The Practice of Unforeseen Circumstance in EPC Contracts
Introduction
In EPC Contracts, especially for the international ones, there is a long period between the finalization of the tender or the execution of contract and delivery of the work. It is a quite common situation, in practice, with EPC Contracts that various events arise that were not present and/or unforeseeable when the bid was made or even when the contract was executed, which changes the circumstances unforeseeably.
Especially, when given new economic and political developments and changes, the differences in climatic and geographical conditions, as well as pandemics that are the concerns of today, these may cause unforeseen circumstances, for both the employer and the contractor, during the performance of such contracts. Upon the occurrence of these unforeseen circumstances, the contractual rights and obligations of the parties, and the adaptation of the contract when necessary, are the most common causes of disputes, especially in 2020 and in 2021.
The Term Unforeseen Circumstance
The terms ‘unforeseen circumstance,’ and ‘unforeseeability,’ may be evaluated together or separately. Unforeseen circumstance may be considered as the occurrence of a situation that was unforeseeable at the moment of execution of the contract, or it can be seen as the occurrence of a certain unpredictable event or situation. Thus, unforeseen circumstances that the parties would never imagine to have occurred during the execution phase of the contract, and unforeseen circumstances where there was a possibility for something to come up, but the manner of its occurrence, and its effects upon the operations carried out was unexpected, may both be considered within the scope of the term unforeseen circumstance.[1]
What is unforeseeable for an unforeseen circumstance is not the possibility of their occurrence, but it is the probability of its occurrence, and the effects of unforeseen circumstance on performance, and who bears the risk in case of its occurrence, and its consequences.[2]
Thus, it is crucial to carry out any necessary research in the most detailed manner possible, especially by the contractor prior to the execution of the contract and, in some cases, before the bidding for the tender. This research is called “due diligence” in the language of international contracts.
The essential aim of due diligence is to determine risk factors and the way to draft allocation of risk in the contract, and the effects of the occurrence of risk factors during performance of the operations, and to determine the consequences and effects of its occurrence.
The most important work to be done to determine those is inspection of the geographical conditions and ground conditions of the site where the operations that are set forth in the contract will be carried out, the determination of the accuracy and fit for purpose of data provided by employer, both among the tender documents, and at the contract stage, and to ascertain who will bear the liability and obligations of the project drawing and design.
In spite of all the work carried out, the occurrence of unforeseeable and/or unforeseen circumstances when the contract was drafted and executed during the performance of the work is possible, and a frequently encountered situation. Many legal institutions have emerged, especially the adaptation of contract, in order to provide contractual justice in unforeseen circumstances.[3]
Two legal institutions chiefly apply upon the occurrence of unforeseen circumstances, and in circumstances which may lead to rescission of the contract that are unforeseeable and difficult to be covered up, or in extremely difficult circumstances. These are “hardship” and “force majeure”.
Although the term force majeure is used in the texts of some articles in some principle laws of Turkish legislation, it is not clearly defined in Turkish Commercial Code or Turkish Code of Obligations (“TCO”).
Therefore, force majeure definitions and circumstances provided by institutions that lead international contracts, such as the ICC and FIDIC, may be used via reference or directly incorporated into the contract.
However, the TCO has regulations regarding consequences of the occurrence of force majeure events, situations that cause hardship, and unforeseen circumstances.
Firstly, Article 136 of the TCO regulating the cases where the unforeseen circumstance cause “impossibility of performance” for either of the parties or both parties states that “If the performance of debt becomes impossible due to reasons that the debtor cannot be held liable for, the debt shall come to an end;” thus regulating that the debt will come to an end in such a situation. However, with the regulation in the third paragraph of the same Article, “If the debtor fails to timely notify the creditor of the impossibility of performance, and did not adopt measures to prevent the increase of damage, the debtor shall be responsible to compensate the damages that occurred for this reason,” the duty of notifying the parties and duty of precaution has been brought to the parties of the contract.
In cases where performance is not entirely impossible, Article 137 of the TCO regulates partial impossibility of performance. “According to this Article, if performance becomes partially impossible for reasons that the debtor cannot be held liable, the debtor shall only dispense with part of the debt which became impossible. However, if it is expressly understood that such a contract will not be executed by the parties if the partial impossibility of performance was foreseen beforehand, the whole debt shall come to an end.”
When the second paragraph of the same Article is evaluated within the framework of EPC Contracts, if the contractor’s debt will be rendered partially impossible, and the employer accepts partial performance, payment, which is the corresponding performance, shall be performed at that ratio. Thus, the contractual duties will continue. However, if the parties or the creditor did not consent to such performance, or if the corresponding act has an indivisible character, the full impossibility provisions of Article 136 of TCO will apply.
