Credit: ArLawKa/Adobe Stock

Thomas Frad
Karasek Wietrzyk Rechtsanwälte, Vienna

Douglas Stuart Oles
Smith Currie Oles, Seattle

Richard Bailey
Druces, London

Claus Lenz
Lenz Dispute Resolution, Hamburg

Emma Niemistö
Borenius Attorneys Ltd, Helsinki

Arianna Perotti
Dardani Studio Legale, Milan

Yann Schneller
DARCI (Dispute Avoidance and Resolution for the Construction Industry), Paris

 

Although construction contracts are generally based on predictions as to the costs and time required to perform various tasks, the parties’ terms must sometimes be rebalanced to adjust for unforeseen circumstances that are encountered. In this article, authors from seven countries compare how such unforeseen circumstances are handled in their respective jurisdictions, including analysis under both common law and civil law systems. This is the first of two parts; the second part and the bibliography will be published in the next issue of this journal.

When project risks are allocated in construction contracting (as in other commercial transactions), they are often assigned to the party who is best able to avoid or mitigate them. For example, employers are usually responsible for unexpected subsurface conditions on their own properties, and contractors are usually responsible for costs of correcting defective work by themselves and their subcontractors.

This article focuses on a series of risks that are generally outside the anticipation and control of the contract parties. These risks have had significant impacts over the last several years due to various volatile factors affecting construction markets.

In countries that apply the Napoleonic force majeure concept when unforeseen events cause project delays, many of these risks have traditionally been handled by granting uncompensated time extensions. Under that approach, the employer sustains losses arising from late project completion, while the contractor sustains increased costs of prolonged work. The relative sizes of such losses can vary widely according to the circumstances of each project, and the contract parties may differ in their ability to bear the resulting financial burdens.

In a world where certain categories of impacts are foreseeable, but their extent cannot reasonably be estimated in advance, many contractors are unable or unwilling to sign a contract limiting their remedy for unforeseen conditions to a time extension. The market is therefore seeing an increased pressure for new risk allocation clauses and/or equitable remedies through the applicable disputes resolution process. This paper will look at some of these efforts, both in civil law and common law systems.

Wars and civil unrest

With the Russian invasion of Ukraine in February 2022, Europe was unexpectedly impacted by the first war since the Balkan conflicts of the early 1990s. Compared with the Balkan conflicts, this continuing war has involved much larger military forces, affecting larger populations and causing much wider economic disruption. After most Europeans had enjoyed more than 75 years of peace, they are now reminded of the sad fact that war remains a real and enduring risk.

In Ukraine, construction and other commercial activities were already disrupted when Russia occupied Crimea in 2014. In the more recent war, almost every kind of business has been interrupted by military action.

In Israel, the surprise attack by Hamas in October 2023 led to a series of military actions that have disrupted business there and in surrounding countries. Meanwhile, ongoing piracy in the Gulf of Aden has disrupted shipping and added to the costs of international commerce.

On the other side of the world, Chinese Government threats to achieve reunification with Taiwan through military action have created heightened concern about future military disruptions to commercial life in that important high-tech economy.

There are, of course, other areas in the world where construction and other commercial activities have been disrupted by wars or civil unrest. In all such places, contractors are asked to submit fixed prices for construction projects, although the scope and duration of military disruptions to their work cannot reasonably be estimated.

In legal systems that recognise the principle of force majeure, acts of war are often a type of delay disruption for which contractors receive additional time but no compensation. When this rule was first promulgated in the Code Napoleon, the French emperor doubtless had war on his mind as a circumstance that should be anticipated by contract. Once the memories of the Second World War had faded, however, many contractors and employers in peaceful countries often gave little consideration to the risk of war, and they typically included no price contingency for such an occurrence. Since the wars in Ukraine and the Middle East, however, this approach has required re-examination.

FIDIC contracts

FIDIC contracts are the most widely used standard forms of construction contracts internationally.^[1] They are recognised for their fair and balanced risk/reward allocation between the employer and the contractor. As we shall see below, this is particularly true and relevant in relation to the current economic crisis discussed in this paper, as FIDIC contracts contain several mechanisms designed to rebalance the parties’ contractual obligations.

With regards to acts of war, both the 1999 and 2017 editions of the ‘rainbow suite’, (comprising the FIDIC Red,^[2] Yellow^[3] and Silver Books^[4]) provide that a contractor may be entitled to an extension of the time and prolongation costs.

The 1999 edition of the FIDIC rainbow suite is identical across all three books. It provides that acts of war may qualify as force majeure events.

