In the construction and infrastructure industry, contractual force majeure clauses allocate risks that at common law may have excused non-performance. Force majeure clauses usually come into play as a result of weather-related events, strikes, or natural disasters; and parties are accustomed to dealing with these types of risk. With greater anxiety over the potential economic impact of the Coronavirus (COVID-19), however, force majeure provisions are getting a fresh look. At this stage of the threat, businesses are concerned about supply chain disruptions, particularly regarding products and materials manufactured in China. Should the COVID-19 threat continue to grow, however, parties should plan for travel restrictions and labor disruptions to their projects. In doing so, you should consider how force majeure may play into your project or contractual relations.
Force majeure is a common law doctrine aimed at risk allocation where a contract is silent. “The doctrine ultimately represents the ever-shifting line, drawn by courts hopefully responsive to commercial practices and more at which the community’s interest in having contracts enforced according to their terms is outweighed by the commercial senselessness of performance.”[i] The doctrine is synonymous with impossibility, impracticality, or frustration.[ii] As a result of both uncertainty and difficulty predicting how courts may apply the doctrine, parties include force majeure clauses to more precisely allocate risk.
Common in the construction and infrastructure industry, “a force majeure clause excuses a party from performing if an event identified in the clause occurs such that performance of the contractual obligation is sufficiently disrupted ….”[iii] Like any other term, when interpreting a force majeure clause, courts look to the plain language of the contract, and may consider outside evidence of intent in the event of ambiguity. Importantly, however, a force majeure clause will not be interpreted to excuse non-performance for normal, expected risks. In considering your own force majeure issues, keep in mind this “top 5” list:
First, look at the contract. Parties are free to bargain force majeure clauses to their benefit and include conditions otherwise inexcusable at common law or under applicable statutes For example, in dealing with the Uniform Commercial Code, courts generally agree that parties can obtain broader protection than what the Code allows.[iv] “In a relatively free and fluid wholesale market, a seller should be entitled to utilize the power of his position to contract to his best advantage.”[v] By way of example, the standard American Institute of Architects (AIA) form A201-2007 provides:
If the Contractor is delayed at any time in the commencement or progress of the Work by an act or neglect of the Owner or Architect, or of an employee of either, or of a separate contractor employed by the Owner; or by changes ordered in the Work; or by labor disputes, fire, unusual delay in deliveries, unavoidable casualties or other causes that the Architect determines may justify delay, then the Contract time shall be extended by Change Order for such reasonable time as the Architect may determine.
Notably, the standard AIA clause does not reference any particular “act of God” or calamity. Rather, the clause lists a series of events ranging from labor disputes and fire to deliveries and casualties. Then, it provides a “catch all” that gives the architect discretion in deciding force majeure. The terms pandemic or epidemic are not referenced. Therefore, in evaluating COVID-19-related impacts, the case must be tied to the supplies, materials, and labor itself rather than just public/governmental declarations. For example, if the project requires a certain amount of materials from an impacted region, supply chain disruptions may qualify as “unusual delays in delivery.”
Second, force majeure provisions will be interpreted narrowly. “The catch-all language of the force majeure clause … is not to be construed to its widest extent; rather, such language is to be narrowly interpreted as contemplating only events or things of the same general nature or class as those specifically enumerated.” [vi] For example, one court determined that the disability of a key employee was neither an “act of God” nor fell within the same class as labor strikes, fires, floods, earthquakes or war.”[vii] Indeed, the court described the nature of the key employee’s disability as being reasonably foreseeable, indicating that the assertion of force majeure for disability or illness will be heavily scrutinized. In the event of disagreement or ambiguity related to whether an event is a force majeure per contract, the trier of fact (judge, jury, or arbitrator) will decide.
Third, in the absence of express contract terms, price increases are typically not enough. Project participants that experienced the drastic rise of steel prices in 2004-2005 remember this lesson well. Particularly with fixed-price contracting, courts are loath to create a remedy that would upset the benefit of the bargain. And, unless the contract itself designates that a product or material must be purchased from an exclusive source, to the extent a product becomes unavailable, a contracting party must demonstrate its efforts to obtain suitable replacements. This will include discussions with the owner, contractor, or design team.
Fourth, if the force majeure event causes delay or disruption on the project, the contract will determine compensability. Look first at the force majeure clause itself, which may indicate what the contracting party is entitled to. For example, the standard AIA provision allows for an extension of time as opposed to additional compensation. Each contract is different, but absent contrary language, a “no damage for delay” clause will likely govern.
Last, the party asserting a force majeure delay or impact is likely to have its own prior or contemporaneous performance scrutinized. For instance, assuming there is a force majeure delay associated with the supply of materials, questions may arise as to whether approvals or submittals were timely submitted, whether material deposits were made, or whether the materials could/should have been ordered earlier. Force majeure impacts and delays do not untether the project or performance from the contract itself. To the contrary, force majeure is firmly rooted in contract with a plethora of contract considerations to be accounted for, including prior performance, ongoing performance, and notice.
Force majeure is intended to be the exception and not the rule. Each aspect of force majeure is intended to be narrowly applied. Thus, if you believe your project or you are being impacted by COVID-19 or a potential force majeure, thought must be given to the nature of the impact or delay, supporting information and documentation, and your efforts to mitigate the impact. At Klehr Harrison Harvey Branzburg LLP, we advise the construction and infrastructure industry concerning disruptions and delays. The most successful impact claims do not wait for an after-the-fact analysis, rather they take an up front and thoughtful approach to problem solving.
[i] Transatlantic Financing Corp. v. U.S., 363 F.2d 312, 315 (D.C. Cir. 1996).
[ii] See Bruner & O’Conner Construction Law Sec. 7:229 (2020).
[iii] Id. at Sec. 19:60.
[iv] InterPetrol Bermuda Ltd. v. Kaiser Aluminum Int’l Corp., 719 F.2d 992, 1000 (9th Cir. 1983).
[v] InterPetrol Bermuda, 719 F.2d at 1000.
[vi] Seitz v. Mark-O-Lite Sign Contractors, Inc., 510 A.2d 319, 321 (N.J. Super. Ct. 1986).
[vii] Seitz, 510 A.2d at 321–22.