What is a “Force Majeure” Clause? Do I Need one in my Contract? Three Options For Contractors, Subcontractors and Suppliers to Consider

William L. Porter | Porter Law Group

In the world of the building and construction industry, the general rules of contracting are fairly simple.  A supplier agrees to supply equipment or materials for a specific price and within a certain time frame, does so, and is paid an agreed sum.  Likewise, contractors and subcontractors agree to build structures per plans and specifications within certain time frames and are paid accordingly.  Pretty simple.  But what happens when some outside event makes performance impossible or unduly expensive or substantially delayed?  What happens, for example, if a ship is sitting off the coast of Long Beach for three months with equipment ordered for the project and it cannot be unloaded due to a labor shortage?  What if government mandates cause factories that build needed equipment to close due to an epidemic or pandemic?  What if the supply warehouse holding the equipment until it is ready for installation unexpectedly burns to the ground?  What if a Russian missile blows up the factory in Ukraine where the intended equipment is being manufactured?  What happens then?  Who bears the financial consequence?

A properly constructed “force majeure” clause may provide the answer to these questions.  The Marriam-Webster Dictionary defines “force majeure” as a literal translation from the French meaning “a superior or irresistible force.” It further defines the term as “an event or effect that cannot be reasonably anticipated or controlled.”  The Oxford Dictionary defines force majeure as “unexpected circumstances, such as a war, that can be used as an excuse when they prevent somebody from doing something that is written in a contract.”

Using the above examples, which involve labor interruption, pandemic closure, catastrophic fire and war, the contractor, subcontractor or supplier would argue that none of those events are their fault, and they should not be responsible for the consequences.  From the perspective of the property owner who contracted to have the building built and equipped, neither is it their fault.  All things being equal, the property owner might argue that the risk of non-performance is generally on the contractor, subcontractor or supplier.  After all, if equipment is stuck on a ship, or even if the factory is bombed or the supply warehouse burned down, then the owner will argue that the contractor, subcontractor or supplier is obliged to find another supplier not suffering from these problems.  Each side claims an arguably reasonable position.  The question therefore is not so much whether there will be a risk of non-performance due to outside causes.  Such a danger always exists.  Rather, the important question relates to allocation of risk.  If someone must bear the financial burden of a failure to perform, who should that be?  The party who includes a force majeure clause to allocate risk away from themselves, will have great advantage when unforeseen issues intervene.

Before moving along to some possible force majeure clauses for consideration, some related legal doctrines warrant mention. Among these doctrines are “impossibility,” “impracticability” and “frustration of purpose.”  Without getting deeply into definitions on a tangential issue, “impossibility” might apply when events make the performance of the contracted for action impossible, for example, when a finish contractor cannot perform its work because the building where the work is to be performed has been destroyed through no fault of the contractor.  “Impracticability” may possibly be established when unanticipated events cause the cost of performance to rise to such a degree that timely performance would put the contractor out of business.  “Frustration of purpose” might be established where predecessor trades have not performed the work necessary for the finish contractor to perform its work in a timely manner.  Each one of these legal doctrines might possibly come to the aid of the contractor to avoid liability, but great uncertainty remains.  While arguments might be made on each of these three examples, there are numerous detailed articles on these legal doctrines that can be referenced.  In any case, it is highly probable that each of these scenarios would benefit from an allocation of risk a force majeure clause might provide.

Set forth below are three options for contractors, subcontractors and suppliers to consider in dealing with future force majeure issues.  Adding a clause like one of those listed below to a construction or supply contract or subcontract before it is signed allows a contractor, subcontractor or supplier to better protect themselves.  While none of the three options may be appropriate for any particular circumstance, a review of them may be helpful to those who seek to add a protection on an issue which might unexpectedly arise at any time.  The main difference between the three options presented is the length and complexity of each.  Each example is drafted as between a “Contractor” and “Contracting Party.” For use of the examples, that Contracting Party might be defined elsewhere as an Owner, Subcontractor or Supplier.

