Practical Law

There is extensive experience within the UK construction and engineering industries (and the advisers to those industries) of working in many different parts of the world. However, there is now a need (as opposed to a willingness) to work abroad because of the reduced workload in the UK. Less experienced companies will seek to work internationally, possibly for the first time. Some (including experienced players) might be willing to take on more risk than would be acceptable under normal market conditions in order to secure the revenue they need to keep the financial wolf from the door.

Into this somewhat precarious commercial scenario must be placed political uncertainty. In recent weeks, we have witnessed change on an unprecedented scale and rapidity. This might well prove to be one of the most difficult times in which to assess “country risk”. Can anyone confidently predict how working and trading conditions will develop across the Middle East or North Africa over the lifetime of even a medium sized project? Are there other countries which could be the subject of rapid and unpredictable change, even if not on the same scale?

Given that (in most cases) the show must go on, here are a few practical suggestions about contracting overseas where there is a significant country risk. Given the experiences with foot & mouth and swine flu, some of these might well be applicable to all jurisdictions (including the UK).

Force majeure

No list of force majeure events will cover every situation. Some people prefer to use force majeure undefined and then argue the point when the problem arises. The disadvantage of that approach is the uncertainty which results if there is a disagreement over whether a series of events amounts to force majeure.

Conceptually, force majeure is usually seen as something beyond the control of the affected party. Typically, you will need to show that, even if you had done all that was to be reasonably expected of someone in your position, you would still have been affected.

Clause 19.1.1 of the FIDIC Silver Book talks in terms of events that:

“(b) … could not reasonably have [been] provided against before entering into the Contract,

(c) …having arisen, … could not reasonably have [been] avoided or overcome”

This begs the question of what it is that you can be reasonably expected to do. Of course, that will depend on the project and the location. At one extreme, you might be expected to build a fortress-like compound with its own security and airstrip. However, in some projects, for example the refurbishment of a functioning city-centre hotel, that would simply not be possible.

The problem (particularly at the moment) is that what would be reasonable to budget for at the beginning of the project may not be the same as what is reasonable a couple of years later.

Risk rather than actuality

In many cases, it will be the risk of a force majeure event, rather than an event itself, which will disrupt the project. For example, will your force majeure clause be available in the following scenarios?

• You decide that it is not safe to continue working but, in the event, nothing happens at the site or even in the region in which you are working.
• You cannot source adequate labour or materials because of adverse travel advice or insurers declining transit cover.
• The project is intermittently affected over a prolonged period by security problems together with failures of transport, utilities and communications.

Specific contract clauses

Another factor is that there are demobilisation and mobilisation costs to be considered, together with prolongation claims relating to staff, sub-contractors and suppliers. These may not be available under force majeure clauses, some of which only give an extension of time.

In practice, many contracts deal with force majeure type events using “ordinary” provisions. These might include clauses giving an extension of time for general unavailability of labour or materials due to strikes or government action, failure or unavailability of utilities or transport facilities and insured events like fire and vandalism. I have seen a number of contracts where any delays “outside the reasonable control” of the contractor lead to an extension of time. There is sometimes an overlap between these provisions and the force majeure clauses and, again, there is a question over what is reasonable.

Practicalities and civil contingencies

I wonder whether the classic procedures involving what is seen as adversarial (or at least “contractual”) extensions of time, with claims for extra cost, disruption and expense based on an objective (but undefined) test of reasonableness are really suitable for working in certain places at the moment.

A few years ago I was asked to draft a contract for an emergency repair service. The client was a Category 2 Responder under the Civil Contingencies Act 2004 (see the UK Resilience homepage), which meant that a force majeure event would in all likelihood lead to an increased workload for the contractor rather than a suspension of duties.

Although co-operative, the contractor quite understandably said that there would be some situations where they simply could not continue to provide the repair service at all. In other situations, they would only be able to continue if they used special equipment or resources, which would have to be secured (even on an as-needed basis) in advance if they had to be deployed at short notice. The resources in question were things like a large helicopter (with sufficient crew to work round the clock), a number of four wheel drive vehicles and a stand-alone radio communication system. Not difficult to procure, unless you wait until they are actually needed, then you have to join the queue.

Contingency approach to risk management

We decided to adopt a contingency approach to this problem, rather than just agreeing a form of words as to the rights and responsibilities of the parties. The same risk planning tools that are used for other risks in projects can be applied to the country risk scenario.

So, for example, if a high level of preparedness and continuity is required, the client will have to pay for the required resources either to be on site or close to hand.

Obviously, health and safety comes first and if it’s time to leave then it’s time to leave. However, a site that is managed in such a way that it can very quickly be made safe and put into suspension will be better able to cope with contingencies.

Force majeure and related provisions can then be drafted on the basis that the contractor is assumed to have certain equipment and resources all immediately deployable and that it will run the site in a resilient way.

One step removed

To some extent the points made above are self-evident. However, what is often forgotten is the effect on suppliers and sub-contractors who are not “in-country” but suffer delays and cancellations because of events in distant places. They in turn have sub-contractors and suppliers who are also affected. Increased care and attention should be given to cancellation and delay provisions in contracts where the ultimate client is in a country where there are increased risks.

Again, there might be contingency plans. What will happen if the project is delayed by three months, twelve months or cancelled completely? Should components be finished or left incomplete? If finished, should they be stored by the supplier or delivered?

These issues are not exclusive to country risk. Other risks, such as the impact of client insolvency, raises similar issues down the supply chain which are too often not addressed until after the event.