What risks in a construction or engineering contract are normally borne by the contractor? To what extent is force majeure relevant in such contracts?
Generally, the contractor assumes risks concerning the execution of the works in accordance with the owner specifications, with the applicable regulations and without defects, as well as risks related to the imposition of variations. Also, the contractor usually assumes the risk of damage or destruction of the works until the delivery of the completed building to the owner. The contractor may also take on responsibility for design, being, in this case, responsible for errors or omissions in the construction project.
In private works contracts, the allocation of risk is more subject to negotiation.
In relation to force majeure, the law provides that a party that is unable to perform its obligations because of an unforeseeable event outside its control can avoid liability for delay or non-performance of the contract. Factors of force majeure can include earthquakes, floods, fires, epidemics, sabotage, strikes, embargoes or international blockades, acts of war or terrorism and government impositions. The Public Procurement Law foresees an extension of the deadline to perform the works in case of force majeure and the right to terminate the contract if the execution is suspended due to force majeure for more than 1/5 of the deadline to perform the works. The party invoking force majeure has 8 days, counting from the date where it became aware of the triggering event, to notify its counterpart. All obligations arising from the contract are temporarily suspended so as to ascertain to what extent the event triggering force majeure hindered the execution of the contract.
Construction contracts usually contain a force majeure clause setting out what sorts of events may qualify as force majeure and the contractual consequences of those events occurring.
Contractors usually assume a “best effort” obligation to successfully perform construction services. Employment risks are entirely borne by the contractor. Third-party damages related risk are borne, in principle, by the client. But if the activity performed by the contractor is considered a risky activity or if the contractor is negligent in performing its obligations, it will be liable.
The contractor is liable to the developer or purchaser for damages that affect the construction’s sustainability or adequacy to fulfil its purpose that occur within ten years of the completion of the construction. The contractor is not liable if it proves the damages originated in a third-party act or force majeure. This liability can’t be waived.
Force Majeure applies unless otherwise stipulated.
Parties can contractually waive or include different obligations.
In so-called ‘traditional’ procurement, the building contractor is responsible for the construction of the works, but not for their design. In design and construct (D&C) contracts, the building contractor also takes on responsibility for design of the works either by appointing the design consultants or assuming responsibility for design consultants procured by the employer. In the latter instance, the design consultants may be appointed by the employer in the usual way, even before the building contractor is selected; when the employer enters into the D&C building contract, the design consultants’ appointments are simultaneously transferred across (or ‘novated’) to the building contractor and this places single point design (as well as workmanship) responsibility on the contractor and gives the building contractor control of the design process.
Force majeure clauses are often included in D&C contracts. Sometimes the scope of a force majeure clause will be quite limited because most construction contracts will already provide a contractor with some relief for delay caused by third-party events in the form of an extension to the date for completion of the works.
Given that force majeure clauses are creatures of contract, their interpretation will be governed by the normal rules of contractual construction. Force majeure provisions will be construed strictly in the event of any ambiguity. In this context, it means that the clause will be interpreted against the interests of the party that drafted and is seeking to rely on it (‘contra proferentem’). The parties may contract out of this rule.
Importantly, parties cannot invoke a force majeure clause if they are relying on their own acts or omissions.
The underlying test in relation to most force majeure provisions is whether a particular event was within the contemplation of the parties when they made the contract. The event must also have been outside the control of the contracting party. There are generally three essential elements to force majeure:
There are two aspects to the operation of force majeure clauses:
The events which trigger the operative clause must be clearly defined. It is in the interests of both parties to ensure that the 'force majeure' is clearly defined in their contract.
The preferred approach for a developer is to define force majeure events as being any of the events in an exhaustive list set out in the contract. In this manner, both parties are aware of which events are force majeure events and which are not.
Generally, the risks to be borne in construction or engineering contracts by the contractor or engineer respectively to the principal are subject to negotiation during the pre-contractual phase.
The allocation of risk determined by the construction or engineering contract will generally reflect the strength of the respective parties. Such allocation of risk will also depend upon the possibility and/or obligations by the parties to insure certain risks. Most construction or engineering contracts will expressly foresee a detailed risk allocation with respect to, but not limited to, price variation, timing, security and material.
