What relief does FIDIC provide when bank accounts are frozen as a result of war, hostilities, rebellion, terrorism etc.? Maybe not as much as you think.

Tensions in Africa and the Middle East have seen the implementation of numerous international financial sanctions. While these sanction regimes vary in execution and enforcement they often freeze assets and prevent financial transactions. These restrictions may impact on the Employer’s performance of its payment obligations under the Contract. This can have serious consequences where the Contractor is entitled to suspend or terminate on notice for non-payment. Many parties automatically assume that financial sanctions will be recognised as force majeure. However, this may not be the case.

Contractual definition of Force Majeure

“Force Majeure” as defined under the FIDIC form of contract is strictly prescribed.

Sub-Clause 19.1 defines a Force Majeure event or circumstance as one which is “exceptional” and:

“(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.”

One might assume that financial sanctions resulting from war, hostilities, rebellion, terrorism etc. would generally meet these requirements. However, Sub-Clause 19.2 expressly excludes from the definition of Force Majeure any payment obligations between the parties. It states:

“Notwithstanding any other provision of this Clause, Force Majeure shall not apply to obligations of either Party to make payments to the other Party under the Contract”.

Therefore, it would appear that financial sanctions preventing the payments under the Contract are not covered by Force Majeure as defined in Sub-Clause 19.1. This could have serious consequences, as the Contractor would be entitled to suspend or terminate on notice for non-payment under Sub-Clauses 16.1 and 16.2.

Does Sub-Clause 19.7 (Release from Performance under the Law) offer a solution?

Sub-Clause 19.7 applies to events or circumstances outside of the control of the Parties (which render contractual performance impossible or unlawful) regardless of whether or not they fall within the definition of Force Majeure laid out under the Contract. It states (with emphasis added):

“Notwithstanding any other provision of this Clause, if any event or circum­stance outside the control of the Parties (including, but not limited to, Force Majeure) arises which makes it impossible or unlawful for either or both Parties to fulfil its or their contractual obligations or which, under the law governing the Contract, entitles the Parties to be released from further performance of the Contract, then upon notice by either Party to the other Party of such event or circum­stance:

(a) the Parties shall be discharged from further performance, without prejudice to the rights of either Party in respect of any previous breach of the Contract, and

(b) the sum payable by the Employer to the Contractor shall be the same as would have been payable under Sub-Clause 19.6 [Optional Termination, Payment and Release] if the Contract had been terminated under Sub-Clause 19.6.”

The imposition of financial sanctions will almost certainly be outside of the Parties’ control, and may well render performance of the Employer’s payment obligations impossible, so it is worth studying the Sub-Clause in more detail.

Impossible or Unlawful

The use of the words “impossible or unlawful” under Sub-Clause 19.7 suggests a higher threshold is intended than, for example, mere “prevention” under Sub-Clause 19.2. Therefore, when claiming that performance has been rendered impossible or unlawful it may not be enough for a party to establish that new circumstances have rendered its contractual performance merely more onerous or uneconomic. On the basis that the Sub-Clause should not be invoked lightly given its severe consequences, many will argue that it has to be actually and absolutely impossible or unlawful for the event or circumstance to excuse non-performance. So, if there was any way that a diligent party could have still performed its obligations then this clause will not apply. Although there is no precedent in relation to Sub-Clause 19.7 on this specific point known to the author, there is authority relating to the common law doctrine of frustration, which is closely connected and arguably analogous to contractual impossibility. It is generally considered that in order for a contract to become frustrated an event which renders performance radically different must have occurred after the formation of the contract (the “radical change in obligation” test[1]). In Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd [2] the Court of Appeal in Singapore recently examined the test and held that in order for a contract to become frustrated literal impossibility of performing the contract is not required. It is sufficient that the obligation has become “radically or fundamentally different” from the one agreed to. Thus, it found that although a mere increase in cost will not result in a frustrating event, an astronomical increase might. It is not clear from the judgment whether the judges considered the earlier case of Tsakiroglou & Co Ltd v Noblee Thorl GmbH[3] where the House of Lords held that a contract was not frustrated when performance became more difficult and expensive by the closure of the Suez canal but not impossible. This is an area of law yet to be tested openly in the context of FIDIC and we would be interested to hear your views on it.

In any event, Parties affected by financial sanctions resulting from war, hostilities, rebellion, terrorism etc. should still consider whether other measures could be taken that would allow performance under the Contract. It might be possible to circumvent the sanctions in some lawful way. For example, depending on the sanction regime the sanctions may not apply to various branches and subsidiaries. Also, some countries (including the United Kingdom and the United States) have procedures in place for companies to request exemptions from the sanction regime. Further, some sanction regimes may exclude from their scope contractual obligations created before the conflict began. Finally, it may be possible to agree variations to the Contract to remedy the situation.

