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Lack of Electricity: A “Force Majeure” to Stop the Project?

15/8/2018

A government authority not supplying electricity to a project under construction doesn’t constitute an event of “Force Majeure” for exempting the developer from their contractual obligations, as long as the authority’s action is not the direct cause for delaying the completion of the project.

The fact that a government authority has refrained from supplying electricity to a project under construction, doesn’t constitute an event of “Force Majeure” for exempting the developer from their contractual obligations, as long as the authority’s action is not the direct cause for delaying the completion of the project.

Facts

On or about 2007, a group of investors (Buyers/ our Clients) have entered into sale purchase agreements (SPAs) with a renowned developer (Seller/ Developer) for the purchase of high end residential units to be developed in a world class residential, commercial and leisure facilities project so called “La Hoya Bay Residence” on Al Marjan Island in the Emirate of Ras Al Khaimah. On signing the SPAs, Buyers have paid to developer between 25% – 50% of the purchase price.

Due to Developer’s unjustified delay in completing the project and handing over the units, our Clients, after several attempts to contact the Developer to reach amicable settlement, have instructed M&A to commence legal proceedings. According to the terms of the SPAs, all disputes arising between Seller and Buyer shall be referred to arbitration according to the rules of the Ras Al Khaimah Centre of Reconciliation and Commercial Arbitration.

A separate arbitration case has been filed for each Buyer according to the selected arbitration rules. Before the Arbitration Tribunal, M&A requested: a) cancelation of the SPA based on Developer’s failure to fulfill its contractual obligations; b) Developer to refund our Client the paid amount plus interest according to the law; c) Developer to compensate our Client for losses and damage incurred as result of developer’s failure to perform its contractual obligations; and d) Developer to bear all arbitration costs and lawyers fees.

Parties’ Arguments

Developer argued that based on a Force Majeure event, it couldn’t fulfill its contractual obligations. Developer explained that due to government’s failure to supply electricity to the project, the financing banks have refrained from continuing financing the project. As result, developer has failed to meet its contractual obligations and complete the project. Developer has requested the Tribunal to reject the cases.

M&A argued that the fact that a government authority has refrained from supplying electricity to the project, doesn’t constitute an event of Force Majeure as long as the authority’s action is not the direct cause for Developer’s failure to fulfill its obligations. It is established that an event of Force Majeure must be neither expected nor controlled at the time of signing the contract and is beyond the party’s control when it occurs. It is clear that Developer, at the time of contracting with our Clients, was well aware of the lack of electricity in the plot of land on which the project will be developed.

M&A further argued that the fact that the banks have stopped financing the project, is the Developer’s sole responsibility not the Buyers who never been aware of such financing requirements at the time of contracting. Such event may not constitute a Force Majeure that would exempt Developer from performing its contractual obligations under the SPA.

Tribunal Ruling

After a long debate, the Arbitration Tribunal has rejected all the Developer’s arguments and finally ordered: 1. Cancelation of the SPA; 2. Developer to (i) refund the Buyer all the amounts paid in addition to 9% interest from the date of filing the case until full refund of the money; (ii) compensate the Buyer for the losses and damage incurred as a result of Developer’s failure to perform its contractual obligations; and (iii) pay all arbitration costs and lawyers’ fees.

Awards issued in 2014.

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