Sub-Clause 19.1 [definition of force majeure] reads as follows:

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

(a) which is beyond a Party’s control,

(b) which such Party could not reasonably have provided against before entering into the Contract,

(c) which, having arisen, such Party could not reasonably have avoided or overcome, and

(d) 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:

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

(ii) rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war,

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

(iv) 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

(v) natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity’ [emphasis authors’ own].

Sub-Clause 19.1 expressly indicates that acts of war, whether declared or not, may qualify as force majeure. This provision may therefore apply to the war in Ukraine, regardless of how it is labelled.

Six conditions must be met under the 1999 edition of the FIDIC Red, Yellow and Silver Books for an event to qualify as force majeure. Five conditions are listed in Sub-Clause 19.1 [definition of force majeure]: in addition to conditions (a)–(d), the event or circumstance must be exceptional, as the first sentence indicates. Furthermore, Sub-Clauses 19.2 [notice of force majeure] and 19.4 [consequences of force majeure] require that the event prevents the affected party from performing any (ie, one or more) of its obligations.

Furthermore, Sub-Clause 19.4 [consequences of force majeure] provides that if the contractor is prevented from performing any of its obligations under the contract due to a force majeure event, it may be entitled to an extension of the time (provided that completion is delayed as a result) and to payment of ‘cost’ incurred. This applies even if the war does not occur in the country where the works are carried out. ‘Cost’ is defined as ‘all expenditure reasonably incurred (or to be incurred) by the contractor, whether on or off the site, including overhead and similar charges, but does not include profit’. This may include prolongation costs, as well as head office overheads.

The expression ‘force majeure’ has caused some confusion among FIDIC users, particularly in cases where the governing law attributes a different legal meaning to the same expression. To address this, FIDIC has replaced ‘force majeure’ by the expression ‘exceptional events’ in the 2017 edition of the FIDIC rainbow suite.

In essence, however, in relation to war and hostilities, the provisions are virtually identical. Sub-Clause 18.1 [exceptional event] provides that ‘war, hostilities (whether war be declared or not)’ may qualify as exceptional events. The same six conditions as for a force majeure event, are required. In addition, the contractor may also be entitled to an extension of the time for completion and to payment of costs incurred as a result of the war, whether the war occurred in the country where the works are being carried out or not. Finally, ‘costs’ are defined in an identical way in the 1999 and 2017 editions of the rainbow suite.

Both the 1999 and 2017 editions of the FIDIC rainbow suite are therefore reasonably contractor-friendly. If an event meets the conditions of a force majeure event (1999 edition) or exceptional event (2017 edition), the contractor could be entitled to an extension of time and additional cost (excluding profit) arising from the war in Ukraine.

Italy

In Italy, there is no statutory definition of force majeure, but that principle is nonetheless recognised in the Italian Civil Code.^[5] Force majeure is usually interpreted by Italian case law as an event of objective unpredictability and extraordinariness that irremediably prevents the performance of a contract obligation.

Supervening circumstances of war or civil unrest events that objectively and irremediably prevent the performance of contractual works can be deemed as force majeure events discharging the contractor from liability.

In 2022, the Italian National Anti-Bribery Authority (Autorità Nazionale Anticorruzione or ANAC) issued a resolution clarifying that the invasion of Ukraine should be regarded as a force majeure, outside the control of suppliers,^[6] and it suggested to administrations/public employers that they should consider suspending affected contracts. ANAC also excluded the applicability of penalties or default terminations in cases where it is objectively impossible to fulfil the supply of goods as originally stipulated in a contract.

The rules of remedies available in the case of supervening circumstances are those that are provided for impossibility and hardship in contract performance.

In particular: if the event of force majeure creates a temporary impossibility to perform a contract, the parties are entitled to an extension of time for completion at no additional cost,^[7] whereas, if performance becomes truly impossible, the obligation is extinguished and the contract terminated.^[8]

A right to contract termination may also be claimed when extraordinary and unforeseeable events have rendered performance of a contract excessively onerous for one of the parties, unless the other party proposes to fairly amend the contractual conditions.^[9]

Price contingencies related to war risk are, under Italian law, subject to an agreement between the parties. These kinds of contingencies were uncommon in the past, but in recent months have been brought to the negotiation table more frequently.

