FORCE MAJEURE AND RISK MANAGEMENT: THE CURRENT SITUATION CALLS FOR BETTER CO-OPERATION

“The war in Ukraine is a force majeure event.”

“We can claim extension of time due to the issues with acquiring transportation as this is COVID-19 related.”

“Don’t worry, we are back-to-back – so there are no risks.”

All the above may be true. Of course, it may also be false. In effect, force majeure or “exceptional events,” as it is called in the FIDIC suite of contracts, and the legal effect resulting from such events varies greatly from contract to contract and country to country.

As many contracts have already been concluded without emphasis on the “exceptional events” clauses, the situation on international projects is quite often that the legal position differs between contractors from main to subcontractor and so on.

One example is that Danish law requires that an exceptional event entails compliance with the contract becomes impossible. This principle also applies to the standard Danish AB rules. FIDIC conditions of contact, on the other hand, require that the circumstances resulting from the event could not reasonably have been avoided or overcome. Further, FIDIC conditions of contract provide that under certain situations, the contractor is awarded time and costs, whereas AB only provides for extension of time.

To understand your legal position, you need to read the contract. Often you will also need local legal advice. Of course, your legal position is not (by far) the only factor determining your negotiation position. If you have regard for how the project may be executed in the best overall manner, (all) parties are much more likely to achieve a better result from the negotiations.

Risk management – not risk allocation – is required

In the current situation where uncertainty on time of delivery and the risk of cost increases grow day by day, it is tempting to simply allocate all risk in this regard to the contracting partner. This may be prudent in some situations where the partner is able to provide security, is financially solid, and the best positioned to handle the risks in question. However, even in this situation, you should be aware that such risk allocation comes at a premium.

To us, co-operation and flexibility are keywords. With co-operation and flexibility, you will be able to identify and handle risks and thus lower the contingencies paid. Still, more importantly, this will ensure that your project has a higher chance of succeeding.

How to put together a flexible co-operation depends on the situation. Does the situation call for broader co-operation with the suppliers, an integrated model for project delivery, or something in between? This question cannot be answered in general terms, but you are welcome to reach out to Steffen Hebsgaard Muff or Peter Damsgaard Eriksen if you want to know more.