Longer Version:

#­­­___ FORCE MAJEURE  Except with respect to payment obligations under this Agreement, no Party shall be liable for, nor shall such Party be considered in breach of this Agreement, due to any failure to perform its obligations under this Agreement as a result of a cause beyond its control, including but not limited to any act of God or a public enemy or terrorist, act of any military, civil or regulatory authority, change in any law or regulation, fire, flood, earthquake, storm or other like event, disruption or outage of communications, power or other utility, labor problem, unavailability of supplies, epidemic, pandemic, contagious illness of employee(s) causing reduction in workforce, delay or disruption, or other public health situation or resulting government actions or recommendations which restrain the ability of Contractor to commence, continue or complete performance of the Agreement.  On reasonable notice, the time for performance shall be extended by the reasonable period of such delay.  If the Project is delayed for more than sixty (60) continuous or intermittent days from the same Force Majeure cause, either Contractor or Contracting Party has the discretion to terminate the Contract without liability.  Contractor shall be entitled to payment for work performed and materials supplied to the work site to the date of termination and for materials ordered if the order cannot reasonably be rescinded.

Shorter Version:

#___ FORCE MAJEURE  No Party shall be liable for, nor shall such Party be considered in breach of this Agreement, due to any failure to perform its obligations under this Agreement as a result of a cause beyond its control, including but not limited to any act of God or a public enemy or terrorist, act of any military, civil or regulatory authority, change in any law or regulation, fire, flood, earthquake, storm or other like event, disruption or outage of communications, power or other utility, labor problem, unavailability of supplies, epidemic, pandemic or other public health situation or resulting government action or recommendation which restrains the ability of Contractor to commence, continue or complete performance of the Agreement.  If the Project is delayed for more than sixty (60) continuous or intermittent days from the same Force Majeure cause, either Contractor or Contracting Party has the discretion to terminate the Contract without liability.

Shortest Version:

#___ FORCE MAJEURE  No Party shall be liable for, nor shall such Party be considered in breach of this Agreement, due to any failure to perform its obligations under this Agreement as a result of a cause beyond its control, including but not limited to any act of God or a public enemy or terrorist, act of any military, civil or regulatory authority, change in any law or regulation, fire, flood, earthquake, storm or other like event, disruption or outage of communications, power or other utility, labor problem, unavailability of supplies, epidemic, pandemic or other public health situation or resulting government action.

Note: The shorter you make the clause, the more uncertainty you have on what to do when the situation arises.

Conclusion:

When contractors, subcontractors and suppliers encounter events not properly addressed by the terms of their current contracts and subcontracts, it is time to revise the operative document.  Contractors, subcontractors and suppliers would do well to consider a clause to protect themselves from unforeseen events that impact on timely performance.  Those who actively protect themselves with protective contract language are more likely to survive unforeseen events when others do not. Before using any clause in a legal document always be sure to have the clause and the legal document in which it is included reviewed by a licensed attorney familiar with the industry in question.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Pay Now, Argue Later: Appeals Court Affirms Strict Interpretation of Prompt Pay Act

Ezra Dunkle-Polier, Jonathan T. Elder and Nina L. Pickering-Cook | Anderson & Kreiger

On June 7, 2022, the Massachusetts Appeals Court affirmed a strict reading of the Prompt Pay Act, G. L. c. 149, § 29E (the “Act”) in Tocci Building Corp. v. IRIV Partners, LLC, Case Nos. 21-P-393 & 21-P-733.  That case and its background were featured in a prior Punch List post.

The trial court concluded that strict compliance was required of the Owner in reviewing payment requisitions, meaning that “unless a rejection, in whole or in part, in compliance with the statute is made” within 30 days of the application, “the application for periodic progress payment is ‘deemed approved’ by operation of law and must be paid.” In this case, the Owner failed to certify that the payment rejections were made in good faith.

The Owners believed the ruling to be too harsh. On appeal, it disputed the importance of the certification requirement as “merely ministerial,” but the Appeals Court rejected this argument.  “The Legislature required this certification if a rejection is to be effective, and we are not free to ignore that requirement by deeming it merely ministerial.” And practically, “the certification requirement ensures…that the owner be deliberate about rejecting applications…it takes care to reject them only in good faith,” and it “provides a clear indication to the contractor that an application has been rejected.”

However, the Appeals Court went on to set forth a critical holding that where pay applications are deemed approved because of the Owner’s failure to meet the Act’s requirements, the Owner does not waive its right to claw back money that may be lawfully owed to it due to defective work or other contractual entitlement to those monies, even if the money is part of one or more of those “deemed approved” payments.  Here, the Owner argued that the contractor breached its contract so it had good reason to not remit payment.