Finally, the Italian Civil Code does not have a specific rule establishing a duty of renegotiation to restore balance of the contractual conditions in the event of unforeseen supervening circumstances.^[10] Although it has been argued that a duty to renegotiate (but not to amend) the contractual conditions in good faith can be required under the good faith doctrine,^[11] distinguished authors have highlighted the urgent need for an amendment of the Italian Civil Code in this regard.^[12]

In this connection and interestingly, the new Italian Public Contracts Code includes the right of the disadvantaged party to renegotiate the contractual conditions in good faith when extraordinary, unforeseeable and non-culpable circumstances, unrelated to ordinary economic fluctuations and market risk and materially altering the original balance of the public contract have arisen.^[13]

Germany

In Germany, there is no statutory law defining force majeure, but it is, nevertheless, recognised in the law. According to the interpretation of German courts, force majeure is an external event that is unpredictable, unforeseeable and unusual, and which cannot be prevented or rendered harmless by economically acceptable means, even by exercising the utmost care reasonably to be expected in the circumstances.

Many contracts contain clauses enumerating force majeure events, often allowing other similar events to be treated in the same way. War and civil unrest are usually included in the listed events.

A typical force majeure clause could read as follows:^[14]

‘The obligations of both parties under the contract may be suspended by either party without liability if the performance is obstructed or rendered impossible by events beyond the reasonable control of such party, eg act of god, war, riots, fire, explosion, epidemic, flood, strike or lockout. Each party agrees to notify the other party in the event of the suspension of any deliveries to be made under this contract and agrees to apply all reasonable efforts towards prompt resumption of such delivery after removal of the cause of suspension; provided however, that if any such delivery is delayed for more than [insert a reasonable time limit], then either party may elect, by written notice to the other party, to cancel such delivery without liability.’

Without a contractual agreement, the party who seeks relief from its obligation due to a force majeure event must generally take recourse to other statutory provisions or to good faith principles that are expressly recognised by German law.

There are basically two statutory provisions to be observed.

According to section 275 of the German Civil Code, the performance of contract obligations is excused to the extent that it is impossible for the obligor or any other person to perform such obligations. The obligor may also refuse to perform its contractual obligations to the extent that they require unreasonable expense and effort.

Section 313 of the German Civil Code stipulates that if the circumstances forming the basis of a contract have significantly changed, the contract may be amended (if possible) or terminated if one of the parties cannot reasonably be expected to uphold the contract as originally written.

The provisions read as follows:

‘Section 275 German Civil Code

Exclusion of the duty of performance

A claim for performance is excluded to the extent that performance is impossible for the obligor or for any other person.

The obligor may refuse performance to the extent that performance requires expense and effort which, taking into account the subject matter of the obligation and the requirements of good faith, is grossly disproportionate to the interest in performance of the obligee. When it is determined what efforts may reasonably be required of the obligor, it must also be taken into account whether he is responsible for the obstacle to performance.

In addition, the obligor may refuse performance if he is to render the performance in person and, when the obstacle to the performance of the obligor is weighed against the interest of the obligee in performance, performance cannot be reasonably required of the obligor.

The rights of the obligee are governed by sections 280, 283 to 285, 311a and 326.

Section 313 German Civil Code

Interference with the basis of the transaction

If circumstances which became the basis of a contract have significantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change, adaptation of the contract may be demanded to the extent that, taking account of all the circumstances of the specific case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to uphold the contract without alteration.

It is equivalent to a change of circumstances if material conceptions that have become the basis of the contract are found to be incorrect.

If adaptation of the contract is not possible or one party cannot reasonably be expected to accept it, the disadvantaged party may revoke the contract. In the case of continuing obligations, the right to terminate takes the place of the right to revoke.’

In addition, there is the good faith principle addressed in section 242 of the German Civil Code:

‘An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration.’

Regarding the war in Ukraine, several German ministries passed new regulations for the public sector addressing consequences of the war.^[15] They referred to price increases for raw materials, price escalation clauses, current tender procedures and adjustments to existing contracts. The latter regulations are important for the applicability and interpretation of section 313 of the German Civil Code and might serve as a guidance also for business-to-business (B2B) contracts of private parties.

First, it is stated that, in principle, the risk to procure materials is with the contractor. However, the war in Ukraine and its effects on the materials markets can be deemed sufficient to interfere with the basis of the transaction. The most important question – and this has to be decided in each individual case – is whether it is unreasonable for the contractor to be bound by the agreed terms (the regulations passed by the ministries only look at price development; this will be addressed later).

With regard to German law, the war in Ukraine is considered as a force majeure event. How far a party’s obligations are affected is a matter of each individual case. If the result is considered as an impossibility to perform, a party can invoke section 275 of the German Civil Code. If it is only (extremely) burdensome to perform, a modification to the agreed terms can be demanded on the basis of section 313 of the German Civil Code, as long as it does not create unreasonable circumstances for the other party. If this is not possible, the affected party can revoke or terminate the contract.

