Force Majeure In Construction Contracts Essay

In handling a project, one of the most important is looking at the project plan. In the project plan, it almost includes all the necessary information from the high level up to not so much low level or details of the project. It is also the starting point of any project which is being initiated mostly by over-all project manager, Project manager must not only look at the financial or what we call budget or the resources that will be needed or even the schedules or time frame of the project. What are most important actually are the main obligations and what do we expect for the contractor, if wee are talking about construction project. Its main obligation and what are not part of their obligation. The most interesting part is what is not their part of work and what are the liabilities that they may have while doing the project as well as after the project. Questions like, what if†¦this happen, are they liable to it? All of the things that would possibly happen must be clearly stated in the contract, because if the building collapses due to an earthquake, what are the liabilities, if there is how it can be measured or be said that they have such liability to the building they have constructed. That is the main purpose of this paper, to discuss clearly what force majeure is, what are the effects to the parties involved and how it can be applied well. What is Force Majeure? Its Scope and Existence Force Majeure comes from French term meaning â€Å"great force† it is a common clause which primarily frees obligation of one or both of the parties from certain liability that are usually unexpected and commonly called as Act of God. These are such as: flood, earthquake, war, snowstorm, etc. Force majeure is not intended for the obligating parties to be excused to certain obligation, this is just intended to have it clearly stated in the contract in order for the parties to be none liable to certain occurrence which are obvious to be not within their responsibility. But, there are some cases wherein force majeure is customized in some projects where liability may also occur and not just claiming all into as force majeure clause which in any case the ruling will all depend on the gravity of the situation and looking again at the written and agreed contract. In other words force majeure is also stated as exceptional matters or events that are beyond the control of either party or overwhelming superhuman events. Like in the case of military, force majeure may be represented by a different meaning. It pertains to an event either it is internal or external, for instance a military vessel that allows to enter normally in another area without restriction or penalty, a very recent example is in the US Navy aircraft that landed at the Chinese territory after a collision with a Chinese fighter, where the aircraft is allowed to land without any restriction, as it was stated under the principle of force majeure. (Force Majeure, 2007). Effects to the Parties As earlier stated the effects of force majeure have provided great effect for both parties. The force majeure clause since it can be drafted differently, it may assume differently. That is why it should be well enlightened with clear use of precise words and must take into consideration the effect of nature and most especially it must include the general terms of the contract. Take for instance in the case of C. Czarnikow Ltd. v. Centralla Handlu Zagranicznego Rolimpex (1977) the English Court of Appeal held the defendants could in the circumstances of the case rely upon a force majeure clause which provided that if delivery was prevented, inter alia, by ‘government intervention beyond the seller’s control’ the contract would be void without penalty. But in some cases, employers or contractors may be relieve from their main responsibility like another example is when the union of the company set a strike. Another good example is when the contractors may ask for extension of the project, due to devastation of typhoon in the construction site, which is most likely very logical. But the over-all effect of these situations will be tremendous since it would impact the plan of the company. But, the company and contractors, must still need to double check clearly if what was agreed upon in the contract, is the situation really covers and part of the force majeure clause or not. Because, there are certain instances that it would still be part of the liability of the party or parties. (Hussin, Abdul Aziz, n. d. ). Force Majeure in Contracts It is very clear based from it sets of meaning and rules that there is no damages that are recoverable from a party who has been prevented from performing their contract by force majeure. That is why an event that will not be force majeure except: (1) it makes performance of the contract impossible; (2) it was unforeseeable; and (3) it was irresistible, both in its occurrence and its effects. Importance of Force Majeure The main importance of force majeure clause in a contract, most especially in a construction project is that it does not only provide a clear cut obligation for both of the parties. It also gives a deeper understanding by both parties, what are must to be included in the force majeure clause and what are not. Because, not all must be included or else there are times wherein contractors may also be just relieving themselves to certain obligation which might come and with that it will be an unfair treatment for the requesting company. Like for example, a coal supply agreement, the mining company may seek to have â€Å"geological risk† included as a Force Majeure event, however the mining company should be doing extensive exploration