Force majeure and hardship form part of Belgian general contract law. Parties can however contractually extend, limit or exclude the application of force majeure or hardship. Force majeure relieves a party from performing its obligations when unforeseen circumstances, subsequent to the conclusion of the agreement, which are not attributable to the party relying on it, make it materially impossible to fulfil the agreement. The hardship theory allows the revision of an agreement in the event of the occurrence of new circumstances, subsequent to the conclusion of the agreement, which are not attributable to the party relying on it, and if these circumstances have had a disrupting effect on the economy of the agreement, without making the execution of the agreement impossible.
In addition, the above cited public procurement legislation contains certain specific provisions on so-called unforeseeable circumstances in the execution of a public contract on part of the contractor, on the one hand, and on part of the contracting authority, on the other hand (see in particular articles 38/2, 38/9 and 38/10 of the Royal Decree of 14 January 2013 on the general execution rules of public contracts).
The risk of any defects occurring in the works and the risk as to the quality of the construction are borne by the contractor. These risks are provided for in the Law on Obligations which regulates these types of contracts generally and provides for the risks borne by the contractor. Other provisions can be agreed between the parties. Force majeure is relevant to the extent provided for by the law.
The contractor generally bears all construction-related risks, except in cases of force majeure. They usually review all projects and plans and confirm their feasibility. According to the Brazilian Civil Code, any event whose effects are beyond the reasonable control of the parties and which they could not have prevented, is considered force majeure event. However, the parties may stipulate that certain clearly and expressly identified risks, even if out of the control of the contractor, will be borne by the latter.
In so-called ‘traditional’ procurement, the building contractor is responsible for the construction of the works, but not for their design. In design-build contracts, the building contractor also takes on responsibility for design of the works, usually by retaining the design consultants. In some scenarios, the design consultants may be appointed by the owner in the usual way, even before the building contractor is selected; when the owner enters into the design-build contract, the design consultants’ appointments are simultaneously transferred across (or ‘novated’) to the building contractor and this places single point design (as well as workmanship) responsibility on the contractor and gives the building contractor control of the design process.
Force majeure clauses are often included in design and construction contracts. It is common for a force majeure clause to provide a contractor with only an extension in time. In some contexts compensation will be payable as well, but it is often limited when available. For example, certain force majeure provisions will entitle a contractor to be compensated for the cost of maintaining and securing the construction site during a shutdown.
However, given that force majeure clauses are creatures of contract, they can be heavily negotiated and unique from contract to contract. Their interpretation will be governed by the normal rules of contractual construction. Force majeure provisions will be construed strictly in the event of any ambiguity. In this context, it means that the clause will be interpreted against the interests of the party that drafted and is seeking to rely on it (contra proferentem).
Importantly, parties cannot invoke a force majeure clause if they are relying on their own acts or omissions.
Most force majeure provisions will also be negated where a particular event was within the contemplation of the parties when they made the contract. The event must also have been outside the control of the contracting party.
The events which trigger the operative clause must be clearly defined. It is in the interests of both parties to ensure that the 'force majeure' is clearly defined in their contract.
Articles 772, 773, 780 and 784 of the Civil Code provide that under contracts for works (generally smaller projects), the contractor has an obligation to complete the main portion of the work, be responsible for the ancillary portion of the work, deliver the work product and take due care.
For construction project contracts (larger projects), article 800 of the Civil Code sets out a liability on the part of the surveyor and designer for any defects in design. Articles 801 and 802 provide that the contractor is liable for any defects in construction and for any personal injury or property damage.
In a construction or engineering contract, the contractor assumes various risks related to the execution of the work. These risks vary depending on the specific provisions set forth in the contract, but some common risks typically assumed by the contractor are:
In relation to force majeure, a party who is unable to perform its obligations due to an unforeseeable event beyond its control can avoid liability for non-performance of the agreement.
Construction contracts usually contain a force majeure clause allowing the contractor additional time to complete the works or the suspension of the contract or certain obligations. Events such as bad weather, strikes or government action are usually specifically managed by considering them as legitimate reasons to postpone the completion date. It is legally possible to exclude force majeure as a reason for non-performance or late performance. In the event of force majeure extending over a long period of time, the parties have the right to terminate the contract.