It should be noted that, so far, no relevant court decisions are available on this subject. In general, the courts were previously quite restrictive in applying section 313 of the German Civil Code.^[16] However, recently – in connection with the Covid-19 pandemic – some courts have shown a tendency to allow a wider application.^[17] This might change in the future.^[18]

Austria

In Austria, there is a model contract for construction contracts, known as the ÖNORM B 2110,^[19] which is published by Austrian Standards International.^[20] ÖNORM B 2110 is the basis for the vast majority of construction contracts, even though it is regularly modified in favour of the employer, like FIDIC contracts.

Therefore, the following comments are based on ÖNORM B 2110.

Force majeure

In Austria, there is also no statutory definition of force majeure, even though the concept is recognised by the courts. ÖNORM B 2110 also does not contain a definition of force majeure.

In Austria, the idea of a force majeure is generally understood to be an extraordinary event affecting a transaction from outside the control of the parties. It must be unforeseeable, and it cannot be averted without endangering the economic success of the contractor, even when exercising the utmost care. It is unexpected and cannot reasonably be accepted and tolerated by the contractor because of its frequency.^[21]

Entitlement to compensation

According to contractual provisions of the Austrian General Civil Code (ABGB), the contractor bears the risk of events that originate from its own sphere or from the neutral sphere, that is, events outside the parties’ control.^[22] Force majeure events are assigned to the neutral sphere; thus, according to the statutory provisions, a contractor generally bears the risk of increased costs arising from a force majeure event.

ÖNORM B 2110 partially shifts this risk to the employer in clause 7.2.1. According to this provision, the responsibility for events is thereby assigned to the sphere of the employer if they:

1. make the contractual performance of the services objectively impossible; or

2. were not foreseeable at the time of the conclusion of the contract and cannot reasonably be avoided by the contractor.

Therefore, if events occur that either make the contractual performance of the service objectively impossible or were not foreseeable at the time of the conclusion of the contract and cannot be avoided by the contractor in a reasonable manner, under Austrian law, a contractor is generally entitled to additional/compensation and additional time for performing the construction contract. For events attributable to Covid-19, the Austrian Supreme Court^[23] has recently ruled with reference to clause 7.2.1 that the employer bears the risk of additional cost claims by the contractor. Based on this decision, it can be assumed that the same principle will apply to risks arising from the Ukraine war.^[24] The scope of this leading decision is still being debated among legal commentators. However, it is clear that price increases at a construction site that are directly attributable to such an event can be charged to the employer. Whether and to what extent home office costs of a construction company can also be charged remained open in the recent decision.

Assumption of risk

The concept of force majeure also plays a major role in what Austrian courts call assumption of risk. This concerns the question of who bears the risk if a construction project is damaged or sinks before it is handed over to the employer. In principle, according to both the ABGB and ÖNORM B 2110, the contractor bears this risk.^[25]

Therefore, if the building under construction is damaged before it is handed over to the employer the contractor (or its insurer) must repair it or potentially rebuild it (clause 11.1.1. ÖNORM B 2110).

However, ÖNORM B 2110 provides for an exception in favour of the contractor. If construction work or parts thereof provided by the employer are damaged or destroyed by an unavoidable event, and the contractor has taken all necessary and reasonable measures to avert the consequences of such events, the employer will generally bear the risk (clause 11.1.1. lit b ÖNORM B 2110). This means that the employer must pay to repair or restore work on the construction project at the contractually agreed prices (clause 11.1.2. ÖNORM B 2110). This exception does not apply to the contractor’s site equipment, stored materials and so on, which are not considered to be part of the construction project.

In summary, it can therefore be said that, according to the principles of ÖNORM B 2110, in cases of force majeure, the employer generally bears the risk. In practice, however, the contractor-friendly regulatory approach of this model construction contract is often modified in contracts, at least partially, to the detriment of the contractor.

Cessation of the basis of the contract

A contract in Austria can be challenged by any party on the grounds that the basis of the contract has ceased to exist. Unlike in Germany, Austria has no statutory provision for this, but the legal principle of the cessation of the basis of contract is recognised by the courts. Cases of force majeure can also be handled under this cessation approach.

