Use of force majeure in Gulf is all in a good clause

Developers are using force majeure as a catch all for delaying projects - with video.

The manufacturing plants of hundreds of Japanese companies such as Nissan have been damaged and their businesses disrupted by the earthquake.

A two-word clause buried in most property contracts is at the heart of disputes worth billions of dirhams.

Historically, "force majeure" has been applied to floods, earthquakes and other unexpected natural disasters that prevent one of the parties from honouring the terms of a contract.

But the use of force majeure has been tweaked and revised in recent years as an excuse for projects that have stalled.

This has allowed developers to stave off investors hoping to get their money back after completion dates were missed.

Force majeure has been applied to a wide range of issues in Dubai, including shortages of utility connections and the global financial crisis.

"Developers have exhausted all other avenues, so it comes down to the last chance issue, which is force majeure," says Michael Lunjevich, a contracts specialist with Hadef & Partners, a legal firm.

Homebuyers and investors hoping for refunds on long-delayed projects have been stymied by developers' use of force majeure.

In many cases, they have little recourse to challenge the clause, which may put a project in limbo for years. But the cases are rarely clear-cut. Defining and interpreting force majeure clauses is a source of controversy and debate in the legal community.

Force majeure literally translates as "superior strength". But its application varies in different jurisdictions.

Some courts take a literal approach, allowing its use only for natural disasters. Others use a more liberal definition, applying it to circumstances deemed beyond the control of the parties concerned.

In Dubai, force majeure is a central issue in several disputes, including that between owners and developers at the Jumeirah Golf Estates.

Homes there are either completed or near completion, but buyers have not been able to take possession because the master developer, Nakheel, has not finished work on the infrastructure.

Sub-developers have invoked force majeure, citing Nakheel's financial woes as an issue beyond their control.

In other cases, developers have used the credit crunch and the volume of buyers defaulting as reasons for extending the scheduled completion date for their projects.

The UAE Civil Code does not specifically address force majeure. But it does provide a judge leeway to reduce "onerous obligations on contracting parties in extenuating circumstances", Hadef & Partners said in a recent report.

The global financial crisis may not qualify as "extenuating circumstances".

Ludmila Yamalova, a partner at the law firm HPL Yamalova & Plewka, says the economic meltdown was not unforeseeable. "The financial crisis is a predictable event," she says.

Force majeure is not meant to cover the risks developers and other corporations must build into their business models, Ms Yamalova adds.

Credit wrangles, supply shortages, strikes and other issues are all part of doing business, she argues.

Company lawyers counter that force majeure covers any event outside their control, whether natural, political or financial.

"There is no limit to the arguments you could come up with if you follow that logic," Ms Yamalova says.

There are also time limits on the use of force majeure, she argues. Even if you accept that infrastructure issues or the financial crisis qualify as force majeure, sooner or later the contracts have to be honoured.

Force majeure is "not perpetual carte blanche", Ms Yamalova says.

In some cases UAE courts have sided with investors, ruling that developers cannot use the financial crisis to invoke the clause.

But "precedents are not binding", in the UAE, Ms Yamalova points out, adding there is no guarantee other court cases will end in a similar judgment.

Challenging a developer's use of force majeure can also be expensive.

The UAE does not allow class-action lawsuits. A plaintiff would have to pay lawyers and experts with no guarantee they would recover any money, even if they won in court.

"Where is the money going to come from to pay them back?" Mr Lunjevich says. "So only in the most extreme cases would we see people do it."

To try to avert conflicts, many developers now attempt to change the role of force majeure in their contracts to include a range of adverse circumstances including fires and non-performance by sub-contractors.

"Most of the new contracts try to expand the application of force majeure," says Zafer Sheikh Oghli, a litigation partner for Al Tamimi, a legal firm.

If both parties agree to the language and sign the contract, it may be difficult to challenge the provisions.

"It's not the duty of the judge to define force majeure as long as both parties agree on the definition," Mr Oghli adds.