The practical effect is that the Owner must put its own funds at risk.  It has to make quick payment and then wait to resolve its back charge claims through a separate action.  With Tocci on the books, Owners who choose to flout this process and withhold payment may be opening themselves up to bad faith claims under G. L., c. 93A.  Regardless of business strategy, though, one point remains clear: all parties to construction contracts on covered projects ($3 million+ cost of construction at the prime contract level) need to familiarize themselves with the details of the Act’s payment provisions and ensure they have the people and policies in place to process requisitions in strict compliance with the Act’s requirements.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

You Can’t Treat Construction Claims Like Your Grandkids

Matthew DeVries | Best Practices Construction Law

I have seven children. and two of them have flown the coop.  I also have two grandchildren who are ripe for spoiling. You see, grandchildren are a different type of kid, which means I get to treat them different than the kiddos living under my roof.  In construction, however, some courts have held that the type of contract delivery method do not change the treatment of the other contract clauses, such as the applicability of a differing site conditions clause.

Appeal of John C. Grimberg Co., Inc., ASBCA No. 58791 (Oct. 25, 2018) involved the construction of a biolab facility at Fort Detrick, Maryland. The contract was a design-build contract.  As is typical of a design-build contract, no unit prices for rock excavation were set for because the contractor’s foundation solution is not established at the time of award. Interestingly, this contractor had performed other contracts at Fort Detrick involving deep foundations that happened to be design-bid-build contracts containing unit prices for excavation.

During construction, the presence of incompetent rock forced the contractor to use more drilling rigs than anticipated.  This crowded the site and prevented scheduled commencement of grade beams and rough-in of underslab MEP work. By the time the contractor completed drilling piers, it had excavated nearly four times the amount it had anticipated in its proposal.  The contractor submitted a Request for Equitable Adjustment, alleging that it had encountered a Type I differing site condition—i.e, where the site differed materially from those represented by the government. The contracting officer denied the claim, and the contractor appealed.

To establish such a claim, a contractor must prove: (1) the conditions indicated in the contract differed materially from those actually encountered during performance; (2) the actual conditions were reasonably unforeseeable to the contractor at the time of bidding; (3) contractor reliance; and (4) damages.  In this case, the board rejected the government’s argument that the differing site conditions clause is applied more restrictively to a design-build contractor than in the design-bid-build context. The board reasoned:

The identical DSC clause is required to be included in fixed-price construction projects, whether the design-bid-build or design-build method of contracting is utilized. There is no justification for interpreting the clause differently in the design-build context. As appellant concedes, design risk is transferred to contractors in the design-bid context, but not the risk of DSCs. A design-builder does not forfeit its rights under the DSC clause to rely on solicitation representations of subsurface site conditions.

The board concluded the contractor had established Type I differing site conditions claim that the “quantities of rock encountered greatly exceeded the quantity reasonably foreseeable based on a fair reading of contractual indications, albeit the Project was constructed in highly-variable karst topography at the site.”

Ultimately the decision is a good lesson for contractors to document “all of the facts, circumstances and contractual indications of subsurface conditions,” which is what the board relied upon in making its decision.  Another lesson learned is the importance of “reasonableness” when drafting or submitting claims.  Although the board found that two of the borings used by the contractor were unreasonable, it was “more reasonable” than the government’s analysis.  In the end, reasonableness matters.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Quick Note: Attorney’s Fees on Attorney’s Fees

David Adelstein | Florida Construction Legal Updates

In a recent case, the appellate court held that the attorney’s fees provision in the contract was NOT broad enough to entitle the prevailing party to recover attorney’s fees for litigating the amount of attorney’s fees.  This is known as “fees on fees” which is when you can recover your prevailing party attorney’s fees when you are fighting over the quantum that should be awarded to you as the prevailing party.

The attorney’s fees provision at-issue stated:

“In any lawsuit to enforce the Lease or under applicable law, the party in whose favor a judgment or decree has been rendered may recover its reasonable court costs including attorney’s fees from the non-prevailing party.”

Language similar to this language can be found in many contracts as a prevailing party attorney’s fees provision.

However, this provision was NOT broad enough to recover “fees on fees.”   As explained in this article, if this is a consideration, you can negotiate or include this provision into your construction contract by expanding the scope of the prevailing party attorney’s fees provision to clarify that it entitles the prevailing party to recover attorney’s fees in litigating the amount of attorney’s fees.