In general, the principle of contractual compliance (pacta sunt servanda) means that Austrian contracts must be upheld even if circumstances subsequently change. The parties are free, however, to provide for changes of circumstances in their contract.^[26]

The requirements for asserting a cessation of the basis of the contract are as follows.^[27]

1. It must be a typical circumstance that is associated with such a transaction and not merely individual motives of the specific contracting parties.

2. The circumstance must not fall within the sphere of interest of the party who wishes to invoke the changed circumstances; rather, the change must come from an external source.

3. In addition, the change in the basis of the transaction must have been unforeseeable for the party invoking its cessation.

It should also be noted that, according to Austrian case law, the legal concept of cessation/change of the basis of the contract is an ‘ultima ratio’, a measure of last resort that should be applied with restraint in order to protect the integrity of negotiated contracts.^[28]

According to the case law, changes in prices are generally not taken into account as a basis for increased compensation to a contractor because price changes are usually viewed as foreseeable.^[29]

Finland

In Finland, there is no statutory law defining force majeure in the context of construction contracts, but the concept is recognised by courts.

It is very typical for parties to include force majeure provisions in their commercial contracts. Also, a general analogy can be inferred from rules of interpretation governing contracts under the Sale of Goods Act (355/1987).^[30]

In the Finnish Sale of Goods Act, the equivalent of a force majeure situation and principle of hardship is included in section 23 of chapter 5, and it reads as follows:

‘The buyer is entitled to hold to the contract and to require its performance. The seller is, nevertheless, not obliged to perform the contract if there is an impediment that he cannot overcome or if the performance would require sacrifices that are disproportionate to the buyer’s interest in performance by the seller.

If the impediment or disproportion ceases to exist within a reasonable time, the buyer may, nevertheless, require performance of the contract.

The buyer loses his right to require performance of the contract if he defers his claim for an unreasonably long time.’

In accordance with Finnish court praxis, the essential elements applying to force majeure can be summarised as follows, with certain relevant court judgments referring to respective assessments indicated in footnotes:

• Performance obstructed or rendered impossible means that mere difficulty of performance or reduced profitability does not constitute force majeure.^[31]

• Unforeseeability refers to a recurring event or something that may have been anticipated to happen at the time of contracting cannot lead to force majeure compensation.^[32]

• Reason beyond party’s control refers to a party’s partial contribution to the course of events obstructing performance that should be taken into account and force majeure may not be viably invoked.^[33]

• Inability to overcome means that a party should, in any event, aim to minimise effects of any delay or obstruction, thus force majeure may only be invoked to the extent that one cannot overcome it or mitigation would require measures that are considered economically unreasonable.^[34]

In local construction contracts in Finland, a standardised set of general conditions is widely applied, namely the Finnish General Conditions for Building Contracts, YSE 1998. In YSE 1998, force majeure terms reflect the above explained general criteria, and specific relief events are set out as follows (as may be individually modified case by case):

‘Section 20 Force majeure

1. The contractor is entitled to receive a reasonable extension to the building contract period if the obstacle to completion of the building contract in accordance with the contract is one of the following reasons:

a) an exceptional circumstance referred to in the State of Defence Act or the Readiness Act or a comparable circumstance which causes the contractor considerable difficulties in engaging employees and procuring construction goods or otherwise prevents execution of the building contract;

b) a strike, boycott or embargo preventing the work of the contractor, his subcontractor or supplier, or a nominated subcontractor, or a lockout approved or decided by employers’ organisations, or other similar industrial action materially preventing the work from being carried out;

c) exceptional weather conditions seriously inconveniencing the contractor’s work;

d) other exceptional circumstance beyond the control of the contracting parties that creates significant difficulty in fulfilling the obligations of the contract and which the contracting party could not have taken into account beforehand and the inconvenience from which he could not reasonably be expected to have eliminated.

2. The contractor is not entitled to receive an extension to the building contract period if the obstacle concerns procurement of construction goods necessary to complete the building contract which the contractor could procure from elsewhere within the time required by the contract without any significant additional costs.

3. The contractor is not entitled to receive an extension to the building contract period on the basis of a strike, boycott or embargo that is caused by the contractor or his subcontractor failing to fulfil his contractual or legal obligations to his employees, their employee organisations or employers’ associations.

4. The contractor is not entitled to an extension to the building contract period if the obstacle concerns work which has already been delayed from the completion date under the contract for a reason due to the contractor, unless there are special grounds for an extension.’

