifthe Contractor does not notify a compensation event withineight weeks of becoming aware of the event, it will not be entitled to an extension of time or additional cost.Subject to complying with the notification requirement setout above, a prevention event will, in principle, give rise to timeand cost relief.Further, the Employer may terminate the contract if the eventeither stops the Contractor from completing the works or is forecast to delay completion by more than 13 weeks (see clause 91.7).LOGICThe LOGIC forms are used in the UK offshore oil and gasindustry. Clause 14 of the General Conditions of Contract forConstruction (3rd edition) sets out an exhaustive list of ForceMajeure events which includes such matters as riot, war, invasion, earthquake, fire, explosion and/or other natural physicaldisaster, strikes at a national or regional level, and changes to anygeneral or local Statute, Ordinance, Decree or other law.To obtain relief, the affected party must show that:1.one of the specific events above has occurred;2. such event is beyond the control of, and without the faultor negligence of, the affected party;3.it could not provide against the event by the exercise ofreasonable diligence; and4.it has notified the other party in accordance with clause14.3.If the Contractor is delayed by a Force Majeure event, clause14.4 provides that the Contractor is entitled to an extension oftime but (similar to the JCT approach) not additional cost.However, and unlike the other forms of contract referred toabove, a Force Majeure event does not crystallise an entitlement toterminate the contract even if it subsists for a substantial periodof time.SummaryThe forms of contract described above each take a slightlydifferent approach to Force Majeure:1.In FIDIC, JCT and NEC contracts, Force Majeure is notdefined exhaustively. In LOGIC, by contrast, it is.2. In FIDIC and NEC, the Contractor is entitled to bothan extension of time and additional cost if a Force Majeureevent occurs. JCT and LOGIC provide that a Contractorwill be entitled to an extension of time only.3.Both FIDIC and JCT allow either the Employer orContractor to terminate if Force Majeure subsists for longenough. In NEC, only the Employer can terminate. InLOGIC, Force Majeure does not lead to a termination rightfor either party.Practical ConsiderationsNegotiating Force Majeure ClausesThere are multiple factors to consider when negotiating ForceMajeure clauses.ParametersIf the parties intend to include specific thresholds in the ForceMajeure definition, for example to cover earthquakes of a certainmagnitude, any units of measurement should be consistent withthose used in any project specifications. Further, it is advisableto ensure that any specific thresholds are measured on an objective basis, thereby reducing the chances of a future dispute.To take an example: the specification may require a Contractorto design and build a power plant to withstand an earthquakemeasured on a scale of ground acceleration (which measures themagnitude of the earthquake in an objective manner), but theConstruction & Engineering Law 2020 Published and reproduced with kind permission by Global Legal Group Ltd, London

