Defences to construction disputes

There are many defences to the non-performance of a construction contract. Some have been touched upon earlier and they include fraud, misrepresentation and mistake. All of these “excuse” performance by one party to the contract and, in the case of mutual mistake, both parties. This chapter deals with the other defences to performance, most notably force majeure and frustration. As discussed earlier, in the UK, if a contract becomes impossible to perform, or is only able to be performed in a manner substantially different from that originally agreed between the parties, then the doctrine of “frustration” may apply and the contract can be terminated. This may not be in the interests of either of the parties who may wish the contract to be suspended, rather than terminated, for the duration of the frustrating event, or for a specific period. In contrast, where the delay or failure to perform a contract by a party for reasons beyond its control occurs, then the doctrine of “force majeure” may apply, which, instead of terminating the contract, generally results in suspension of contractual obligations while the uncontrollable event is in progress.

Force majeure

Force majeure provisions in construction contracts excuse performance if a specified event occurs and also allocate the risk of any unanticipated events. The concept of force majeure originated with the French Napoleonic Code and is frequently used in most construction contracts. For example, in the JCT contracts, force majeure is listed as a “relevant event” and under the common law a related concept is “commercial impracticability”. FIDIC contracts define it (in Sub-Clause 19.1) as:

“In this Clause, “Force Majeure” means an exceptional event or circumstance:

  1. which is beyond a Party’s control,

  2. which such Party could not reasonably have provided against before entering into the Contract,

  3. which, having arisen, such Party could not reasonably have avoided or overcome, and

  4. which is not substantially attributable to the other Party

Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, so long as conditions (a) to (d) above are satisfied:

  1. war, hostilities (whether war be declared or not), invasion, act of foreign enemies,

  2. rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war,

  3. riot, commotion, disorder, strike or lockout by persons other than the Contractor’s Personnel and other employees of the Contractor and Subcontractors,

  4. munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio-activity, and

  5. natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.”

A force majeure clause sometimes expressly states that it is the exclusive remedy or may specifically assign the risk of some future unexpected event to one party. It should be noted, however, that if the clause does not state that this is the sole remedy then the affected party may also rely on the defence of commercial impracticability. Allocating all possible risks becomes burdensome and cannot cover the entire spectrum of possibility and, even if the contract does not include a specific event in the force majeure provision, a party may still be excused from performance if that specific event occurs. This is the reason why, for example, the FIDIC contract is worded as it is – to allow any manner of exceptional event to fall within the purview of the sub-clause.

In Matsoukis v Priestman,1 the defendants agreed to build a steamer for, and deliver her to, the plaintiff on or before 28 February 1913. The contract contained the following exceptions clause:

“If the steamer isn’t delivered entirely ready to purchaser at the above-mentioned time, the builders hereby agree to pay to the purchaser for liquidated damages, and not by way of penalty, the sum of £10 sterling for each day of delay and in deduction of the price stipulated in this contract, being excepted only the cause of force majeure, and/ or strikes of workmen of the building yard where the vessel is being built, of the workshops where the machinery is being made, or at the works where steel is being manufactured, for the steamer, or any works of any subcontractor.”

Owing to the universal coal strike of 1912, the defendants could not obtain their materials and consequently could not complete the vessel in time. Accordingly, the plaintiff’s steamer completion and delivery was late and the plaintiff claimed damages. The construction of the steamer was, in fact, delayed, not just by the coal strike, but also by events including bad weather, the absenteeism of workers because of a football match and the funeral of the shipyard manager. The court took the position that these causes were the “usual incidents interrupting work” so did not constitute force majeure but, as to whether the coal strike constituted force majeure, the court held that: (1) the general dislocation of the business of defendants, and of those from whom they obtained materials, operated indirectly on the completion of plaintiff’s steamer and this constituted a case of force majeure within the meaning of the exceptions clause and, therefore, excused defendants in respect of the delay so caused; (2) as to delay due to breakdown of machinery it comes within the words “force majeure”, which certainly cover accidents to machinery. The term “force majeure” cannot, however, in any view, be extended to cover bad weather, football matches or a funeral. These are the usual incidents interrupting work, and the defendants, in making their contract, no doubt took them into account. Here, the contract provided for liquidated damages except “the cause of force majeure” and certain types of strike.

The logic from this case suggests that force majeure means anything outside the control of the contractor and is not limited solely to acts of God. Indeed, the concept has had less than distinct borders over the years and some cases have suggested that the events which constitute force majeure should be set out in the clause itself and that phrases such as “usual force majeure clauses apply” are unenforceable as not being specific enough.

The term “force majeure” is, thus, either defined precisely, as in the FIDIC contract language described earlier, or the contract states what is to happen if an event of force majeure occurs. In some contracts, for example, force majeure is defined to mean certain specified events such as war, terrorism and nuclear and/or chemical contamination. Indeed, some contracts, like FIDIC, specify what must happen if there is a force majeure event.

Generally, such clauses allocate the risk if performance becomes impossible or impracticable as a result of an event or effect that the parties could not have anticipated or controlled. To determine whether this has been the case one must first determine whether the unanticipated event is defined in the contract as a force majeure event. Then, a review should be made of what evidence exists as to whether the unanticipated event was beyond the reasonable control of the party seeking the force majeure protection. Once this is done successfully, a determination must be made as to whether the contract can still be performed and a determination as to whether the contract included procedures for delay or other damages and whether or not these were adhered to.