In Finland, the war in Ukraine could generally be accepted as a force majeure event (in contracts entered into before the start of the conflict), falling at least under subsection (d) of the first paragraph of section 20, while the ‘comparable circumstance’ in subsection (a) would have to occur in the place where construction works take place. In accordance with YSE 1998 section 20, the contractor would be entitled to an extension of time, and as regards costs, there is a limited compensation scheme set out in YSE 1998 section 50 as follows:

‘Section 50 Effect of force majeure on contract price

1. If building contract work is interrupted in whole or in part for a reason beyond the control of the contracting parties as referred to in section 20, with the exception of the reason stated in item c of paragraph 1 of the said section, and loss or damage is incurred by the contractor as a result, the client shall compensate the contractor for the site security expenses, heating and other energy costs and the costs of protecting, servicing and maintaining the site as a consequence of the interruption.

2. Furthermore, the client shall contribute towards the other costs incurred by the contractor, the size of the contribution amounting to 2 per cent of the average daily cost of the building contract per working day for the first 5 working days of the period of interruption, and 1 per cent per working day thereafter, the average daily cost being calculated by dividing the contract price exclusive of value added tax by the number of working days in the building contract period.

3. Calculation of the costs caused by the interruption shall take into account the shifting of the building contract period to a less advantageous or more advantageous time of year.

4. The contractor is not entitled to receive from the client any other compensation for an interruption.’

In addition to force majeure effects interpreted in accordance with individual construction contract terms, statutory legislation stemming from section 36 of the Finnish Contracts Act (228/1929, with relevant clause amended by statute 956/1982) may be invoked to adjust terms of the contract. The relevant statute, which also specifically confirms applicability to pricing terms, is as follows:

‘Section 36

(1) If a contract term is unfair or its application would lead to an unfair result, the term may be adjusted or set aside. In determining what is unfair, regard shall be had to the entire contents of the contract, the positions of the parties, the circumstances prevailing at and after the conclusion of the contract, and to other factors.

(2) If a term referred to in paragraph (1) is such that it would be unfair to enforce the rest of the contract after the adjustment of the term, the rest of the contract may also be adjusted or declared terminated.

(3) A provision relating to the amount of consideration shall also be deemed a contract term.

(4) The provisions of the Consumer Protection Act (38/1978) apply to the adjustment of consumer contracts.’

This provision effectively compares to the civil law hardship doctrine, but it is worth noting that there is a very high bar applied to a commercial contract term being modified. The main rule under Finnish law is to respect the binding nature of contracts (pacta sunt servanda), and to presume that prudent parties addressed such events that may lead to a rightful claim for compensation of costs in their contract. Thus, the assessment of hardship is based on the balance of risks agreed between the parties to a contract, with the basic notion often being that contractors bear the risk of normal market disruptions and the like. To apply section 36 of the Contracts Act, a contractor would be likely to have to demonstrate, by objective standards, that the original contract balance is so significantly altered by unforeseen market disruption that no contractor in similar circumstances could be expected to bear the risk.^[35]

There is one fairly recent decision from the Kouvola Court of Appeal on 17 January 2014 (no 25, docket no S 13/383) concerning the applicability of section 36 of the Finnish Contracts Act that may shed light on the legal threshold for contract adjustment. The Court of Appeal upheld a trial court ruling that the price provision of a fuel oil supply agreement should be adjusted under section 36 of the Finnish Contracts Act. In that case, the market price of fuel oil had almost tripled during the contract term and the fuel supplier had incurred substantial losses in providing its goods in accordance with the agreement. The trial court had ruled that, although the risk of price fluctuation would usually be borne by the supplier (as the parties to the agreement were of equal standing), the price in this case had to be adjusted because it was ultimately unfair. The trial court justified its ruling in part by stating that, because the reason for price escalation was beyond the control of either party, neither party could have foreseen the significant increase the fuel oil would undergo when concluding the original agreement; therefore the agreement should be equitably modified.^[36]

England

In England, there is no statutory definition of force majeure, but there have been a number of attempts to define it for the purposes of contracts.

The expression force majeure does not exist under English contract law, but the generally perceived view is that it is something that makes the contract impossible, is unforeseen, and was unavoidable in occurrence and effects. Some people use the slightly more pithy phrase of ‘Act of God’ to describe the equivalent of force majeure, although this suggests natural causes and, in reality, is not wide enough. English common law has the doctrine of frustration, which is a defence to a claim for breach of contract. Force majeure may be drafted into a contract as a ground for extending the completion date for performance.