The contractor is responsible for the construction of the works, whereas the designer is responsible for deficiencies in design and the supervising engineer for deficiencies in supervision. In general, a party that is unable to perform its obligations because of an unforeseeable event outside its control (ie force majeure) is not liable for the consequences of such an event. Additionally, construction contracts usually contain a provision for the exclusion of liability for contractors in the case of force majeure.
Usually, the building contractor itself is responsible for the construction (the works). The Civil Code states that if the construction is being undertaken on the instructions of a client, the contractor bears the risk of damage to or destruction of the works, up to the point of handover, except to the extent the damage is caused by factors outside the contractor's control. Design issues are separate from the building contractor's obligations as the relationship with design consultants is created separately. If the building contractor also provides the design, his responsibility does relate to this area.
Liability for damage in the field of civil law is based on the principle of strict liability, subject to what are called 'grounds for release'. In this area, the injured party must prove that the damage has been caused by a breach of duty by a responsible person. The responsible person cannot be absolved of responsibility as the issue of responsibility is not the main factor, but the responsible person may absolve himself of liability if he proves that the infringement was caused by one of these 'grounds for release'.
Where absolute strict liability applies the responsible person cannot avoid liability; even evidence of force majeure cannot be relied upon. An example of such absolute strict liability is a contractual penalty. Under the Civil Code, the circumstances which preclude strict liability do not affect an obligation to pay a contractual penalty. It should be noted that the parties to a contract may agree to exclude this rule.
The main building contractor is responsible for the construction.
Where a turnkey contractor is used that contractor is additionally responsible for the design of the works (all design services). The design consultant in this instance is appointed by the turnkey contractor.
The standard form building contracts AB 18 and ABT 18 do not use the wording ‘force majeure’, but both contracts contain a clause allowing the contractor additional time to complete the work if the cause of the delay cannot be attributed to the contractor and is beyond his control, eg where the delay is due to circumstances attributable to the employer, or in the cases of war, Acts of God, fire, strike, lock-out and vandalism.
Generally, the risks in construction or engineering contracts to be borne by the contractor or engineer respectively are subject to negotiation during the pre-contractual phase.
The allocation of risk under the construction or engineering contract will generally reflect the strength of the relevant parties. This allocation of risk will also depend upon the availability or the obligations on the parties to insure certain risks. Most construction and engineering contracts will expressly provide for a detailed risk allocation covering, but not limited to, price variation, timing, security and material.
In relation to force majeure, a party that is unable to perform its obligations because of an unforeseeable event outside its control can avoid liability for non-performance of the agreement.
Construction contracts usually contain a force majeure clause allowing the contractor additional time to complete the works. Events such as bad weather, strikes or government action are usually specifically managed by considering them as legitimate grounds to postpone the completion date. It is legally possible to exclude force majeure as a ground for non-performance or late performance.
Construction contracts have to deal with quite a number of instances where risks have to be allocated between principal and contractor. The following examples may be highlighted:
Risks borne by the contractor in a construction contract are usually in relation to failure to build, defective work or delay.
The term ‘force majeure’ is used with reference to all circumstances independent of the will of man and which are not in his power to control. Unlike most industry forms, the Standard Form of Building Contract often used in Hong Kong do contain a force majeure clause allowing the contractor additional time to complete the works. The term ‘force majeure’ must be construed as a whole with the rest of the contract and with regard to the nature and other terms of the contract.
The contractor is responsible for the construction of the works, including pre-financing the project milestones (though sometimes employers/clients agree to pay an advance amount), health and safety on the construction site and property protection etc. In design and build projects, the contractor is not only responsible for the construction, but also for the design of the works.
In relation to force majeure, if the contractor is unable to perform its obligations (eg completion by a specified date) under the construction contract because of unforeseeable events outside its control, this might result in the extension of the original time for completion.
In the standard works contract, the contractor is responsible for the construction of the works (not design) whereas design and build agreements require the contractor to also take design responsibility. Design consultants, eg architects are appointed by the employer before the building contractor is selected. After the contractor executes a Design and Build Agreement, the design consultants' appointments are novated to the contractor, the latter being solely responsible to the employer for design and workmanship, although the employer will generally require a collateral warranty from the architect in order to create a direct contractual link.