Hardship is the most commonly faced situation when unforeseeable circumstances occur, and is regulated under Article 138 of the TCO. According to this Article, if an extraordinary situation that could not be foreseen, and could not be expected to be foreseen at the execution of the contract, emerges for a reason not caused by the debtor and changes the facts that were present when the contract was executed against the interests of the debtor in a way contrary to good faith principles, and the debtor did not perform, or performed by reserving their rights arising from the impossibility of performance, the debtor has the right to request adaptation of contract from the judge, and if that is not possible, to rescind the contract and, for EPC contracts, in principle, the debtor uses the right of cancellation instead of rescission.
In cases where unforeseen circumstances that disturb the balance between the performances which require adaptation, and frustration of the contract occurs, the aforementioned institutions of the TCO will apply.
However, as the regulations regarding force majeure and adaptation of contract are not mandatory, the parties may have adopted solutions provided by international institutions, such as the ICC, FIDIC, or other solutions that they have consented to. Therefore, to make determinations as to how the occurrence of unforeseen circumstance will affect the parties, whether or not there is a provision in the contract, must be checked in the first place.[4]
In addition, FIDIC Contracts that are the most frequently used “model contracts” across the globe in terms of EPC Contacts, regulates hardship and force majeure in a detailed article under the heading Unforeseeable Physical Conditions in the most frequently used editions, such as the ‘red book’ and ‘yellow book.’ Article 4.12 regulates the parties’ and, especially, the contractor’s, requests of additional time and expenses in case of the occurrence of an unexpected physical circumstance. Thus, even though the occurred circumstance was not unforeseen, an important precaution has been taken to prepare the parties for the relevant circumstances, to continue the work, and to prevent disputes regarding the allocation of risk through this Article.[5]
Furthermore, in the same model contracts, the term ‘unforeseeable’ is defined as “Not reasonably foreseeable by an experienced contractor by the date of submission of the tender.”[6]
In the ‘silver book,’ which is another FIDIC model contract, a different regulation is present in favor of the employer. In Article 4.12 of the silver book entitled ‘Unforeseeable Difficulties,’ the following facts that (a) the contractor shall be deemed to have obtained all necessary information as to risks, contingencies and other circumstances that may influence or affect the works, (b) by signing the contract, the contract accepts total responsibility for having foreseen all difficulties and costs of successfully completing the works, and (c) the contract price shall not be adjusted to take into account any unforeseen difficulties or costs, are regulated.
As it may be understood from that Article, the FIDIC silver book brings through it a contractual provision, which leaves the total risk related to unforeseeable circumstances with the contractor.[7]
Most EPC contracts, such as these model contracts, include provisions such as adaptation, force majeure and hardship, regarding unforeseeable circumstances and unforeseeability. While drafting these Articles, initially, the strategy and dispute resolution method, and consequences in case the contractor fails to clear up the effects caused by unforeseeable circumstance, or fails to reasonably decrease the effects, must be considered.[8]
Conclusion
Leaving the effects of unforeseeable circumstance to the general provisions of the law applicable to the contract leads to various uncertainties, and may cause damages beyond the expectations and calculations of both the contractor and the employer. Therefore, drafting a definition for unforeseeability and unforeseeable circumstance, and also drafting Articles regulating force majeure, hardship and the calculation and adaptation methods to be applied, which were previously practiced and became subjects of court decisions, not only removes the uncertainties, but also reduces the risk of a dispute to a great extent, and even specifies the damages and risks of parties in case of a dispute.
[1] Schneider, Micheal E.: “A Typology of Risk Allocation – The Example of FIDIC Suite of Contracts”, in Atamer, Yeşim M./ Süzer Baş, Ece/Geisinger, Elliott: Uluslararası İnşaat Sözleşmelerinde Beklenmeyen Hal Kavramı, On İki Levha, p. 17.
[2] Koot, van de Wim: “The Owner’s and Contractor’s Due Diligence in Theory and Practices”, in Atamer / Süzer Baş / Geisinger, p. 51.
[3] Baysal, Başak: “A Comparative Analysis Regarding Continental European Legal Systems”, in Atamer / Süzer Baş / Geisinger, p. 91.
[4] Baysal, p. 93.
[5] Bunni, Nael G.: The FIDIC Forms of Contract, 3rd Edition, Blackwell Publishing, p. 528.
[6] Bunni, p. 528.
[7] Bunni, p. 584-585.
[8] Schilling, Alexander: “A Critical View from the Industry”, in Atamer / Süzer Baş / Geisinger, p. 197.
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