Force majeure in construction contracts

Sebastián Mejía,  March 11, 2024

Construction works and their execution are subject to various factors, often leading to extended durations. It is a risk that during their development, events may occur that qualify as "force majeure", inevitably impacting the fulfillment of contractual obligations for parties. Traditionally, contracts abide by the commonly known Latin doctrine, pacta sunt servanda, translated as "agreements must be kept". However, a major exception doctrine, commonly known as "force majeure" (sometimes interchangeably with fortuitous event or in Latin, imposibilitá soprevvenuta, etc.), allows exemption from its application. Therefore, defining mechanisms for addressing such events is crucial.

Domestic laws governing force majeure principles and concepts typically vary substantially. Overcoming these obstacles is preferable through mutual agreement between parties, rather than adhering strictly to domestic regulations, by including a force majeure provision within their framework, especially in construction agreements.

It is advisable that force majeure provisions draw inspiration from principles of private international law, such as the UNIDROIT Principles of International Commercial Contracts, commonly known as "UNIDROIT Principles". Article 7.1.7 of these principles contains a force majeure provision stating: "Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably have been foreseen at the time of the conclusion of the contract or to have avoided or overcome it or its consequences".

Additionally, the International Chamber of Commerce offers two versions of force majeure provisions - extensive and abbreviated. The extensive version defines force majeure as the occurrence of an event or circumstance preventing or impeding a party from performing contractual obligations, provided certain conditions are met. The extensive version provides as it follows:

"Force Majeure" means the occurrence of an event or circumstance ("Force Majeure Event") that prevents or impedes a party from performing one or more of its contractual obligations under the contract, if and to the extent that the party affected by the impediment ("the Affected Party") proves: a) that such impediment is beyond its reasonable control; and b) that it could not reasonably have been foreseen at the time of the conclusion of the contract; and c) that the effects of the impediment could not reasonably have been avoided or overcome by the Affected Party."

Therefore, force majeure may be defined as circumstances beyond parties’ control, which are unforeseeable, unavoidable, and insurmountable, preventing one party from fulfilling its obligations. Its occurrence is an exemption invoked by the affected party as justification for a breach of contract due to the force majeure event during the contract’s duration. Does every event automatically qualify as force majeure, preventing parties from fulfilling their obligations? Not necessarily. All elements of the definition must be fulfilled to answer such a question. These elements include:

1. Impediment beyond one’s control: Arises from a materialized risk not assumed in the contract by the party invoking force majeure. Also requires the impediment not to be caused by factors attributable to the affected party.
2. Causality: non-compliance must result from multiple factors, all of which must be impediments. If any causing factor is attributable to a party, it does not constitute an impediment or force majeure event.
3. Unforeseableness: It cannot be demonstrated that, at the time of concluding the contract, the impediment was known (certain knowledge) or could have been known (presumed knowledge).
4. Unavoidability and insurmountability: If one party is at risk of failing to fulfill its obligations, it must take necessary measures to mitigate, avoid, or overcome the effects of the impediment.

It is not sufficient for an event to occur, potentially qualifying as a force majeure event, for the affected party to allege an exemption to contractual obligations. It must justify and even demonstrate the fulfillment of all four previously described elements.

Finally, parties should establish procedures in their force majeure clause for dealing with such events. Including and/or drafting such provisions has become increasingly common in construction agreements and international contracts. For instance, the International Federation of Consulting Engineers (IFCE) has developed standard contracts for turn-key projects, naming EPC/TURNKEY PROJECTS, which categorize applicable force majeure events as "exceptional events".

Such provisions outline:

a) Force majeure definition and conditions to be fulfilled.
b) Duty of the affected party to immediately notify the other party of an impending failure to meet contractual obligations due to a force majeure event.
c) Exemption from contractual obligations for the affected party as long as the force majeure event endures.
d) Requirements to minimize the effects of the event on the contract’s duration and execution. If a payment obligation is unaffected, it should not suspend its fulfillment.
e) Options after the force majeure event or impediment, including contract extension or early termination, with payment for completed works.
In conclusion, including force majeure provisions in construction agreements is essential to address unpredictable events affecting contract execution. These clauses provide a clear framework for determining circumstances justifying exemption from contractual duties, the procedure to follow, and the means to overcome obstacles or breaches. In this way, effective management of such events protects the interests of both parties, ultimately contributing to proper contract execution.

In case of any doubt or comment, you can address it to the following email: smejia@alegalis.com

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