The Force Majeure Doctrine And Standard Construction Form Contract Provisions: Revisiting An Old Contract Provision During These New Uncertain Times

Matthew S.C. Moore and Cornelius Banta, Jr. | Peckar & Abramson

I. INTRODUCTION

As we approach the first anniversary of the World Health Organization’s declaration of COVID-19 as a global pandemic, its impact on local and global economies and our way of life cannot be ignored. The effects of COVID-19 to
the construction industry are wide-reaching. Consequences on a project site include quarantines or other governmental restrictions resulting in impacts to the project workforce. Offsite impacts can cover a much broader scope of
issues implicating the various links of the supply chain relied upon by the construction industry. For instance, labor shortages at manufacturing factories or fabrication facilities resulting in production delays or material price increases, transportation embargoes causing project supply issues, or governmental actions inhibit manufacturing and production by causing temporarily artificial inabilities to service existing demands. Due to these impacts, project participants are turning to the force majeure provision in
their contract as a pathway for equitable relief.

This article will discuss the origins of the force majeure provision and relevant Texas case law. The article will conclude with an examination of key provisions found within certain standard form contracts published by
The American Institute of Architects (AIA), AGC ConsensusDocs, Engineer Joint Contract Documents Committee (EJCDC), and Design-Build Institute of
America (DBIA) through a COVID-19 lens and propose modifications to balance the risks and exposures caused by COVID-19 or other pandemics.

II. HISTORICAL BACKGROUND

The force majeure doctrine has its historical underpinnings in the British common law doctrine associated with frustration of purpose and impossibility of performance.2 As one may recall from their 1L Contracts class, early British common law imposed absolute liability on parties
that failed to satisfy unconditional contractual promises.3 Unsurprisingly, parties sought to avoid the strict application of this rule, and courts over time softened the rule to allow a party to assert the defense of physical impossibility as an excuse to nonperformance.4

Such a narrow defense did not provide much comfort, prompting parties to include contractual provisions related to excusable nonperformance.5
Borrowed from the Code Napoleon, the term “force majeure” came into
use in British contracts to characterize these contractual carveouts.6
This French civil law concept represented the codification of a legal doctrine harkening back to Roman law and the legal principle impossibilium nulla obligatio est (“there is no obligation to perform impossible things”).7

For this reason, force majeure provisions are sometimes referred to by the Latin phrase “vis major”.8

Commentators have observed that British lawyers likely relied on the civil law concept and the corresponding body of law as a way to include by contract what the common law failed to provide.9 However, British courts were wary of relying on a singular term to incorporate by reference
an entire civil law doctrine that had no equivalence in common law.10 Thus, efforts to contract around the harsh applications of the common law appeared to require parties to explicitly define the events that constituted
force majeure.

Later, American courts largely followed the British common law’s general principal of absolute liability for nonperformance along with the limited exception of “frustration.” The latter doctrine is often referred to as
“impossibility” in the U.S.11 A “freedom of contract” state such as Texas has not departed from this legal tradition.12

For well over a century, Texas courts have recognized that force majeure is not so much a common law doctrineas it is a creature of contract.13 Texas case law holds that supervening events preventing performance (e.g., Acts
of God) do not relieve a party from performance unless the express terms of the contract provide otherwise.14 Courts are also not inclined to bail out a party by reading a force majeure provision into a poorly drafted contract,
particularly when the more typical force majeure events affecting performance could be anticipated by the parties during contract negotiations.15 Hence, Texas jurisprudence has not departed in any appreciable degree from the old British common law rule on contract performance.

Though excusable force majeure events are defined by contract, Texas does recognize the common law doctrine of impossibility.16 The Texas Supreme Court adopted the Restatement (Second) of Contracts’ formulation, which
excuses a party’s performance of a contractual obligation “made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made.”17 As the Eleventh Court of Appeals observed, impossibility of
performance “read[s] into a contract an escape clause that does not otherwise exist.”18

However, courts are cautious to apply this common law exception. For one, a party seeking to invoke the excuse of nonperformance due to legal prohibition must make reasonable effo ts to avoid the application of the regulation, including appealing a regulatory agency ruling even if the party believes it will be unsuccessful.19 Additionally, courts often find that a temporary legal restriction against the purpose of the contract does not give rise to impossibility.20 This is particularly true when the terms of the contract in question contemplate the possibility of delayed performance in connection with compliance with applicable legal requirements.21 The efore, the doctrine of impossibility operates as an “escape clause” in only limited circumstances. The best line of defense remains a welldrafted force majeure provision.