Force majeure is provided for in Irish standard form contracts for a party that is unable to perform its obligations because of an unforeseeable event outside its control. It allows the contractor appropriate extensions of time. The parties may also rely on the common law doctrine of frustration to avoid liability for non-performance of the agreement where performance is rendered impossible due to unforeseeable events.
The RIAI have two standard forms of building agreement: 1) with quantities and 2) without quantities. The 'without quantities' form of contract means that the contractor will price the construction of the building which is shown on the plans. Therefore, if the plan shows doors, the contractor's price will include for hinges and handles. The contractor takes the risk of incorrectly pricing the number of hinges and handles required. If the contract is 'with quantities', which would mean that the employer would arrange to have a bill of quantities drawn up which would set out everything the contractor would need to carry out the works. Therefore, if the bill of quantities insufficiently quotes what is needed, for example if it says six hinges are needed, rather than the five hinges that were quoted in the bill, the Contractor will be entitled to receive the price for 6 hinges. In other words, the contractor will be entitled to receive payment for any extras required.
Ground condition risk will generally remain with the employer.
In 2001, the then Director of Consumer Affairs took proceedings to the High Court under Regulation 8(1) of the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995 and 2003 ('Unfair Terms Regulations') to tackle the issue of unfair conditions in building contracts being inserted by solicitors acting for building contractors. Since 2001, unfair terms cannot be imposed on consumers where they contract with contractors. These regulations, as amended by SI 160/2013 implement Council Directive No. 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts.
Terms regarded as unfair include:
The contractor bears the risk of the works until the moment of delivery. Generally, upon delivery of the works, a snagging list is drawn up, which the contractor must remedy. After delivery and remedy of the detected snagging, a contractor is, in principle, no longer liable for the works. This does not, however, apply to hidden defects – defects that could not have been known about at the time of delivery. The liability of a contractor in respect of defects is generally subject to an expiry period or limitation period of two years, for hidden defects and non-compliance of the works, and ten years for serious defects and risk of collapse or ruin.
In respect of the other parties involved with a construction project, the contractor is, in principle, only responsible for carrying out the works. The client guarantees the design. There is an interaction between the responsibilities of these two parties; indeed, the contractor has an obligation to detect and notify its client about obvious mistakes in the construction, working methods and/or instructions.
Force majeure clauses are usually contractually agreed between the parties. Invoking force majeure can, in principle, only play a role during the phase prior to delivery of the works.
Force majeure is defined as any events, acts, facts or circumstances which:
The occurrence of a force majeure event usually involves an extension of the term agreed for completion of the works with no extra-money. The parties may agree that, if the event of force majeure lasts longer than a period previously agreed upon between the parties, the construction contract may be terminated.
Risks borne by a contractor in a construction contract are usually in relation to failure to build, defective work or delay.
In general, a contractor that is unable to perform its obligations because of a force majeure event is not liable for consequences of such event so long as the contractor exercises due care of a good manager.
The contractor bears the risk of the works until the moment of delivery. Generally, upon delivery of the works, a list of delivery defects, which the contractor must repair, is drawn up in a report of delivery. After delivery, a contractor is liable for defects that have not been discovered at the delivery of the works, unless such defects are not attributable to the contractor. This provision can, however, be explicitly deviated from in the event of a professional client. Depending on the general conditions or statutory regulations declared applicable, the liability of a contractor in respect of hidden defects is, under the aforementioned UAV 2012, subject to an expiry period varying from five to ten years, commencing after delivery or at the end of the defects liability period and a limitation period, pursuant the Dutch Civil Code, varying from two to twenty years after discovery of the defect. These periods generally commence after delivery or at the end of the defects liability period.
In respect of the other parties involved with a construction project, the contractor is, in principle, only responsible for carrying out the works. Generally, the client provides the contractor with the design and guarantees the design. There is an interaction between the responsibilities of these two parties in that during the performance of the works, a contractor is obliged to warn its client about obvious mistakes in the construction, working methods and/or instructions. However, it is not uncommon that the client also commissions the contractor to provide for the designing of the works. In this event, the contractor guarantees the soundness of the design.