Of course, financial sanctions are often intended to apply for a limited time, and therefore the Employer’s performance of its payment obligations under the Contract is not likely to be impossible permanently, only temporarily so. This raises two questions:

1. is a temporary impossibility sufficient for the purposes of Sub-Clause 19.7; and
2. if so, is there a temporary fix available?

In order to establish whether contractual performance has been rendered impossible or unlawful the courts will look at all the facts of the case including the degree and duration of the impossibility. If the event or circumstance is of a temporary nature it may not be considered by an adjudicator, arbitrator or judge to be sufficiently impossible or unlawful to permanently discharge the Parties from performance. However, it is worth noting that this is by no means a foregone conclusion. Under the common law doctrine of frustration (mentioned earlier) events and circumstances causing temporary disruption, such as war, have regularly frustrated contracts thus bringing them to an end[4].

In respect of the second question, it is unfortunate that Sub-Clause 19.7 does not make express provision for a temporary fix to the temporary impossibility of the Employer’s performance of its payment obligations under the Contract. The only solution provided is a permanent discharge from further performance and not mere suspension. However, if performance of the obligation could reasonably be suspended or deferred until the sanctions were lifted, a practical approach would be to excuse (by agreement) a party of the obligation temporarily from any liability for non-performance, as long as the sanctions are in place. Sub-Clause 14.8 could compensate the Contractor for non-payment in financing charges.

Contractual Obligations

The next consideration is whether all of a party’s “contractual obligations” must be impossible or unlawful to fulfil for Sub-Clause 19.7 to apply or whether just one or more will suffice, i.e. is it sufficient for the Employer merely to be unable to fulfil its payment obligations under the Contract?

There is commentary which says that “the provisions in clause 19.7 are expressly applicable to all obligations and can therefore be evoked where, for example, the employer’s payment obligations are impeded by causes which fulfil … 19.7”.[5]

The view that not all contractual obligations need to be impossible or unlawful is supported in the case of Codelfa Construction Pty Limited v SRA of New South Wales[6] where the court held that the contract had been frustrated by an injunction against night time working which restricted the contractor’s ability to perform his time obligations under the contract (where time was made of the essence).

This approach is also favoured by others. For example, the ICC Force Majeure Clause 2003 (a standard form clause drafted by the ICC for express incorporation into contracts by the parties) excuses a party from contractual performance and relives that party of any liability in damages “where a party to a contract fails to perform one or more of its contractual duties” because of an impediment outside of its control.

Under the Governing Law of the Contract

The words “under the law governing the Contract” in Sub-Clause 19.7 indicate that the governing law of the Contract may itself allow the Parties to be released from further performance under the Contract quite independently from the Contract. This is more common in civil law jurisdictions than common law jurisdictions.

Shall be Discharged from Further Performance

Only when all the particular circumstances are met does Sub-Clause 19.7 envisage that (upon notice) the Parties will be “discharged from further performance” of the Contract. Read with Sub-Clause 19.6 it seems likely that this means that the parties are discharged from all further performance including that which has not been affected by the impossibility or unlawfulness.

The Sum Payable by the Employer to the Contractor

Where the Parties are discharged from performance, “the sum payable by the Employer to the Contractor shall be the same as would have been payable under Sub-Clause 19.6”. This means that the Employer must still find a way to pay the Contractor for the work done and the debts owed. Essentially, the Employer is left with the same problem, he has no money with which to pay.

Conclusion

Where an Employer’s bank accounts are frozen as a result of financial sanctions resulting from war, hostilities, rebellion, terrorism etc. there is a risk that the Contractor may suspend or terminate on notice for non-payment, and claim interest on the unpaid sums. An Employer would be wrong to assume that Force Majeure will excuse him from his respective payment obligations under the Contract. Sub-Clause 19.7 may discharge him from further performance, thus ending the Contract, but that will not complete the project and he will still be left with the debts for the work done or the sums owed under Sub-Clause 19.6. In summary, FIDIC, as it is currently drafted, provides little or no relief.

[1] Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696

[2] [2014] SGCA 35

[3] [1962] AC 93

[4] See for example, Avery v Bowden (1856) 5 E & B 714 and Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32.

[5] Samuelsson and Iwar, FIDIC an analysis of international contracts (2005) Kluwer International Law at pp. 298-299.

[6] (1982) 149 CLR 337.