Force majeure risk

Heavy rail Heavy rail

Description (What is the Risk)

The risk that unexpected events occur that are beyond the control of the parties and delay or prohibit performance.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Network Rail may seek force majeure relief on specific projects, for defined force majeure events such as (a) war, terrorism, (b) acts of vandalism or accidental damage or destruction of machinery, equipment, track or other infrastructure; (c) natural disasters; (d) nuclear, chemical or biological contamination; (e) pressure waves caused by devices travelling at supersonic speeds; (f) discovery of fossils, antiquities or unexploded bombs; and/or (g) strike or other industrial action other than involving the contract counterparty or Network Rail.

The Manufacturer will seek comparable force majeure relief and will also usually seek to cover strikes, lock-outs or other labour disputes where these are nationwide or rail industry-wide events.

Mitigation Measures (What can be done to minimize the risk)

Insurance is the expected mitigant.

An MSA will usually terminate after a force majeure event has been in place for a specified period (e.g. one year).

Government Support Arrangements (What other government measures may be needed to be taken)

None.

Back to Heavy rail

Description (What is the Risk)

The risk that unexpected events occur that are beyond the control of the parties and delay or prohibit performance.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Force majeure is a shared risk and you would expect to see a fairly well developed list of events that entitle the Private Partner to relief.

Typical events could include:

- natural force majeure events, which typically can be insured (eg fire / flooding / storm, vandalism etc), and

- force majeure events which typically cannot be insured (eg strikes / protest, terror threats / hoaxes, suicide / accident, passenger emergency, collision / derailment, emergency services, trespass etc.)

Force majeure events occurring during construction will also cause a delay in revenue commencement. The ability of the Private Partner to bear this risk for uninsured risks will be limited, and the Contracting Authority will typically have to bear the risk after a certain period of time or level of cost has been exceeded.

During operation, the impact of the force majeure will depend on whether the project is availability based (where relief from KPI penalties may be required) or is demand-based (where an element of Government subsidy may be required).

Mitigation Measures (What can be done to minimize the risk)

Project insurance (physical damage and loss of revenue coverage) is the key mitigant for force majeure risks that cause physical damage.

Force majeure events that do not cause physical damage and which are outside the scope of the business interruption insurance will cause a cash flow issue for the Private Partner. The Contracting Authority may therefore grant the Private Partner certain royalty reliefs to allow the Private Partner to prioritise its debt service obligations. This relief could be provided by way of a low-interest 'loan', such that when revenues restart and exceed a certain threshold above debt service, the Contracting Authority would be repaid the 'lost' royalty payments.

Government Support Arrangements (What other government measures may be needed to be taken)

See comments on the risk of uninsurability for an existing rail ROT project in emerging markets.

Comparison with Developed Market

On emerging market transactions, the Contracting Authority often does not provide any compensation for termination arising from a 'natural' force majeure, on the grounds that this should be insured.

Back to Heavy rail