Invoking force majeure can, in principle, only play a role during the phase prior to delivery of the works, for example, in situations involving delay and/or price increases. A situation that has recently come up is the war between Russia and Ukraine. Force majeure will not often be invoked after the works have been delivered. The phenomenon of force majeure is embedded in general civil law, which means that a contractor can, in principle, always rely on it. The circumstances of the situation will, however, affect whether the contractor will succeed in alleging force majeure, since in any case it must be established that the breach of contract cannot be attributed to the contractor.
Under a typical fixed price contract in New Zealand, the key risks borne by the contractor are:
The NZS suite of construction contracts do not contain a force majeure clause, although there is an extension of time regime for specified events (including unforeseeable circumstances). There is also a clause dealing with frustration (the contract becomes impossible to perform) that allows either party to terminate.
All risks pertaining to damages to persons and property during the construction process are the contractor’s responsibility.
Construction contracts usually contain force majeure clauses in the event of the occurrence of the specified happenings regarded as being out of the control of the parties
Normally, the responsibility follows the function, meaning that the parties are responsible for their own duties. For example, the building contractor is responsible for the construction of the works, but not for their design although, in design and build (D&B) procurement, the building contractor also takes on responsibility for design of the works. The client, in most situations, bears the risk in relation to unexpected ground conditions, unless the contract expressly states otherwise.
Force majeure is a recognized Norwegian legal concept in several different situations. It is however rare that a contractual party’s claim based on a force majeure incident is accepted. In Norwegian standard documents a claim for extension of time from the contractor is generally accepted where the delay is due to a force majeure event. However, a contract party is not entitled to claim compensation for additional costs which have arisen due to a force majeure event.
In Poland the building contractor is responsible for the construction of the works and also takes on responsibility for design of the works.
Force majeure concerns a party that is unable to perform its obligations because of an unforeseeable event outside its control. According to a force majeure clause such party may avoid liability for non-performance of the agreement. Standard building contracts do contain a force majeure clause allowing the contractor additional time to complete the works.
Normally, the contractor only assumes risks concerning the construction of the building (eg execution in accordance with the employer specifications, with the applicable regulations and without defects). It is, however, unusual for contractors to bear the financial risks that arise from the construction work or the cost of procuring licences.
Force majeure legal provisions will assist a contractor who is seeking a remedy for delay to or termination of works due to an unforeseen event that cannot be attributed to either party. It is also common (and advisable) for the parties to set out what sorts of events may qualify as force majeure and the contractual consequences of those events occurring.
In accordance with the general principles of the Romanian law, the risk of destruction or loss of assets is borne by the owner of the relevant assets. Therefore, if the materials necessary for the construction works have been procured by the contractor, he will bear the risk. However, if the materials have been procured by the employer and the construction has been affected by defects in the materials, the employer will bear the risk.
In addition, under the Romanian Civil Code, the contractor bears all the risks arising from a construction contract, as he undertook the obligations of the contract at his own risk. Thus, if the performance of the contract becomes impossible due to force majeure or for any other reason apart from the employer’s default, the contractor is not entitled to receive the construction price, as he has not carried out the works.
However, the employer is obliged to pay the price of the construction works if he was in default in handing over the site of the works. Also the contractor is entitled to ask for payment of the price if the construction works are not carried out due to defects in materials provided by the client. The constructor benefits from a legal mortgage for the payment of the price, which produces effects only after registered in the relevant land books.
These provisions may be waived by the parties to a construction agreement and the client/employer’s liability may be extended.
There is a difference between the legal regimes and regulations related to:
Provisions of Civil Code provide that the party liable for the damage can exclude its liability if it proves that it did not cause the damage.
Under the provisions of the Commercial Code, the party bearing the risk of damage is liable regardless its culpability. An event of force majeure is deemed to be a reason for exclusion of the liability.
The effect of the circumstances of force majeure will apply only during the period of existence of such circumstances.
An event of force majeure does not exclude the liability of the party if this party is in default.
The aggrieved party will not be entitled to compensation for damage if the non-performance of obligations by the liable party was caused by the conduct of the aggrieved party itself or due to a lack of co-operation to which the aggrieved party was obliged.