McCardie J reviewed the authorities on force majeure over 100 years ago in the case of Lebeaupin v Richard Crispin & Co:^[37]

‘The meaning of the phrase as used on the continent of Europe is discussed in CALVO’S DICTIONNAIRE DE DROIT INTERNATIONAL, title “Force Majeure” and by DALLOZ, JURISPRUDENCE GENERALE, tome 24, p 755, article “Force Majeure.” A broad statement on the matter appears in GOIRAND’S FRENCH COMMERCIAL LAW (2nd Edn) p 854, who says:

“‘Force Majeure.’ This term is used with reference to all circumstances independent of the will of man, and which it is not in his power to control, and such force majeure is sufficient to justify the non-execution of a contract. Thus war, inundation, and epidemics are cases of force majeure; it has even been decided that a strike of workmen constitutes a case of force majeure.”

This is a wide definition, but I think that it usefully, though loosely, suggests not only the meaning of the phrase as used on the continent, but also the meaning of the phrase as often employed in English contracts. That “war” comes within the meaning of force majeure would seem to be the opinion of SWINFEN EADY, LJ, in Zinc Corpn, Ltd v Hirsch (7).’

The following is a definition of force majeure used in an English construction contract:

‘Force Majeure: an event which prevents or delays either Party from performing its obligations under this Contract, and which results from events, circumstances or causes outside the Parties’ control, and which would have been judged to have such a small chance of occurring at the Base Date that it would have been unreasonable for the Parties to allow for it.’

In England, there are a number of standard form contracts produced, primarily by the Joint Contracts Tribunal (JCT), which is the leading supplier of standard contracts and the NEC suite of contracts. The standard JCT provision does not define force majeure, but refers to it as a Relevant Event, in most of the forms of contract, which can entitle the contractor to an extension to the date for completion. The JCT Design and Build Contract 2016 lists force majeure as Relevant Event 14, the final Relevant Event in the list of possible events. There is no similar Relevant Matter entitling the contractor to loss and expense for a force majeure. Covid-19 was often claimed as a force majeure in the early stages of the pandemic in the United Kingdom.

The NEC takes a different approach and does not use the phrase force majeure, but it has a provision that achieves the same thing. Core Clause 19 is titled Prevention and stands separate from Core Clause 6 Compensation Events. Clause 19.1 states the following:

‘19.1  If an event occurs which

• Stops the Contractor completing the whole of the works or

• Stops the Contractor completing the whole of the works by the date for planned Completion shown on the Accepted Programme.

And which

• Neither Party could prevent and

• An experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable to have allowed for it.

The Employer gives an instruction to the Contractor stating how the event is to be dealt with.’

The above clause amounts to a force majeure clause, but without using that phrase. By doing so, it allows the provision to be used internationally as there can be no argument over the use of the term force majeure and its application under the applicable law of the contract.

In conclusion, there is no single contractual definition of force majeure in English law and there is a similar provision in the doctrine of frustration, which may be used as a defence in any event. The term has, however, come into regular use in England and is now regularly referred to in contracts, sometimes as a defined term and, on other occasions, not. War is a force majeure, but it is also a potentially frustrating event.

United States

In the US, standard contracts generally continue to treat acts of war and civil unrest as uncompensated force majeure events.

Example 1

US Federal Acquisition Regulation (FAR) 52.249-14 [Excusable Delays]:

‘Except for defaults of subcontractors at any tier, the Contractor shall not be in default because of any failure to perform this contract under its terms if the failure arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of these causes are (1) acts of God or of the public enemy, (2) acts of the Government in either its sovereign or contractual capacity, (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (8) freight embargoes, and (9) unusually severe weather. In each instance the failure to perform must be the control and without the fault or negligence of the Contractor. “Default” includes failure to make progress in the work so as to endanger performance.’

Example 2

US American Institute of Architects (AIA) Document A201-2017, General Condition 8.3.1:

If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented…, or other causes beyond the Contractor’s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.’

France

French law establishes a formal distinction between private law and public law. Private law regulates relationships between private individuals, while public law regulates the organisation of the state (constitutional law), and the relationships between the state (and institutions deriving from it) and private individuals (administrative law).

According to French legal thinking, the laws relating to administrative contracts are fundamentally different from those governing contracts between private individuals. This is because the administration must safeguard the public interest and ensure the continuity of public services. As a result, administrative law invokes a more distinct set of regulations than those applied to relationships between private persons.

In France, private construction contracts are governed by the law of obligations included in the French Civil Code, and disputes relating to such contracts, in the absence of an arbitration clause, are heard by the French civil courts.