and analysis of its geological reserves and should not even be negotiating a coal supply agreement if it cannot take the risk that there may be a geological limit to its coal supply from time to time. The outcome of that negotiation, of course, depends on the relative bargaining power of the parties and there will be cases where Force Majeure clauses can be used by a party effectively to escape liability for horrific performance. The General Effect of Force Majeure To further understand force majeure concept, these are the many general effects of force majeure: (1) neither party will be liable if it is prevented from performing its operation by a force majeure event; (2) a force majeure event is something external to the parties (such as an â€Å"act of God†, or disruption to their equipment or machinery); (3) the event should be both beyond their control and such that they could not have prevented the event, or the consequent failure in performance, by the exercise of due diligence; (4) an obligation to pay money will not be suspended by a force majeure event; (5) the party affected by the force majeure must notify the other party and use due diligence to remove the disruption and resume performance of its obligations. In other words, the effect must be beyond the control of both parties and the other party must know the situation in order to also make some adjustment on the issues. (Adlam, JG, 2007). Maui Gas Contract In the company’s contract, it clearly defined and enlisted the following situations or events that will be part of the force majeure clause, and these are: acts of God, strikes, lockouts or other industrial disturbances, acts of the Queen’s enemies, sabotage, wars, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, floods, storms, fires, washouts, arrests and restraints of rulers and peoples, civil disturbances, explosions, breakage of or accident to machinery or lines of pipe, freezing of wells or delivery facilities, well blowouts, craterings, the order of any court or governmental authority, the necessity for making repairs to or reconditioning wells, machinery, equipment or pipelines (not resulting from the fault or negligence of such party), or any other act or omission occasioned by any cause beyond the control of the party invoking this Article. But it has to be well observed and studied if both parties did not perform negligence towa rds its duty. Because if there will be cases proven that there are failure in the duties made by either parties and at the same time reasonable. There will also be no such condition or occasion affecting the performance of this Agreement by any party shall continue to relieve the party affected thereby from liability or to hold in abeyance a cause of action, after the expiration of a reasonable period of time within which by the use of due diligence such party could have remedied the situation preventing its performance, nor shall any such circumstance or occurrence relieve any party from its obligation to make payment of amounts then due hereunder nor shall any such circumstance or occurrence affected thereby from liability or hold in abeyance a cause of action unless such party shall give notice of such circumstance or occurrence in writing with reasonable promptness; and like notice shall be given upon termination of such circumstance or occurrence. (Adlam, JG, 2007). Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp & Paper Co. , decided by the Supreme Court of Canada in 1975. In this case the mill company had a force m ajeure clause in a contract with the company that supplied waste paper. The force majeure clause excused the mill from purchasing its required amount of waste paper as a result of an act of God, the Queen’s or public enemies, war, the authority of law, strikes, the destruction or damage to production facilities, or the nonavailability of markets for pulp or corrugating medium. The latter condition became important when the markets failed. It was necessary for the court to determine the meaning of this event. The Chief Justice comments on interpretation of force majeure clauses have shaped all subsequent cases. An act of God clause or force majeure clause, and it is within such a clause that the words â€Å"non-availability of markets† are found, generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible. (Construction Contracts: Defining & Shifting the Risk, 2004). Application of the Interstate: and Sales Full Disclosure Act to Condominium Projects and Single Family Homes This is with regards to contract provision and circumstances of non-performance as well as the focus on force majeure clause. That it must be carefully stated in order to ensure that they will not be interpreted by courts as undercutting the obligation to complete construction within two years. As with limitation of damages sought by purchasers, state law controls in determining whether or not a specific provision undercuts the seller’s obligation to complete construction within two years. In this project the possibility of impossibility of performance due to unexpected and uncontrolled event is limited. Because this can only happen if one of the party completely discharged its obligation under the contract. The only recognize part of force majeure in this case may come from â€Å"bad whether† which may also cover some instances or events that may affect the implementation of the projects, such as earthquake, flood, strikes, fires, etc. In other words, it was clearly stated that non-performance may not be possible to be part of the force majeure clause since it can only happen if one of the partner completely abandoned or removed its obligation while the list of events that will be covered under force majeure