Herbert Smith Freehills LLPForce Majeure clause may measure the earthquake on the ModifiedMercalli scale (which measures seismic intensity in a subjective manner). As the magnitude and intensity scales measuretwo completely different aspects of the earthquake, there maybe a disconnect between the project specification requirementsand the point at which a party would be able to invoke the ForceMajeure clause.DelayThe parties may want to consider whether there should be aminimum period of delay before a Force Majeure clause can beinvoked. Further, the parties may look to address expressly howto treat any disruption that subsists once the Force Majeure eventhas ended.Interaction with other contractual provisionsThe parties should consider how other provisions of the contractinterface with the Force Majeure clause. For example, the relationship between the Force Majeure clause, the extension of timeregime and the liquidated damages provisions should be madeclear – if the Force Majeure clause simply states that the Contractoris relieved from its obligations, that would not, strictly, move thecontractual completion date.NoticeIt should be clear when the notice is to be given. For example, isit when the Force Majeure event arises, when it affects the relevantparty, or when it actually starts to delay completion? Further, itshould be clear if the notice is intended to be a condition precedent to relief (in which case clear drafting to that effect will beneeded) and, if so, whether the notifying party loses its entitlement altogether if no notice is given, or just has its entitlementadjusted to reflect the delay in giving notice.TerminationIf Force Majeure leads to termination, it would be prudent tospecify which party will bear the risk of:1.any advance payments made for the services;2. the cost of any materials already delivered to a Contractor,or which the Contractor is contractually liable to accept;3.the cost of removing any equipment from the site; and4.the cost of repatriating the Contractor’s staff.PFI contractsIn the context of UK PFI projects, guidance has been issuedby HM Treasury on the type of events that should be includedas Force Majeure events, and this must be taken into accountwhen drafting. The guidance proposes a relatively narrow (andclosed) list of events.PandemicsIf the parties refer to pandemics or epidemics, they shouldbe aware that there is no clear legal definition of the word“epidemic”, and there may be room for debate as to whethera particular disease has passed the threshold. The positiontaken by an international organisation (e.g., the World HealthOrganization) will be a good indication of whether there is apandemic or epidemic, but ultimately each case will fall to bejudged on its facts and the particular drafting in question.How Force Majeure Clauses are Applied inPracticeIn practice, the party seeking to rely on the Force Majeure clausewill bear the burden of proving that the event in question fallswithin the clause, and that it has caused an inability to perform.In practice, establishing causation can be challenging,particularly where the inability to perform has competingcauses. Whether the Force Majeure event must be the sole causeof a party’s inability to perform will ultimately depend upon thewording of the clause itself. In Seadrill Ghana Operations Limitedv Tullow Ghana Limited ([2018] EWHC 1640 (Comm)), Tullowfailed to fulfil its obligations under the contract (namely toprovide a drilling instruction in October 2016) as a result of twomatters, one a Force Majeure event and the other not. The ForceMajeure clause on which Tullow sought to rely stated that: “neitherCOMPANY nor CONTR ACTOR shall be responsible for any failureto fulfil any term or condition of the Contract if and to the extent that fulfilment has been delayed or temporarily prevented by an occurrence, as hereunder defined as FORCE MAJEURE ” The High Court decidedthat the clause required the Force Majeure event to be the effectivecause of the failure which, in this case, it was not.The party relying upon the Force Majeure provision will alsohave a duty to mitigate the effects of the event – even if this is notstated expressly, it is likely to be implied. If it is the failure to takesteps to mitigate – as opposed to the event itself – that causes theinability to perform, there may be no entitlement to relief.Lender PracticeWhere a construction project is funded by external financing,the Project Company will need to consider the implications ofinvoking a Force Majeure clause on the Facility Agreement.For example, the Lender’s prior written consent will oftenbe required before the Project Company can claim Force Majeurerelief or take any steps in response to a Force Majeure notice froma Contractor (for example, by accepting that there is a ForceMajeure event). Otherwise an event of default may arise underthe Facility Agreement.If a Force Majeure event occurs which adversely affects theability of the Project Company to perform its obligations underthe Project Agreement, the material adverse effect (MAE) provisions may also be triggered. MAE clauses are used in lendingtransactions as a catch-all default to enable Lenders to acceleraterepayment or refuse to lend additional funds. A MAE clausecannot be triggered on the basis of circumstances known to therelevant party on entering into the agreement, although it maybe possible to invoke the clause where conditions worsen in away that makes them materially different in nature. The changerelied upon must also be material, in the sense that it must besufficiently significant or substantial, and it must not be merelya temporary blip. In any event, there is some legal uncertaintysurrounding the issue of invoking MAE provisions, so Lendersoften wait until the Project Company defaults under anotherevent of default.What Happens if There is No Force MajeureClauseWhere the contract does not contain a Force Majeure provision,the affected party may seek to rely on the common law doctrineof frustration. Frustration applies where:1.an event occurs after the contract has been entered into;2. which is not due to the fault of either party; and3.which renders further performance impossible or illegal,or makes the parties’ obligations radically different fromthose contemplated when the contract was entered into.Establishing frustration is far from straightforward, and thereare few reported cases where it has been argued successfully (atleast in modern times).Construction & Engineering Law 2020 Published and reproduced with kind permission by Global Legal Group Ltd, London3

4Force Majeure Clauses in Construction ContractsThe presence of a Force Majeure clause in a contract does notautomatically exclude the operation of the doctrine of frustration. However, frustration only applies to unforeseen events,and if the parties have addressed a particular event in a ForceMajeure clause, it could be said that the parties have foreseenthat event, such that the party must pursue relief under the ForceMajeure clause rather than assert frustration.The effect of frustration at common law is to release theparties from their future obligations and bring the contract toan end. It is therefore somewhat of a blunt instrument, and lacksthe clarity and nuance that a properly drafted Force Majeure provision provides.Concluding ThoughtsThe COVID-19 pandemic has placed Force Majeure provisions firmly in the spotlight. This has served to emphasise theinherent flexibility of such provisions and their importance.Whether the list of Force Majeure events is open or closed, andwhether a Force Majeure event gives rise to an entitlement tocost in addition to relief from performance, can make a significant difference to how the risk of unforeseen events is allocatedbetween the parties. Perhaps, going forward, they will be negotiated more closely than has sometimes been the case to date.Construction & Engineering Law 2020 Published and reproduced with kind permission by Global Legal Group Ltd, London