III. SPECIFIC APPLICATIONS OF THE FORCE MAJEURE DOCTRINE

Due to the emphasis Texas courts place on the specific language in the force majeure provisions in determining whether a specific instance constitutes excusable nonperformance, it is worth considering some of the typical force majeure provisions and how they are interpreted by the courts.

Texas case law continues the theme developed by British common law that magic words alone (e.g., “force majeure”) will not excuse a party’s failure to perform if there is no further effo t to clarify.

A. Acts of God

A common force majeure event that comes to mind is the familiar “Act of God.” Courts have defined the phrase as being “an act occasioned exclusively by forces of nature” that “could not have been prevented or escaped by any amount or foresight or prudence, or by any reasonable
degree of care or diligence, or by the aid of any appliances which the situation of the party might reasonably require him to use.”22 Courts have found that even natural disasters that occur infrequently can still be “reasonably anticipated” by the contracting parties.23

The case of Metrocon Construction Company v. Gregory Construction Company is instructive. The general contractor sued the masonry subcontractor for breach of contract and negligence seeking to recover additional sums spent to repair the masonry walls for a shopping center project that fell over during a high wind weather event.24 The subcontractor argued the breach was excusable because it was caused by an Act of God.25 The Fifth Court of Appeals disagreed, noting that the
subcontract agreement did not contain a force majeure provision that excused performance due to an Act of God, and that high winds were the type of risk that could be anticipated when the subcontract was drafted.26 Thecourt further noted that the Act of God did not actually prevent
performance of the subcontract, but merely made it more burdensome than originally anticipated, which is not a legally justifiable e cuse for failure to perform.27

Furthermore, a party should be wary about invoking an “Act of God” clause in a force majeure provision if the force of nature occurred after anticipated performance. Long ago, the Texas Supreme Court held that a force majeure event is not an excuse for nonperformance when a prior material breach has occurred.28 Thus, in the construction industry context, a contractor seeking to claim a pandemic as an “Act of God” force majeure excuse for its failure to meet a specific turnover date would have to demonstrate that no concurrent delays existed.

B. “Catch-All” Language

One should also be cautious about relying on a “catchall” clause in a force majeure provision. The following is example of such a clause: “[A]ny other cause not enumerated herein but which is beyond the reasonable control of the [p]arty whose performance is affected . . . .”29 Typically preceding a laundry list of specifically identified events,30 a contractor whose work was impacted by COVID-19 may be tempted to use this open-ended clause given that pandemics were not often one of the specifically enumerated force majeure events in contracts drafted prior to March 2020.

Faced with this creative contract interpretation argument, Texas courts would likely apply the familiar doctrine of ejusdem generis in order to determine if this unspecified event, which the party claims excused performance, is of the same kind as the events specifically listed in the force
majeure provision. The specific list of events, and how a court characterizes them, will determine the outcome.

For instance, in R & B Falcon Corp. v. American Exploration Company, the United States District Court for the Southern District of Texas was asked to decide whether a seabed anomaly affecting the structural integrity of an
under-construction offsho e oil rig fell within the “catch all” language of the force majeure provision in the parties’ drilling contract.31 The p ovision reads, in relevant part:

[E]ach party to this Contract shall be excused from complying with the
terms of this Contract . . . if and for so long as such compliance is hindered
or prevented by riots, strikes, wars . . . , insurrection, rebellions, terrorist acts,
civil disturbances, dispositions or order of governmental authority . . . , acts of God . . . , inability to obtain equipment, supplies or fuel, or by any act or cause (other than financial distress or inability to pay debts when due) which is reasonably beyond the control of such party . . . .32

Applying ejusdem generis, the district court interpreted the list as being essentially comprised of “governmental instability and supply-chain related events . . . ,” which the court categorized as being “external to the actual
performance of the contract.”33 The event in question (a seabed anomaly), though, related to the set-up and operation of the rig, which pertained to the core subject matter of the drilling contract. As such an event could be
contemplated by the parties, it did not come within the scope of the force majeure provision.34