was clearly to avoid confusion. (Chasnow, Robert, 2007). Hungary 10 December 1996 Budapest Arbitration proceeding Vb 96074 This case was actually between Yugoslavian company and Hungarian Company. The Yugoslavian company sold and delivered caviar to a Hungarian company. Based on their agreed contract â€Å"the buyer has to pick up the fish eggs at the seller’s address and take the goods to his facilities in Hungary†. Payment was due two weeks after the delivery of the goods, at which time the UN embargo against Yugoslavia took effect in Hungary. The seller assigned the claim for the price of the goods to a company located in Cyprus. The buyer acknowledged the assignment, but could not pay on the basis that the UN embargo was a force majeure. The arbitral court found that the damage caused by force majeure had to be borne by the party to whom the risk had passed the buyer. In this connection, the arbitral court found it necessary to point out that the risk of freight had to be borne by the buyer, unless the contract of the parties or the applicable law provided otherwise as stated in article 67 of CISG. The [buyer] could not be exculpated by proving that the damage was owing to an act or omission of the seller based from the article 66 of CISG. The result was that the court held that the buyer was obliged to pay the price of the delivered goods with interest. (Hungary 10 December 1996 Budapest Arbitration proceeding Vb 96074, 1996). Case T-41/97 R, Antillean Rice Mills NV v Council, Order of the Court of First Instance of 21 March 1997, [1997] ECR II-447 In this case the Antillean Rice Mills exports rice from the Dutch Antilles to the EC Council Regulation No. 304/97 which has introduced a safeguard measure in the form of a tariff quota for the period of 1 January to 30 April 1997. The safeguard measure was justified because of the instability of the Community market of a certain type of milled rice, Indica, which was being sold at a price considerably lower than the intervention price. Antillean Rice Mills brought an action for annulment of the aforesaid Regulation before the Court of First Instance and asked the Court to suspend its application during the course of the action. The applicant argued that if interim measures were not granted, the company risked suffering serious and irreparable harm; first because it would have to dismiss 80 out of a total of 117 employees, with consequent loss of know-how and, second, because it risked losing its business relationships and market shares due to the impossibility of satisfying the orders of its clients. The Court dismissed the application on the basis that the applicant failed to prove the irreparable nature of the damage caused by the immediate implementation of the measure. According to settled case law, `damage of financial nature is not in principle considered to be serious and irreparable’, unless the alleged damage threatens the existence of the company concerned or it cannot be quantified. The alleged temporary loss of productivity with the consequent restructuring of the company and loss of market shares were not found to be irreparable damage that could not be rectified by appropriate compensation if the Regulation was annulled. Second, the suspension would deprive the Regulation of its effectiveness in the event that the main plea was dismissed and the Regulation upheld. If low-price rice imported from the OCTs continued to overflow the market, the Community rice producers would have no incentive to change over to Indica rice, which was the purpose of the safeguard measure. In this situation, since permanent damage was not proved, the Court upheld the Community interest in the direct application of the actions. (Case T-41/97 R, Antillean Rice Mills NV v Council, Order of the Court of First Instance of 21 March 1997, [1997] ECR II-447, n. d. ). Conclusion In this paper it shows that force majeur does not immediately means that it can derived from an event that are beyond the control of the parties or act of God, like earthquake, flood, etc. It can also include certain damage to production, like machine breakdowns and strikes by employees. It also stated here that force majeur must be carefully studied and validated before any project may be started. Obligations of both parties must also be specified in the contract in order not to encounter confusion on what is really part of the force majeure clause and those that are purely obligatory to both parties. References Adlam, JG. â€Å"Force Majeure Events Commercial and Legal Consequences. † Ministry of Economic Development – Crown Minerals. 28 August 2007 â€Å"Case T-41/97 R, Antillean Rice Mills NV v Council, Order of the Court of First Instance of 21 March 1997, [1997] ECR II-447. † International Trade Developments, Including Commercial Defence Actions XIII. n. d. Chasnow, Robert. â€Å"Application of the Interstate :and Sales Full Disclosure Act to Condominium Projects and Single Family Homes. † Holland+Knight. 2007 â€Å"Construction Contracts: Defining & Shifting the Risk. † Stewart McKelvey. 7 July 2004 â€Å"Firma Milch-, Fett- und Eierkontor GmbH v Bundesanstalt fur landwirtschaftliche Marktordnung, Reference for a preliminary ruling: Verwaltungsgericht Frankfurt am Main – Germany, Butter from stock – Force majeure. † European Court reports 1979. 1979 â€Å"Force Majeure. † Wikipedia: The Free Encyclopedia. 18 October 2007 < http://en. wikipedia. org/wiki/Force_majeure> â€Å"Hungary 10 December 1996 Budapest Arbitration proceeding Vb 96074. † CISG Case Presentation. 1996 Hussin, Abdul Aziz. â€Å"Force Majeure Clause. † University Sains Malaysia. n. d. Eriksen, Eivind. â€Å"Terrorism and Force Majeure in International Contracts. † Bond Law Review. 2004