Herbert Smith Freehills LLPNicholas Downing, who leads the non-contentious construction and engineering practice at Herbert Smith Freehills, has in excess of 30years’ experience of major construction and engineering projects, including in the commercial development and infrastructure sectors.Notable projects on which Nicholas has recently advised include HS2, Thames Tideway and Hinkley Point C. He is a member of the PrivateSector Client (BPF) Representative Group on the JCT Council, the UK correspondent for the International Construction Law Review, is amember of the construction law committee of the City of London Law Society and is recognised as a top-ranked construction and engineering law practitioner in legal directories.Herbert Smith Freehills LLPExchange HousePrimrose StreetLondon EC2A 2EGUnited KingdomTel:Email:URL: 44 20 7466 lls.comDavid Nitek is a partner at Herbert Smith Freehills, specialising in the resolution of construction and engineering disputes through adjudication, dispute boards, litigation and arbitration. David advises both employers and contractors in a variety of sectors, with a particular focuson transport and other infrastructure projects. He has advised on disputes arising out of some of the UK’s largest infrastructure projectsof recent years, and has extensive experience in the Middle East, having previously worked in the firm’s Dubai office. David’s practice alsoinvolves the management of claims; in particular, the establishment of robust processes for reviewing and resolving claims without the needfor formal dispute resolution proceedings. He has performed this role on a number of substantial projects, working alongside the projectteam and external consultants.Herbert Smith Freehills LLPExchange HousePrimrose StreetLondon EC2A 2EGUnited KingdomTel:Email:URL: 44 20 7466 omHerbert Smith Freehills is one of the world’s leading professional servicesbusinesses, bringing together the best people across our 27 offices, tomeet clients’ global legal service needs. The firm offers a top-tier seamless service across a single global platform and an unparalleled depth ofexpertise. It provides access to market-leading dispute resolution, projectsand transactional legal advice, combined with expertise in a number ofindustry sectors, including construction and infrastructure, energy, naturalresources, technology and financial services.The firm’s specialist construction and engineering team offers the fullspectrum of legal services on all aspects of a project from procurement tocompletion, and our projects group advises clients throughout every stageof a project’s life-cycle. On large-scale, long-term projects the firm offersinnovative financing and bespoke contractual structures that allow clientsto meet their projects’ objectives, acting for parties on all sides of projectsand tion & Engineering Law 2020 Published and reproduced with kind permission by Global Legal Group Ltd, London5

6Chapter 2BrazilBrazilThiago Fernandes MoreiraMattos Filho, Veiga Filho, Marrey Jr eQuiroga Advogados12Making Construction Projects1.1 What are the standard types of constructioncontract in your jurisdiction? Do you have: (i) anycontracts which place both design and constructionobligations upon contractors; (ii) any forms of designonly contract; and/or (iii) any arrangement known asmanagement contracting, with one main managingcontractor and with the construction work done by aseries of package contractors? (NB For ease of referencethroughout the chapter, we refer to “constructioncontracts” as an abbreviation for construction andengineering contracts.)Projects developed in Brazil generally use tailor-made contracts(i.e. contracts specifically drafted for a particular project) ratherthan standard forms. Nevertheless, contracts based on international standard forms such as FIDIC (Fédération Internationaledes Ingénieurs-Conseils) and NEC (New Engineering Contract) arebeing increasingly used whenever a foreign player is involved(e.g. a sponsor, partner or lender). Such projects, however, stillrepresent a small percentage of the projects developed in Brazil.The most common contractual structures used in Brazil arethe following:Engineering, Procurement and Construction (EPC)An EPC contract provides for a single point of responsibility.The employer engages a contractor to provide the design, allnecessary materials and equipment, and the construction worksfor the project. In large projects involving construction anderection works, as well as equipment supply (such as powerplants and factories), the contractor can be hired to provideits services on a turn-key basis and would therefore be responsible for taking over the project in order to allow the employerto be ready to operate it upon completion of the works by thecontractor.Engineering, Procurement and Construction Management(EPCM)This type of contract reflects the arrangement known as management contracting, in which the contractor operates as an employer’s agent and enters into separate contracts with differentcontractors who provide materials, equipment and constructionworks necessary for the project.Design-Bid-Build (DBB)In this type of procurement, the employer engages a designer toprovide the basic design of the project. Once such basic design iscompleted, the project is submitted to a bidding process involvingFlávio Spaccaquerche Barbosaseveral contractors. The selected contractor will be responsiblefor detailing the basic design provided by the employer and, upo

clause 19 of the 1999 FIDIC Red Book). The 2017 FIDIC contracts refer to "Exceptional Events" rather than . Force Majeure. events, but the principles are essentially the same. This article looks at the 1999 FIDIC contracts, which, at least for now, are more widely used. " Force Majeure " is defined at clause 19 of the 1999 FIDIC Red