Traditionally, the building contractor is responsible for the construction of the works, but not for the design. In more modern turnkey oriented contracts, the building contractor may also take on responsibility for design.
The contractor usually assumes the risk of damage or destruction of the works until delivery of the completed building to the developer.
Since May 2000, buyers of newly built property have benefited from a legal 10-year warranty, under which developers are liable in the event of a collapse or serious structural defects. The term of the warranty runs from the date on which the building is completed.
Force majeure is construed strictly (including usually only fire caused by lightning, floods, and strikes which affect other companies besides the contractor) and is relevant mainly in relation to possible delays to the works, which may not then give rise to penalties on the contractors and will involve additional time being given to the contractor to complete the works.
Under the General Conditions for Contracts – AB 04 and ABT 06 – the contractor is liable for damage to any part of the construction that has not yet been handed over to the employer. The contractor is not, however, liable for damage which is caused by the employer.
The General Conditions for Contracts – AB 04 and ABT 06 – state that the contractor is not be liable for damage which is due to war, terrorism, insurrection, natural disaster or comparable circumstances (force majeure).
The contractor generally bears the potential risks or any losses incurred during the construction process. Upon delivery of the work, under Section 600 of the Civil and Commercial Code, unless otherwise provided in the contract, the contractor is only liable for a defect which appears within five years after delivery of the work. This limitation does not apply if the contractor has concealed the defect.
In addition, the construction contract usually contains a force majeure clause. A force majeure event occurs when an event happens that is outside of the control of the parties, for instance, a natural disaster or uprising. The event cannot have been reasonably foreseen and cannot have been prevented. In the event of a force majeure event, the contractor may avoid liability.
Common methods of procurement in Abu Dhabi include 'traditional' procurement, where the building contractor is responsible for the construction of the works, but not for the design, and to a lesser extent, design and build (D&B) procurement, where the building contractor also takes on responsibility for design of the works. It is uncommon in the UAE for the appointment of design consultants to be novated to a D&B contractor.
Force majeure is provided for in Abu Dhabi law through the operation of the Civil Code. A party that is unable to perform its obligations because of an unforeseeable event outside its control can rely on the provisions of the Civil Code in order to avoid liability for non-performance of the contract.
The FIDIC standard building contracts contain a force majeure clause allowing the contractor additional time to complete the works. A force majeure clause should be construed with close attention to the words that precede and follow it and with due regard to the nature and general terms of the contract.
Under the most common method of procurement used in the UAE, the building contractor is responsible for the construction of the works, but not for the design.
Force majeure is provided for in Dubai law through the operation of the Civil Code. A party that is unable to perform its obligations because of an unforeseeable event outside its control can rely on the provisions of the Civil Code in order to avoid liability for non-performance of the agreement. This risk is usually also contractually prescribed in addition to the statutory requirements.
The FIDIC standard building contracts contain a force majeure clause allowing the contractor additional time to complete the works. A force majeure clause should be construed with close attention to the words that precede and follow it and with due regard to the nature and general terms of the contract.
In so-called ‘traditional’ procurement, the building contractor is responsible for the construction of the works, but not for its design. In design and build (D&B) procurement, the building contractor also takes on responsibility for design of the works. The design consultants are appointed by the employer in the usual way, even before the building contractor is selected; when the employer enters into the D&B building contract, the design consultants’ appointments are simultaneously transferred across (or ‘novated’) to the building contractor and this places sole design responsibility for design (as well as workmanship) on the contractor and gives him control of the design process.
Force majeure is not an English law concept and a party that is unable to perform its obligations because of an unforeseeable event outside its control would have to rely on the English doctrine of frustration in order to avoid liability for non-performance of the agreement.
Unlike most industry forms, the JCT standard building contracts do contain a force majeure clause allowing the contractor additional time to complete the works. A force majeure clause should be construed with close attention to the words that precede or follow it and with due regard to the nature and general terms of the contract. The JCT force majeure clause has a restricted meaning because matters such as war, strikes, fire, weather and government action are expressly dealt with elsewhere in the contract.
In what is called 'traditional' procurement, the building contractor is responsible for the construction of the works, but not for its design. In design and build (D&B) procurement, the building contractor also takes on responsibility for design of the works. The design consultants are appointed by the employer in the usual way, even before the building contractor is selected; when the employer enters into the D&B building contract, the design consultants' appointments are simultaneously transferred across (or 'novated') to the building contractor and this places sole responsibility for design (as well as workmanship) on the contractor and gives him control of the design process.