French administrative law operates as a completely separate legal system. It was largely created and developed by administrative courts, which have exclusive competence to hear disputes arising out of administrative contracts. These courts do not apply the French Civil Code, although they may refer to it as a source of inspiration for creating rules applicable to administrative contracts. To protect the public interest, administrative courts have developed rules that endow the public party with special and exceptional powers, which apply regardless of whether they are explicitly provided for in the contract. These powers are counterbalanced by special rights to compensation for the private party, some of which will be discussed below.

Under French private law, historically, force majeure was defined as an event that was (1) external to the parties; (2) unforeseeable; and (3) unavoidable or insurmountable. However, as of 2006, the French Supreme Court (Cour de cassation) abandoned the requirement that the event be external to the parties. This change was subsequently codified in the 2016 reform of French contract law. Article 1218 of the French Civil Code now provides that:

‘In contractual matters, there is force majeure where an event beyond the control of the debtor, which could not reasonably have been foreseen at entry into the contract and whose effects cannot be avoided by appropriate measures, prevents the debtor from performing his obligation.

If the impediment is temporary, the performance of the obligation is suspended unless the resulting delay would justify termination of the contract. If the impediment is permanent, the contract is automatically terminated, and the parties are free from their obligations pursuant to the conditions laid down in articles 1351 and 1351-1.’^[38]

In the context of a construction contract, if a force majeure event has a temporary effect, the contractor is entitled to suspend performance of the works and, therefore, to receive additional time. However, it is not entitled to compensation for prolongation costs.

Whether the war in Ukraine constitutes a force majeure event under French law is likely to depend on the facts. In every case, the party invoking a force majeure must establish that the event was unforeseeable at the time the contract was entered into. This is typically assessed on the date of the contract’s signature. The war in Ukraine is likely to be considered unforeseeable before Russia’s invasion on 24 February 2022, but not after that date. An obligor would also have to demonstrate that the war in Ukraine had prevented the performance of its obligation.

Under French private law, the rules governing force majeure are not mandatory, meaning the parties are free to negotiate, modify or exclude them contractually.

The main standard forms of contract for private construction works in France are published by the Association Française de Normalisation (AFNOR). These include the NF P 03-001 for private building works (last revised in 2017) and the NF P 03-002 for civil engineering works (last revised in 2014). These forms align with the position under French private law, treating acts of war as uncompensated force majeure events (Articles 10.3.1.2 and 9.1.4 of NF P 03-001; and Articles 10.5.1.2 and 9.1.1 of NF P 03-002).

Under French administrative law, the position is more contractor-friendly, although it does not go as far as the 1999 and 2017 editions of FIDIC rainbow suite.

As mentioned above, administrative courts do not apply the French Civil Code, but they may use it as a source of inspiration for creating the rules applicable to administrative contracts.

This is the case in relation to force majeure. French administrative law continues to define force majeure events in accordance with the original private law definition, that is, that the event shall be (1) external to the parties; (2) unforeseeable; and (3) unavoidable or insurmountable. This remains the case today, despite the evolution of case law since 2006, and the 2016 reform of the French Civil Code.

However, unlike private contracts, in the case of an administrative contract, a contractor may recover damages suffered directly as a result of force majeure. This includes damages caused to the works by the force majeure event, but does not include prolongation costs.

Similar to the situation under French private law, the standard form of contract for public works in France (Cahier des Clauses Administratives Générales or CCAG, Marchés publics de travaux, last published in 2021) codifies the default position under administrative law. It provides that a contractor may be entitled to an extension of time and compensation for damages caused to the works by a force majeure event (Articles 17.3 and 18.2 of the CCAG, Marchés publics de travaux).

 

Thomas Frad is a partner at KWR (Karasek Wietrzyk Rechtsanwälte) in Vienna and can be contacted at thomas.frad@kwr.at. Douglas Stuart Oles is a senior partner at Smith Currie Oles in Seattle and can be contacted at dsoles@smithcurrie.com. Richard Bailey is a partner at Druces in London and can be contacted at r.bailey@druces.com. Yann Schneller is an avocat and the founding partner at DARCI (Dispute Avoidance and Resolution for the Construction Industry) in Paris and can be contacted at yann.schneller@darcilaw.com. Claus H Lenz is an attorney-at-law at Lenz Dispute Resolution in Hamburg and can be contacted at lenz@lenz-disputeresolution.com. Emma Niemistö is an attorney-at-law and partner at Borenius Attorneys Ltd in Helsinki and can be contacted at emma.niemisto@borenius.com. Arianna Perotti is an avocato and Of Counsel at DARDANI Studio Legale in Milan and can be contacted at arianna.perotti@dardani.it.