You are here

Share:

Structuring and Drafting the Tender and Contract

55.7 Contractual Categories of Risks: Compensation, Relief, and Force Majeure Events [52]

From the standpoint of contractual risk allocation (that is, the reflection of the risk allocation into the contract), there are different categories of risks.

  • Compensation events – this refers to risk events for which the private partner is entitled to receive financial compensation if the event materializes and to the extent the partner is impacted financially. This may occur in order to restore the financial equation of the project contract (the expected equity IRR and bankability) or to compensate the loss only partially (typically when an event has been nominated as a shared risk or a partial compensation event). Compensation events may be classified as full compensation events, partial compensation events, or shared risk events.
  • Relief events – this refers to risk events for which, if the risk occurs, the private partner will be excused for under-performance or even breach of obligations (that resulted from the event, but no financial compensation is granted). For example, time delays in the case of unforeseen archaeological findings.
  • Force majeure – broadly speaking, force majeure might be considered a compensation event and/or a relief event. However, due to its relevance and international consolidation as a category of risk, it is common and good practice to grant this risk its own status in the contract — and even in terms of law in many countries. Another reason for this special treatment is that this risk event may drive the contract to an early termination under specific provisions (see section 9.9).

Compensation and relief events should always be defined with clarity and precision in an exhaustive manner to respond to their exceptional nature. As in the case of force majeure, the contract should clearly describe the procedures to assess the risk occurrence, the conditions to determine the right of access to the relief or compensation (which should only be available to the extent that the impact could not have been prevented by due care and diligence by the private partner), and other obligations related to information and communication.

The contract incorporation of force majeure is more complex to explain, as there is a need to differentiate between the many civil code countries where it is a legally defined concept (thus leaving little if any scope to make adjustments in the contract), and those common law jurisdictions where there is a clear freedom between the parties to agree on the terms of the contract.

Consequently, in the latter case, it is common to include in the contract an exhaustive list of events that will be construed as force majeure, while in the former it may be not possible to do so. In this latter case, a recommended practice is to define a non-exhaustive list in addition to a “catch-all definition” that ensures that the term includes all events that fall within the legally defined concept.

The common ground is that force majeure events are risk events that are, by their nature, impossible to assess in terms of impact estimates, and very difficult to estimate in terms of likelihood. They also always relate to exogenous factors, are unrelated to the performance of the private partner, and are caused by external agents (wars, riots, natural disasters, and so on).

When the legal definition of force majeure in civil code countries is too narrow, this should not prevent the procuring authority (to the extent allowed by the procurement framework) from defining a wider term or including specific risks similar to force majeure when appropriate for a particular project[53] [54].

Table 5.4 illustrates the standard definition of force majeure in some countries[55].

 

TABLE 5.4: Examples of Force Majeure Definitions in Several Country Standards

Australia

“Force majeure” means (a) acts of God, specifically storms, lightning, cyclones, earthquakes, natural disasters, actions of the elements, tidal waves, floods, droughts, landslides, mudslides and nuclear, chemical and biological contamination; and

(b) civil riots, rebellions, revolutions, terrorism, civil commotion, insurrections and military and usurped power, malicious damage, acts of a public enemy and war (declared and undeclared) as a result of which a party is prevented from or delayed in performing any of its non-financial obligations.

UK

“Force majeure” means the occurrence after the date of contract of:

(a) war, civil war, armed conflict or terrorism; or

(b) nuclear, chemical, or biological contamination unless the source or the cause of the contamination is the result of the actions of or breach by the contractor or its subcontractors; or

(c) pressure waves caused by devices travelling at supersonic speeds, which directly causes either party (the Affected Party) to be unable to comply with all or a material part of its obligations under this contract.

The UK Standardization of PFI contracts treat Acts of God as a relief event.

South Africa

“Force majeure” means any of the following events to the extent that they are uninsurable:

(a) war, civil war, armed conflicts, or terrorism; or

(b) nuclear contamination unless the private party and/or any subcontractor is the source or cause of the contamination; or

(c) chemical or biological contamination of the works and/or the facilities and/or the project site from any of the events referred to in clause (i) above, which directly causes either party to be unable to comply with all or a material part of its obligations under this PPP agreement.

 

Clause (i) is a standard clause that develops the consequences and procedures in case of force majeure.

 

 

[53] As described in chapter 1, legal frameworks should avoid exhaustively restricting or regulating contract features, and they should leave reasonable scope for procuring authorities to find and define the right contract structure for each project.

[54] It is not uncommon in some civil code countries that another risk category is legally defined as a potential exception to the general principle of risk transfer: the concept of "unforeseen circumstances". In such cases, unlike the case of force majeure, it is important to define in precise terms what will be regarded as “unforeseen” in the contract so as to provide the right to receive compensation or relief.

[55] PPP in Infrastructure Resource Centre (PPPIRC)  provides samples and suggested wording for force majeure clauses at http://ppp.worldbank.org/public-private-partnership/ppp-overview/practical-tools/checklists-and-risk-matrices/force-majeure-checklist/sample-clauses, and additional intelligence about force majeure in Force Majeure Clauses - Checklist and Sample Wording (http://ppp.woldbank.org). Termination and Force Majeure. Provisions in PPP Contracts: Review of current European practice and guidance (European PPP Expertise Centre – EPEC, 2013) provides an analysis of force majeure provisions in Europe in section 3.

Add new comment

By submitting this form, you accept the Mollom privacy policy.