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Construction Force Majeure During COVID-19

Does the COVID-19 disruption constitute a force majeure event under your contract?


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Construction Force Majeure Opinions from the Legal Experts

 

According to the National Law Review, the term “force majeure” is French for “superior or irresistible force.” The term commonly refers to natural and unavoidable catastrophes that affect contract performance. Force majeure contract clauses allocate the risk of such events. Most standard construction contracts do not specifically use the term “force majeure.” Instead, relief for force majeure events under most construction contracts is addressed in delay and time extension remedial clauses. For convenience, we will use the term “force majeure” to cover all such remedial clauses.

As you read on, consider these critical questions in relation to your projects as you plan near-term actions and also ponder long-term strategy and potential consequences:

  • Does the COVID-19 disruption constitute a force majeure event under your contract?
  • Is epidemic, pandemic, or illness specifically identified in your force majeure clause?
  • If not, does COVID-19 fall under some of the other events often referenced in force majeure clauses, such as an “act of God,” a “natural disaster,” or just something beyond the contractor’s control?
  • Most force majeure clauses allow for schedule extensions without compensation. But does your force majeure clause support compensation as well as a time extension? Allow one or both parties to terminate the contract? Provide for some other form of contract relief or contract modification?
  • Does the law that controls your contract (federal, state, or international) reinforce or limit how force majeure clauses may be applied?
  • Does that controlling law suggest avenues of relief outside a force majeure clause, such as commercial impracticability?
  • What should you be doing now to reserve your rights and document your position?

Construction Force Majeure by White & Case

When passing risk down a supply chain, it is good practice to ensure that risks are addressed on a back-to-back basis. This applies to force majeure risk as much as any other. At risk of dispensing unhelpful advice after the fact, one consequence of this pandemic is likely to be that parties will pay closer attention to the scope of their own force majeure provisions as well as those in contracts below them in the supply chain.

Fundamental to achieving back-to-back pass-through of risk is ensuring the contracts along a chain have the same governing law although commercial realities mean that this cannot always be achieved. Where the risks under a contract are significant, this may encourage parties to take advice on the scope of force majeure relief under whichever governing law they are agreeing to and, if possible, seek to achieve symmetry of risk allocation through drafting bespoke force majeure clauses.

Where parties find themselves in this current crisis facing an asymmetry of force majeure relief entitlement, it is important to move quickly to address the potential risks. This should be approached in the same way as any assessment and application of a force majeure clause, namely via a careful reading of the scope and requirements of the relevant clauses and a detailed and frank assessment of causation issues.

Construction Force Majeure by Norton Rose Fulbright

Parties should cautiously utilize “general notices” of construction force majeure in construction contracts. These general notices may not constitute satisfactory notice pursuant to the applicable contract, and may negatively impact future arguments that a force majeure event occurred.

Soon after the COVID-19 (coronavirus) outbreak in China, the resulting slowdown in steel, cladding materials and other construction products sourced from China gradually began to distress US construction procurement and scheduling. However, US government authorities’ “stay at home” orders resulting from the spread of the virus to US citizens caused immediate, widespread concern regarding project schedules, delays, labor shortages, and ultimately, potential construction force majeure claims.

Owners, developers, contractors, subcontractors, design-professionals, lenders and others should carefully review their project agreements and otherwise evaluate force majeure provisions and applicable law to ensure appropriate adherence. Further, all parties should consider the appropriateness of issuing force majeure notices, the timeliness of such notices and the substantive and legal impact of the notice.

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Despite the immediate (and understandable) desire to notify other contract parties regarding potential force majeure events to preserve potential claims and prevent arguments that delayed notice prejudiced the other contract party, premature notices may not always satisfy the notice requirements in the contract and could negatively affect future arguments regarding whether a force majeure event actually occurred. For example, the following force majeure provision provides that Contractor must submit notice to Owner within ten (10) days from the occurrence of the delay:

“the time within which construction of the Improvements must be Completed shall be extended for a period of time equal to the period of any delay directly affecting construction which is caused by fire, earthquake, hurricane or other acts of God, strike, lockout, acts of public enemy, riot, insurrection, or governmental regulation of the sale or transportation of materials, supplies or labor…provided, however, that Contractor shall furnish Owner with written notice reasonably satisfactory to Owner evidencing any such delay within ten (10) days from the occurrence of any such delay.”

