force majeure presentation pdf

8/15/2019 Force Majeure Presentation PDF

1/35

Frank G. Adams, PE – President

Christopher J. Sullivan – Vice President – Operations

Interface Consulting International, Inc.


2/35

FRANK G. ADAMS, PE CHRISTOPHER J. SULLIVAN

o Over 40 years of engineeringand construction experience on

projects in over 50 countries

o Arbitrator on construction,engineering, and intellectualproperty disputes

o Speaker and educator inconstruction management andclaims preparation andanalysis

o Over 25 years of engineering,procurement, and construction

experience

o Worked in the US and acrossEurope, South America, Africa,the Middle East, and Pacific

Rim countries

o Numerous publications andspeaking engagements


3/35

I. Force Majeure Defined

II. Force Majeure Clauses

III. Force Majeure Impacts

IV. Force Majeure Implications

V. Force Majeure Dispute Resolution

VI. Force Majeure in Energy Contracts

VII. Force Majeure Risk Mitigation

VIII. Force Majeure in Troubled Times


4/35


5/35

Under most national laws, force majeure events must meetfour criteria:

1. The event must be external to the contract and the parties;

2. the event must render the party’s performance radicallydifferent from what the parties originally contemplated;

3. the event must have been unforeseeable; and

4. the occurrence of the event must be beyond the control ofthe party seeking to use force majeure as an excuse for non-performance.


6/35

o Force majeure means whatever the contract says itmeans.

o Always look to the contract f irst to see if a specificevent is covered.


7/35

TYPICALLY, FORCE MAJEURE IS:

o War, terrorism, strikes, riots, crimes, etc.

o “Acts of God” • Including hurricanes, named storms, flooding,

earthquakes, volcanos, etc.

o Inability to obtain resources due to loss of goods

in transit, force majeure event, shortages, etc.o New laws, regulations, or embargos

o Whatever the contract says it is


8/35

FORCE MAJEURE IS NOT:

o If a contract defines force majeure events, then an event notspecified in the clause may not excuse nonperformance.

o If the contract defines force majeure as a flood orhurricane, then unusually high winds or heavy rain may notexcuse nonperformance.

o A phrase such as “including without limitation” included inthe clause can mitigate the risk of lack of definition.


9/35

o Contractual force majeure clauses routinely enumerate alist of extraordinary events that parties consider to bebeyond their control.

o Should be defined clearly in order to get a true scope ofcoverage.

o

All parties should know the precise definition, scope of itsusage, and limitation of the clause.


10/35

Force majeure clauses have four key components:

1. A description of events that can trigger a force majeurecondition.

2. Terms that define the duration of that condition.

3. A notice provision describing how a declaration of force

majeure is to be communicated.

4. A description of the effects that a force majeure eventwill have on contractual obligations of the parties.


11/35

o The contracting parties shall for a certain period of time be totally or partially excused from their obligations to perform under this Agreement in cases of force majeure by reference herein if suchbreach or failure to perform is due to acts beyond the reasonable

control of such party , which include by way of illustration, acts ofGod or public enemy, acts of Federal, state or local government,either in its sovereign or contractual capacity, fire, floods, civildisobedience, strikes, lock-outs, freight embargoes, inclement

weather, or any other cause or conditions beyond such party’sreasonable control ; provided, however, that the party which hasbeen so affected will (i) promptly give written notice to the other ofthe fact that it is unable to so perform and the cause(s) therefore;and (ii) resume its performance under this Agreement immediatelyupon the cessation of such cause(s).

1

4

3

2


12/35

o Force majeure clauses often contain catchall phrases suchas “or any other cause or conditions beyond such party’sreasonable control.”

o The catchall phrase must be construed within the contextestablished by the list of force majeure events that precedesit.

o The phrase is typically limited to events similar to thosespecifically listed.


13/35

o While a force majeure event, such as a hurricane, maydirectly damage the project site, it may also cause otherindirect damages, such as:

• Work Scope

• Costs to repair damage• Cost to finish original project

• Material shortages

• Labor shortages

• Increase material prices• Increase labor prices

• Supply obligations

• Schedule Deadlines


14/35

o What work was delayed and/or disrupted?

o Was unfinished or finished work damaged?

o Were material or equipment shipments delayedand/or disrupted?

o Was there an impact to labor• Was the labor pool reduced?

• Was the labor poor unable to reside there?


15/35

o Some owners allow price increases for changes in the scopeof work caused by force majeure events.

o This is based on the premise that they would like the

contractor to bid solely on the work described.

o Traditional contract matters usually require a change orderto address the effect of force majeure.

o Many owners do not allow price increases for force majeuregenerated changes and limit contractor relief to scheduletime extensions.


16/35

o A time extension is of limited help to contractors facing increasesin labor, material, and other expenses, such as fuel, workerhousing, temporary facilities, etc.

o Time extensions will not cover the costs of materials or laborthat increase drastically as a result of a force majeure event.

o The party responsible for supplying materials and labor could

include a separate escalation clause in its contract to absorbincreases to material or labor costs.

o Escalation is difficult to estimate until after the force majeureevent.


17/35

o Escalation clauses can reference a general inflation index ora specific materials/industry index to be adjusted forseverity of a force majeure event.

o Although severe weather can impact materials prices, aforce majeure clause is not intended to protect a partyagainst the normal risks of delay and disruption.

o The typical risk of a fixed-price contract is that the price toperform the contract work scope will increase without theowner granting the contractor relief.


18/35

o The party affected by force majeure is not in breach of thecontract.

o

Force majeure only suspends a party’s performance andobligations for the duration of the force majeure.

o The contractor is typically entitled to the extension of time,

and sometimes compensation, for the delay depending onthe wording of the contract clause.