Force majeure is not a Scots law concept and a party that is unable to perform its obligations because of an unforeseeable event outside its control would have to rely on the doctrine of frustration in order to avoid liability for non‑performance of the agreement.
Unlike most industry forms, the JCT/SBCC standard building contract do contain a definition of force majeure but in the published contracts it is an event which, if it occurs, will entitle the contractor to additional time to complete the works. A force majeure clause should be construed with close attention to the words that precede or follow it and with due regard to the nature and general terms of the contract. In JCT/SBCC contracts force majeure has a more restricted meaning because matters such as war, strikes, fire, weather and government action are expressly dealt with elsewhere in the contract.
Ukrainian legislation provides that the contractor is usually liable for accidental destruction or damage to the facilities which are in the process of construction and materials or equipment of the developer or any third parties located on the construction site. However, the allocation of those risks between developer, contractor and sub-contractor could be separately agreed between the parties.
The contractor usually bears the risk of injury to its employees which takes place on the construction site and, in some cases, injuries to third parties (if such injuries took place on the construction site due to the contractor's fault).
The contractor also bears contractual risks connected with breaches of the terms of the construction/engineering contract, such as delays in performance of the construction works or incomplete performance of works.
Usually a construction and engineering contract will include a force majeure clause envisaging circumstances/events deemed to be force majeure. Normally it is stipulated that if a force-majeure event continues to exist for a period of time agreed by the parties (eg three months), the parties are entitled to terminate the construction contract.
The allocation of risk depends on several factors, including, among others, the project delivery method selected and the manner in which the contract price is calculated.
If the project delivery method is a traditional design-bid-build – whose defining characteristics include: (a) three principal participants (owner, architect, and contractor) and (b) two separate prime contracts (owner-architect agreement and the construction contract) – the general contractor is responsible for construction of the project as depicted in drawings, specifications, and other documents prepared by the architect and design team. Accordingly, the general contractor depends on the architect for the design of the project and the quality of the documents the architect prepares. The general contractor has little opportunity for input during the design process with respect to matters in which it has expertise, such as value engineering, cost estimating, constructability, construction scheduling, labour and material market analysis, equipment availability, design of specialized equipment and proprietary systems, and other similar issues.
Depending on the type of contract negotiated, the general contractor also may bear responsibility to complete construction of the project within a certain price. If the general contractor has agreed to construct the project for a fixed price or has guaranteed a maximum, not-to-exceed price, then the cost overruns (with certain exceptions) become the risk of the general contractor. Accordingly, the contractor assumes the risk of volatility in labour and material pricing. Conversely, if the contract is cost-plus, then the general contractor’s compensation is comprised of the actual cost of construction the project – whatever that cost may be upon final completion – plus a fee. In such a case, the owner bears the risk of escalating costs.
The general contractor also may assume the risk of completing the project on time and obligate itself to complete the project by a specific date or prior to the expiration of a certain period of time. Achieving completion of the project on time may be necessary for the owner to meet its obligations with respect to financing or third parties (eg future tenants in the facility being constructed), take advantage of business or seasonal cycles, otherwise generate needed revenue from the project, or limit expenses so the project remains viable. If the general contractor fails to complete the project within the agreed-upon time, then the owner may suffer losses due to the delay. Accordingly, the owner may require that the contractor guarantee the time in which the project will be completed and assume the risk if it is not. For example, the contractor could agree to pay liquidated damages, if the project is not completed by the agreed-upon date of final completion as set forth in the contract.
Another risk assumed by the general contractor arises from the architect’s limited role in the design process in a design-bid-build project (the design is completed by the architect before the project is bid or the contractor selected) and the corresponding limited remedies available to the contractor against the architect. Because the owner enters into separate contracts with the architect and the general contractor, the general contractor and architect are not in privity, ie the general contractor and architect have no contractual relationship. Lacking privity, the contractor’s remedies against the architect are limited, depending on the economic loss rule law in the US state in which the project is located. The general contractor’s only option to pursue a claim might be to bring the claim against the party with whom it has a contract – the owner.
