BuildLaw BuildLaw: Issue 24, June 2016 | Page 20

referring it to the Dispute process under clause 13 of NZS3910. If the contract is found to be frustrated, clause 14.1.2 provides for the costs that are payable by the principal to the contractor following the frustrating events (including the value of the work carried out at the date of termination less amounts previously paid).

In the context of construction contracts, contractors and principals often find themselves in situations where performance has become more onerous, more expensive or slower due to unforeseen circumstances. However, the fact that the bargain has become unworkable in a commercial sense because of an unforeseen event will not discharge the party from further performance on the grounds of frustration. Therefore, it is important that the contract is drafted to reflect the parties’ intention as to what should happen if such an event was to occur and this is what a force majeure clause is desired to do.

Force majeure clauses

Force majeure clauses are common in the construction sector and offer a commercial mechanism to clearly address unforeseen events. Parties can agree upon both the events that trigger the force majeure clause, and the consequences. Unlike the strict doctrine of frustration, where the threshold can be difficult to meet, parties can negotiate force majeure clauses in order to achieve flexibility for certain events. For example, parties to a construction contract may choose to suspend performance or extend time for performance upon the occurrence of a force majeure event.

Clause 10.3.1 of NZS3910 is a force majeure provision which provides that the engineer grant an extension of time to the contractor if the contractor is “fairly entitled to an extension” including by reason of flood, volcanic or seismic events, or any circumstances not reasonably foreseeable by an experienced contractor at the time of tendering and not due to the fault of the contractor.

Force majeure clauses are also included in the FIDIC suite of contracts (Red, Yellow and Silver Books) at clause 19 where “force majeure” is defined as an exceptional event or circumstance beyond a party’s control, which could not reasonably have been provided against before entering into the contract and which, having arisen, could not reasonably have been avoided or overcome and which is not substantially attributable to the other party. The categories listed as force majeure events include (i) war and other hostilities (ii) rebellion, terrorism and civil war (iii) riots and strikes (by persons other than the contractor's personnel and subcontractors) (iv) explosive materials and radioactive contamination and (v) natural catastrophes such as earthquakes, hurricanes and volcanic activity.

Clause 19 of the FIDIC suite of contracts entitles the contractor to an extension of time if it is prevented from performing the contract by any of the force majeure events. However, it will only be entitled to recover the costs incurred due to the force majeure event if it is a category (i) to (iv) event (meaning that the contractor cannot recover costs arising in relation to natural catastrophes).

Relationship between frustration and force majeure

Where the parties have turned their minds to the frustrating event and contractually allowed for it in a force majeure clause, reliance on the common law doctrine of frustration is generally precluded. Given the prevalence of force majeure clauses in standard form construction contracts, a finding that the contract had been frustrated in Codelfa Construction Pty Ltd v State Rail Authority of NSW (supra) has been described by Hudson’s Building and Engineering Contracts (12th edition) as an “exceptional result” (at [1-059]).

Force majeure clauses are common place in the construction industry, such that the absence of