Many of the current COVID-19 government-imposed shutdowns, workforce reductions and “stay at home” orders may not immediately constitute “the occurrence of any such delay,” however, the project will likely eventually suffer delays because of COVID-19 and the associated government orders. Under contracts with similar language, conservative contractors and owners may wish to issue a general notice informing the other party of the potential delay as a “placeholder” to prevent later arguments that the eventual notice fell outside of the ten (10) day time limit.

Such general notice would typically set forth that a force majeure event may have occurred or may be occurring and that a delay may result. However, these general notices may fail to meet the requirements of the contractual provisions for notice because 1) an actual delay has yet to occur; and 2) the notice may lack detail to properly put the other party on notice of the observed delay (see above requiring a notice “reasonably satisfactory to Owner” to satisfy the notice requirement; this typically refers to details regarding the event and resulting delay). Moreover, the contract will likely require a more specific notice with more details regarding the effect of the delay and the specifics of the force majeure event claimed.

In addition to failing to satisfy contractual notice requirements, a premature general notice intended as a placeholder further harms the party providing the notice to the extent the notice asserts or cements the party’s position when the party may wish to assert a contrary position later. In this regard, an early general notice might take a position regarding whether a force majeure event occurred before the party knows if acknowledging the occurrence of a force majeure event benefits the notifying party. For example, in the above referenced contract, if Contractor issues a general notice of potential delays resulting from a force majeure event before experiencing an actual delay in the project schedule, and the contract otherwise provides that Owner may suspend the work due to a force majeure event without compensating Contractor for any delays caused by the suspension, Contractor may wish to argue that a force majeure event did not occur and Owner wrongfully suspended the work without compensation to Contractor.

Construction Force Majeure by Dentons

The outbreak of COVID-19 and the ongoing measures taken by governments to date in this regard, raise a number of practical considerations that should be contemplated by stakeholders involved in construction projects in this province.

  • All parties should review their contracts carefully to determine whether a construction force majeure provision is included and what relief is provided by the contract in this regard. Some construction force majeure clauses will only allow a party to benefit from additional delays in performing their obligations, while others may allow the affected party to claim any additional costs stemming from the force majeure event.
  • Consider the extent to which termination of the contract pursuant to an ongoing event of construction force majeure is a possibility. Many contracts include provisions allowing one or both parties to terminate their agreement following the occurrence of a force majeure event that continues for a specified number of days or months. At the time the contract was drafted, such a possibility was likely considered by the parties to be quite remote. However, given the circumstances surrounding COVID-19, that may no longer be the case.
  • Where appropriate and necessary pursuant to the applicable contractual provisions, parties impacted by COVID-19 should provide notice of this to their counterparty by the deadline, if any, specified in their contract. Even if the contract does not contemplate the need for a notice to be sent, parties affected by COVID-19 should consider transmitting notice of this to their counterparty regardless.
  • Given the ongoing nature of the COVID-19 pandemic and the possibility that additional or differing measures may be taken by the government in this regard, parties should consider reserving their rights with respect to the impact of COVID-19 in order to ensure they can benefit fully from any relief once the pandemic has ended and governmental measures rescinded.
  • Parties should assess and document, on an ongoing basis, the cost and delay impact of COVID-19 on the performance of their contractual obligations and, to the extent possible, take reasonable measures to mitigate its effects.
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Engr. Mary Lucas
Social Media geek living in Dubai. Mechanical Engineer chick, blogger, writer, inventor, and social good follower. Love nature, science & techn. I'm tweeting @MaryLucas87

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