It should be noted that most force majeure clauses set out the type of unforeseeable events that might excuse performance. Thus, the party relying on the force majeure clause bears the responsibility of showing that the event was: (1) beyond the party’s control; and (2) not a consequence of its own fault or negligence. A force majeure clause is not intended to insure against “normal risks” of a contract – bad weather, for example, or a change in market conditions.

Is the contract terminated?

Typically, the contractor is given relief from liquidated damages and there is an option for either party to terminate the contract after a suitably lengthy period of time – under the FIDIC contracts Sub-Clause 19.6:

“If the execution of substantially all the Works in progress is prevented for a continuous period of 84 days by reason of Force Majeure of which notice has been given under Sub-Clause 19.2 [Notice of Force Majeure], or for multiple periods which total more than 140 days due to the same notified Force Majeure, then either Party may give to the other Party a notice of termination of the Contract. In this event, the termination shall take effect 7 days after the notice is given, and the Contractor shall proceed in accordance with Sub-Clause 16.3 [Cessation of Work and Removal of Contractor’s Equipment].

Upon such termination, the Engineer shall determine the value of the work done and issue a Payment Certificate, which shall include:

  1. the amounts payable for any work carried out for which a price is stated in the Contract;

  2. the Cost of Plant and Materials ordered for the Works which have been delivered to the Contractor, or of which the Contractor is liable to accept delivery: this Plant and Materials shall become the property of (and be at the risk of) the Employer when paid for by the Employer, and the Contractor shall place the same at the Employer’s disposal;

  3. any other Cost or liability which in the circumstances was reasonably incurred by the Contractor in the expectation of completing the Works;

  4. the Cost of removal of Temporary Works and Contractor’s Equipment from the Site and the return of these items to the Contractor’s works in his country (or to any other destination at no greater cost); and

  5. the Cost of repatriation of the Contractor’s staff and labour employed wholly in connection with the Works at the date of termination.”

Also, if the force majeure situation is of such nature that work cannot proceed, the claimant party is entirely excused from further performance. A typical clause, such as the FIDIC Sub-Clause 19.7, states:

“Notwithstanding any other provision of this Clause, if any event or circumstance outside the control of the Parties (including, but not limited to, Force Majeure) arises which makes it impossible or unlawful for either or both Parties to fulfil its or their contractual obligations or which, under the law governing the Contract, entitles the Parties to be released from further performance of the Contract, then upon notice by either Party to the other Party of such event or circumstance:

  1. the Parties shall be discharged from further performance, without prejudice to the rights of either Party in respect of any previous breach of the Contract, and

  2. the sum payable by the Employer to the Contractor shall be the same as would have been payable under Sub-Clause 19.6 [Optional Termination, Payment and Release] if the Contract had been terminated under Sub-Clause 19.6.”

It should be noted that this FIDIC Sub-Clause 19.7 includes more than just force majeure but also “any event or circumstance outside the control of the Parties (including, but not limited to Force Majeure) …”. Additionally, the party alleging force majeure has the burden of proof, based upon the balance of probabilities, and it must also mitigate any losses and show that there was no other way of resolving the problem and moving forward with the Works.

Acts of God

Although the terms are sometimes used interchangeably, force majeure and “Acts of God” are different concepts. An Act of God excludes the concept of human agency, whereas force majeure does not. Traditionally, Acts of God included events such as tornados, lightning, floods, earthquakes, droughts and unusually severe weather conditions. Force majeure events typically include not only “Acts of God” but also human-made or human-caused events such as strikes, lockouts, riots, wars, explosions, sabotage and governmental acts. However, contracting parties are free to create, identify and bargain for their own force majeure events.

As mentioned earlier the term “force majeure” is derived from the French Napoleonic Code and is based on the concept that it is fair to allow a party to escape contractual obligations without fault when satisfaction of those obligations is made impossible. While force majeure may be universally applicable under French law, as mentioned earlier, under the common law it is a contractual right allowing one party to be relieved from liability upon the happening of certain defined events.

Force majeure should also be distinguished from the concept of “frustration of purpose”,2 which occurs when, after a contract is made, a party’s principal purpose is substantially frustrated without its fault by the occurrence of an event that negates a basic assumption on which the contract was made. When this happens the remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary. Additionally, although commercial frustration is akin to the doctrine of commercial impracticability, it is different in that performance remains possible but the expected value of the performance, to the party seeking to be excused, has been destroyed by an unanticipated event. Thus, if the frustrating event was foreseeable at the time of entering the contract the concept does not apply.3

The purpose of force majeure clauses – historically and internationally4

As previously mentioned, force majeure clauses exist to exclude liability where unforeseen events, beyond a party’s control, prevent the performance of its contractual obligations.5 The Supreme Court of Canada gave a very good definition of force majeure in Atlantic Paper Stock Ltd v St Anne-Nackawic Pulp & Paper Co,6 where the purpose of force majeure clauses were described as follows:

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