There is both a good and bad to this.  The good is that if you are the prevailing party, you have a contractual basis to recover your fees for litigating the amount of fees.  The bad is that if you are the other party to this equation, it becomes harder to resolve a prevailing party attorney’s fees issue when the other party is entitled to attorney’s fees to litigate the reasonableness of attorney’s fees.  Thus, you are in a position where you need to decide whether to pay the other party what they want to avoid continued fees or incurring more fees (both on your end and fees you will have to pay the other party) simply to argue over the amount of fees.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Pay-If-Paid Versus Pay-When-Paid Clauses

Lawrence M. Prosen and Josephine M. Bahn | Cozen O’Connor

On April 27, 2022, Virginia Governor Glenn Youngkin signed Senate Bill 550 into law, amending a portion of the Virginia Prompt Payment Act and a component of the Virginia wage theft statute. Va. Code § 2.2-4354 and VA. Code § 11-4.6. The changes associated with the law now prohibit “pay-if-paid” clauses in both private and public construction contracts in the commonwealth of Virginia. The law is set to take effect on January 1, 2023. As a result, contractors and subcontractors must carefully contemplate their current standard contracts and master agreements to determine whether they will comply with the legislative changes moving forward. By proactively crafting new language within their standard construction contracts, contractors and subcontractors may avoid additional liability outlined in the new statute related to payment for properly invoiced and completed work.

PAY-IF-PAID VERSUS PAY-WHEN-PAID CLAUSES

This law, in effect, bans pay-if-paid clauses and permits no more than a pay-when-paid clause. What is the difference? A pay-if-paid clause shifts all of the risk for payment by the owner from the general contractor or upper-tier subcontractors to the lower-tier subcontractors by stating that the general contractor has no obligation to pay the subcontractors until the general contractor receives payment from the owner, making such receipt of payment a condition precedent. In contrast, a pay-when-paid clause provides the general contractor or upper-tier subcontractor with a reasonable time period in which to receive payment from the owner and then remit payment to the lower-tier parties.

Previously, general contractors or higher-tier subcontractors could wait to pay their subcontractors until they received payment for the job from the owner — pay-if-paid as it was styled — shifting the risk indefinitely to the lower-tier subcontractors, as receipt of payment from the owner or upper-tier contractor was a condition precedent to any duty to pay the lower-tier. Once the new law takes effect in January 2023, only pay-when-paid clauses, establishing a reasonable time period for payment, will be enforceable. The law will make a maximum required 60-day provision for payment, making it mandatory for all project owners to pay their contractors within said 60-day timeframe. Lower subcontracts will also require that all higher-tier contractors pay their subcontractors within the “earlier of sixty (60) days after their subcontractor’s invoice submittal or seven days after the receipt of the amount paid by the owner or higher-tier contractor.”

It bears noting that the 60-day payment requirement fails to apply to public bodies who are not defined as an “owner” in the legislation. To be clear, the legislation defines an owner as a person or entity, other than a public body as defined in § 2.2-4301, responsible for contracting with a general contractor for the procurement of a construction contract. Because these provisions will be required for all construction contracts moving forward, all general and subcontractors should review the payment terms of their current construction contracts for compliance, certainly those that will remain in effect as of January 1, 2023.

The legislation leaves some ambiguities. For instance, the law fails to outline what constitutes completion of the outstanding payments. However, project owners are cautioned that if they intend to withhold payment for a project, they must do so in writing and provide reasonable specificity of the reasons for their nonpayment/withholding.

Subcontractors Have Additional Protection

Subcontractors are shielded from the risk associated with nonpayment at levels above their contract under the new law. Additionally, should an owner fail to make timely payments as defined above, it may be liable for interest payments under the Prompt Payment Act. These payments would be set at 1 percent per month (12 percent per annum) unless otherwise outlined in the written contract. Owners may consider adding a nominal interest rate to their standard contracts to stunt the potential impact from these changes.

Additionally, every general or subcontractor should still be prepared to make payments to the lower-tier contractors regardless of whether it receives payment from the upstream party. The new statute requires that:

Payment by the party contracting with the contractor shall not be a condition precedent to payment to any lower-tier subcontractor, regardless of that contractor receiving payment for amounts owed to that contractor, unless the party contracting with the contractor is insolvent or a debtor in bankruptcy as defined in § 50-73.79.

In furtherance of this provision, general contractors should consider demanding proof of financial assurance from owners. However, as noted above, should an owner or general contractor be insolvent or file for bankruptcy protections, there is no obligation to pay the subcontractors for their work performed and properly invoiced.

This new law is in follow-up to some other jurisdictions which have, as a matter of statute or common law (case law), found that pay-if-paid clauses are against public policy or otherwise not good law. While the law will create new protections for prime and subcontractors alike, it will undoubtedly result in judicial cases given some of the ambiguities in the law.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.