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1.4.3 Force Majeure

Force majeure has been introduced in this chapter (see section 5.6).

As described in the referred section, force majeure may have different meanings (and therefore a different scope in terms of events included within the category or general term) in different jurisdictions, and it may even be a legally defined term of direct application to PPP contracts (especially in civil code countries where the administrative legal corpus regulates the procurement and public contracts).[14]

Relying on the French code and tradition, which is in this respect quite consistent with international regulations, to be regarded as a force majeure event (and therefore provide relief to the contractual obligations), the event must have the following features.

  • Externality.
  • Unpredictability.
  • Irresistibility.

All of the definitions worldwide (legal definitions or contract specific definitions) include Acts of God as force majeure events, and many of them include a number of man-made events (war, terrorist activities, general labor disputes/strikes, and so on). This later subset is sometimes categorized as political risk.

No matter how the term is defined (if it is defined) in the respective legislation, the risk events considered force majeure should be carefully considered and defined in every country when dealing with PPPs. A concrete definition, including the scope of events to be covered under the term, should be clearly defined in the contract (or better, provided as a contract standard), or the authority should consider certain events (depending on the project) to be taken back explicitly in the contract (under a shared approach as explained below), even if they are out of the scope of the general legal definition (if any).

This PPP Guide considers that Acts of God are always compensation events (granting time and money), as are wars and terrorism. Other potential force majeure events are discussed explicitly in this appendix: riots, vandalism, general strikes (though not strikes in the SPV or its contractors or sub-contractors).

Such events, to the extent they are defined under the force majeure category, are clear events for the authority to take them back.

Technically speaking, these are shared risks (a number of the potential events categorized as force majeure in the contract or by law), as the contract will impose the obligation for the private partner to contract out certain insurance policies which will commonly cover some events potentially regarded as force majeure events. This is so that the first loss in such events will be borne by the private partner who, in turn (and as prescribed in the contract), will be compensated by the indemnity claimed under the insurance policy. The risk of the indemnity being accessible is a risk of the private partner, unless the risk has become an uninsurable risk in the course of the contract (see below “uninsurable events”).

The contract (and as far as possible the policies) should establish that the indemnity amount has to be applied to the loss or any impact suffered by the asset or service.

Force majeure risks are not only to be treated in terms of compensation, defining who should bear a loss and when. The contract should also define how to handle the risk of the service not being available during a certain period of time due to a force majeure event, including provision for either party to renounce the contract and ask for an early termination.

When the contract terminates for a force majeure event, a termination compensation sum should be clearly granted by the contract (see termination provisions in section 8.8).

Force majeure events should not be confused with unforeseen events. A force majeure event may be considered an unforeseen event, but not any unforeseen event will be a force majeure event. The unforeseen nature of a risk event is not a risk category itself but is implicit in most of the risks, and as such, it may or may not result in relief or compensation depending on the specific risk event as described or predefined in the contract (for example, archaeological findings in some circumstances, geo-technical conditions, a change in law in others).

A relevant aspect in considering a force majeure event, also applicable to most of the compensation events as defined in the contract, is that the event should not provide undue protection if the private partner fails to behave as expected. For example, if the design requirements specify that the infrastructure should be designed to withstand a one in one hundred year flood, the private party should bear all of the costs resulting from a one in fifty year flood, but it may be entitled to compensation if a one in five hundred year flood occurs.

The contract shall clearly establish that the private partner, as economic owner of the asset, must exercise all of its due diligence to avoid a risk and mitigate its consequences.

 

[14] Public Private Partnerships in Infrastructure Resource Centre (PPP IRC) provides an interesting description of the variety of approaches to force majeure definition and advises on how to incorporate the concept in the PPP contract.  http://ppp.worldbank.org/public-private-partnership/ppp-overview/practical-tools/checklists-and-risk-matrices/force-majeure-checklist. See also Termination and Force Majeure Provisions in PPP Contracts produced by Allan and Overy and EPEC (2014), describing the approach in a number of European countries.

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