In circumstances where it is possible to insure against the force majeure risk at a reasonable cost, optimal risk allocation dictates that the force majeure risk be allocated to the private party. The issue of insurance and the role it plays in the allocation of force majeure risk is dealt with in more detail in the contract development and management supporting document.
Where force majeure risks are non-insurable, or insurable only at unreasonable cost, optimal risk allocation principles may dictate that better value for money can be achieved by sharing this risk between government and the private party, rather than allocating it to only one party. There can be varying degrees of sharing of a force majeure risk, for example:
• government shares a force majeure risk only to the extent that the materialised risk prevents it from receiving the contracted services.
As an example, force majeure risk can be shared to the extent that the private party is relieved of the risk of contract termination, but effectively retains the financial risk of the force majeure event. Where a force majeure event affects the private party's obligations to provide the contracted services, those obligations would be suspended (subject to certain time constraints). Government's obligation to pay for those contracted services would also be suspended until delivery of the contracted services is restored (causing the private party to lose some or all of its revenue from the contract). In addition, while the force majeure event continues to exist, the private party should be obligated to use its best endeavours (including implementing appropriate temporary measures that would allow continued service delivery) to remove the effect of the force majeure event and restore the provision of the contracted services. If business interruption and/or consequential loss insurances are available, the proceeds of such insurances can be used to mitigate the loss of revenue to the private party and any increased costs to government of alternative service provision:
• the parties agree to negotiate the necessary adjustments (if any) to the charges, volumes and, if applicable, any other provision of the agreement to reflect the effect or impact of the force majeure event. Where the parties are unable to reach a mutual agreement, the matter can be referred to dispute resolution
• the risk is shared in accordance with a material adverse effect regime (as described in the contract development and management supporting document).
Each of the regimes above contains a different level of risk allocation to the private party. Each regime provides a measure of equity in recognising that neither party is responsible for, or able to control, the occurrence of the force majeure event.
Risk sharing allows the parties to, in some way and to a varying extent, pool their resources in resolving the consequences of the force majeure event, and to share the burden in a way that minimises ill-effects on both parties. The exact nature of the risk-sharing arrangement should take into account the ability of each party to manage the consequences of particular kinds of force majeure events.
The government-preferred position, in general terms, is that:
• as a minimum, the private party must maintain adequate insurance against all insurable events that are considered to be 'usual' in accordance with standard commercial practice
• where the project asset is destroyed and/or the provision of the contracted services ceases during the contract term, owing to a force majeure event, the private party must reinstate the project facility (where it owns the asset) and/or the provision of the contracted services, unless government agrees otherwise under the circumstances of the particular project. In doing so, the private party must apply all insurance proceeds to effect reinstatement.
A detailed discussion of the application of insurance proceeds and reinstatement and termination needs when allocating force majeure risk is set out in the contract development and management supporting document.