The spectrum of a construction manager’s risks and responsibilities is wide and filled with variations. At one end of the spectrum, the construction manager operates as the agent of the owner. At the other end of the spectrum, the construction manager is ‘at-risk’ and operates similar to a general contractor.
At the ‘agency’ end of the spectrum, the construction manager does not assume the traditional risks of a general contractor. Rather, the construction manager’s role is to act as an advisor to the owner while monitoring the project. The construction manager typically will attempt to minimize the owner’s risks while at the same time expediting the process – for example, obtaining bids before the design documents are 100% complete.
At the ‘at-risk’ end of the spectrum, the construction manager bears risks similar to the general contractor in the design-bid-build project delivery method. With respect to guaranteeing a price, an ‘at-risk’ construction manager may bear additional risk because the price it guarantees is an estimate based on incomplete drawings. Methods of mitigating this risk include factoring in a larger contingency in the guaranteed price or providing an estimate when the construction management agreement is executed, with provision for a guaranteed price only after the design documents are complete.
The body of law governing an at-risk construction manager is less than an at-risk general contractor or an agent construction manager. As a result, disputes may be more difficult and more expensive to resolve.
Under the design-build approach, a single entity undertakes to both design and construct the project, providing the owner with a single point of responsibility for the entire project. The entity bearing that responsibility is often the general contractor who either has in-house design expertise or takes responsibility for subcontracting with an architect for the design. As a result, some of the risk factors that an owner confronts in the design-bid-construct approach now belong to the design-builder with whom the owner contracts; and the owner is relieved of some of the challenges that accompany holding separate and independent contracts for the construction and design of the project.
Calculating the cost of the project and preparing a proposal presents a difficult exercise for a design-builder and, accordingly, a risk. In preparing a proposal, the design-builder faces a dilemma. The design-builder is arguably best served by developing the design to a point where the design-builder is reasonably confident in its ability to predict all elements needed to produce a final design. If the design builder is comfortable with the design, reasonable projections are possible for cost, time, performance, characteristics, and other matters. Therefore, the design builder can reduce contingencies accordingly and submit a more reliable proposal.
However, the design-builder’s effort to produce a more reliable proposal consumes limited resources and is very costly. For example, the design-build project may be structured as a two-step process, with a ‘go’ or ‘no go’ decision to be made at a certain point by the owner regarding whether to proceed with the design-builder or the project. If the owner decides not to proceed, then the design-builder will not recover those costs if another party is awarded the contract or if the project is abandoned. But, the alternative of putting forth only minimal effort in preparing a proposal is a risky venture. The resulting proposal may not be responsive to the owner’s needs and, therefore, a wasted effort. Moreover, the less-developed proposal may put the design builder at risk. The design-builder has made a wager that it will be able to complete the project for the cost and time proposed, although the design-builder may not have studied the project in detail and as appropriate to make such a judgment.
Force Majeure. The term ‘force majeure’ generally refers to an unexpected event of nature or civil unrest beyond the parties’ control, such as a flood, war, strike, or storm. A force majeure clause attempts to relieve the contractor of certain of its responsibilities for time and/or price upon the occurrence of a force majeure event, generally either by extending the time allowed to perform the contract or by increasing the price beyond the limit of any guarantee.
The extent to which a force majeure clause shifts risk from contractor to owner depends on how the term is defined in a contract and the specific provisions made for force majeure. The contractor will want the term defined as broadly as possible in the contract; the owner will want to narrow the definition. The contractor will want the delay caused by the force majeure event to be compensable, ie the contractor is entitled to claim both time and money. Conversely, the owner will want the force majeure event to be excusable, ie the contractor is entitled to claim only time – and then only if the force majeure event increases the critical path of the project.
Accordingly, the contract negotiated by the parties will determine what constitutes force majeure and how it shifts risk between owner and contractor with respect to a particular project.
Ordinarily, the contractor will not bear the risk associated with design. The quality and standards applicable to construction works is in accordance with industry norms. The contractor will thus bear risks related to the quality of workmanship.
Force majeure is applicable in such contracts and the parties would need to agree on what constitutes a force majeure event depending on their preferences.