19/35

o Force majeure may be declared for a party’s what longer -term consequences might flow from its decision to declareforce majeure.

o Can lead to disputes with a party to the contract thatopposes the existence of the force majeure event.

o

Remember, the clause may be declared by any parties tothe contract.


20/35

o A declaration of force majeure is sometimes made for theparty’s strategic benefit.

o

A contractor or owner may obtain a beneficial timeextension by declaring force majeure and extending theperiod available to meet its commitments.


21/35

o There is as widespread lack of clarity in the formulation ofthe clause, which can impair dispute resolution.

o

Disputes usually stem from different interpretations of thecontract, improper terms being used in the contract clause,and certain omissions in the contract clause.

o

Disputes also typically pertain to the duration of the forcemajeure event and liability issues for repair or replacementof finished or unfinished work.


22/35

o Declaring force majeure protects the party from breach ofcontract claims only if the force majeure clause wasadhered to and the event is listed in the clause.

o The most disputed issue of force majeure is the thresholdissue of which events fit within its definition and excuseperformance.

o Parties frequently write into the contract the remediesavailable upon occurrence of force majeure events.


23/35

o Negligence and fault should be defined separately in thecontract to avoid being regarded as a force majeure event.

o

The party seeking relief under the force majeure clausemust show it exercised reasonable diligence to avoid theevent.

o

If another company affected by the same disruption hasfound an alternative way to fulfill its commitments thatmethod could become the benchmark for establishingwhat should have been done to avoid or mitigate the event


24/35

o A force majeure clause may permit an extension of thecompletion date, but prohibit a contractor from claimingdamages resulting from delay.

o However, parties are free to contract otherwise.


25/35

o An energy contract may include provisions aimed atensuring performance in case of force majeure.

o Some long-term oil and gas supply contracts provide forthe restoration of quantities in force majeure clauses.

o For example, an alternative obligation clause may provide

for “replacement” pipeline gas in place of LNG delivery.


26/35

o Energy contracts are unique in that there can be multiplebuyers and sellers of products.

o Also differ from typical construction contracts in that there

may not be construction involved at all – often involvestransporting, refining, and selling goods.

o For example, a force majeure clause in a contract for the

sale of liquefied natural gas (LNG) the seller(s) and thebuyer(s) can include the standard language of forcemajeure and add potential accidents related to theproduction and transport of natural gas.


27/35

o Typical contract language may start off saying:

o The contracting parties shall for a certain period of time be totally or partially excused from their obligations in cases of force majeure,

such as, in particular: fire, flood, atmospheric disturbances,storm, tornado, earthquake, washing away of soil, landslide,lightning, epidemic, war, riots, civil war, insurrection, actions of public enemies, government action, strikes, lockout , with theburden upon the party relying upon it to supply proof of the forcemajeure nature of such event; and in the following circumstances,

o This is very similar to the other example shown earlier.


28/35

o Then it may go on to list events unique to energy contracts:

o Serious accidents affecting the exploitation of the natural gasdeposit, the transport by pipeline in [seller's country], the handling,

the liquefaction, the storage, the loading operations, the transport byLNG carriers, the discharge, the storage, the regasification, thetransport by the principal pipeline(s) from the regasification facilityand intended for the transport of the Natural Gas that is the subjectof the present contract, such that their consequences cannot be

remedied through the implementation of reasonable means at areasonable cost .

o This language is specific to the LNG industry.


29/35

o Take the example of a gas pipeline operator declaring forcemajeure after its pipeline is damaged in an explosion andthey must repair the damage, return the pipeline to service,and provide an alternative supply in the meantime.

o Whether the duty to mitigate the effects of the explosionon the pipeline also includes a duty to mitigate the effectsof the force majeure event by providing alternative gassupply is not always as clear.

o Force majeure risks affecting a gas supplier with multipleoff-takers might raise additional difficulties, such as orderof relief.


30/35

o Could the pipeline operator be required to have thepipeline repaired as soon as possible, regardless of cost?

o If the pipeline operator is required to source alternate gas

for a buyer, is the cost or inconvenience of doing sorelevant?

o Some agreements deal with such issues explicitly while

many others are silent.

o Major disputes apply the “commercial reasonableness”standard, which is frequently not defined in the contract.


31/35


32/35

o While “Acts of God,” like hurricanes, are likely to be aspecified force majeure event, a court may not excuse aparty’s performance due to a hurricane warning orevacuation notice.

o The owner may seek to have a “hurricane” notice includedas a force majeure event.

o The contractor may counter to have “other severe weatherand weather warnings” negotiated into the clause as well.


33/35

o Be mindful of risks events, like weather conditions,commonly associated with the project location.

o A contractor located in areas where extreme weatherconditions will negotiate terms for monetary relief in theevent of delays resulting from those events.

o A contractor performing work in a region where extremeblizzards are highly likely should make sure “blizzards” and“extreme weather conditions” are written into the contractor include this risk event into their bid price.


34/35

o Was the civil turmoil in Egypt, Syria, Liberia, or Tunisia aforeseeable force majeure event?

o Were the bail outs in Cyprus a foreseeable force majeureevent?

o What about the potential bankruptcy of Greece andPortugal?


35/35

o What about the volcanic eruption in Iceland in 2011 thatdelayed planes and transportation of materials here in theUS?

o The BP oil spill had more far reaching effects than just therig explosion. What other indirect force majeure effectswere there? Rig and vessel construction were halted due tonew laws and regulations.

force majeure presentation pdf

Documents