The Texas First Court of Appeals reached a similar conclusion for a less tangible event—changing market conditions. In TEC Olmos, LLC v. ConocoPhillips Company, a drilling company sought to invoke the force
majeure provision in the parties’ farmout agreement when a market downturn in oil and gas made it difficul to obtain the project financing necessary to test-drill land owned by the lessee.35 The provision contained a list of events like those discussed in the R & B Falcon opinion,36 which the Houston appellate court characterized as being natural or man-made disasters, governmental actions, or labor disputes.37 Although foreseeable, the events were irregular, thus making it difficul for the parties to plan
for and allocate the risk associated with such events.38 On the other hand, changing commodity prices that made a mineral rights lease less profitable were more predictable and went to the heart of the farmout agreement.39

This pair of cases suggest that a pandemic may fall into a “catch-all” provision. Under the R & B Falcon court’s characterization, a contagious disease such as COVID-19 can be viewed as a “supply-chain related event,” external to the subject-matter construction contract. While the manpower shortages and material delays caused by the pandemic may facially be similar to the complained-of declining market conditions that were the focus in TEC Olmos, the root cause is distinguishable. The economic
impacts of a pandemic—arguably a natural or man-made disaster—are irregular and distinct from the typical labor and material fluctuations complained of in the TEC Olmos opinion.

C. Specifically dentified Comme cial Events

Reliance on “Acts of God” or “catch all” clauses may be avoided if the force majeure provision identifies certain commercial events as excuses for non-performance.40 As the construction industry has learned, a major ramification of the COVID-19 pandemic has been the disruption of labor markets and material supply chains. However, Texas courts are quick to scrutinize the specific language in assessing whether the event in question falls within the force majeure provision.

The case of Sherwin Alumina L.P. v. AluChem, Inc. provides a useful illustration. AluChem contracted with Sherwin Alumina to manufacture a ceramics chemical compound.41 Sherwin Alumina began producing
the compound on a specific kiln at its Texas plant, which was initially operated under a temporary Texas Commission on Environmental Quality (TCEQ) permit before a permanent permit could be obtained.42 During
production, Sherwin Alumina had to report several dust emissions events to the TCEQ. Thoughno formal actions were taken by the TCEQ, Sherwin Alumina eventually sent a letter to AluChem declaring a force majeure event due to environmental concerns, and simultaneously filed a declaratory judgment action seeking to adjudicate its contractual right to suspend performance.43

The federal district court subsequently granted AluChem’s motion for summary judgment, finding that the economic impact of anticipated costs of environmental regulation compliance did not constitute a force majeure event under the parties’ supply agreement.44 Specificall , the court rejected Sherwin Alumina’s argument that the extremely high cost of upgrading the kiln fell within the applicable force majeure provision, which read, in relevant part:

Seller shall not be liable for failure or delay in performance under this Order
due . . . to causes such as an act of God, strike, lockout . . . , [or] inability to
obtain or delay in obtaining necessary equipment or governmental approvals,
permits, licenses or allocations . . . .45

The court noted that a party could not avoid contract performance merely because the costs of regulatory compliance were higher than preferred or anticipated.46 Sherwin Alumina was able to upgrade the kiln and continue performing under the contract, but instead sought to avoid the expense as it would make the contract unprofitable. 47

The Sherwin Alumina opinion cautions construction contract parties to determine if supply chain disruptions make performance impossible as opposed to simply expensive.

D. Government Regulations

A final clause often found in a parties’ force majeure provision implicated by pandemics is nonperformance caused by government regulations. On this point, Texas case law mirrors that of the related common law
doctrine of impossibility.48 As a party must prove efforts
to avoid the effect of government regulations when declaring impossibility of performance, a party claiming force majeure must demonstrate that the governmental actions preventing performance were beyond the party’s
reasonable control.

For instance, in Hydrocarbon Management., Inc. v. Tracker Exploration, Inc., the parties’ mineral rights lease agreement excused nonproduction from a well due to government regulations.49 Thewell operator sought to invoke the force majeure provision when the Railroad Commission shut
in the well due to the operator exceeding the production quotas.50 The Seventh Court of Appeals held that the force majeure provision did not apply because compliance with state-mandated production quotas was within the operator’s reasonable control, and the shut in resulted from the operator’s violation of an existing regulation.51

Additionally, the governmental action prohibiting performance under the contract must actually occur. Returning to the Sherwin Alumina opinion,52 the federal district court noted that force majeure provisions do not typically provide for hypothetical or possible events that affect a party’s future performance.53 Thus, the potential or actual threat that the TCEQ may require a chemical manufacturer to suspend operations for multiple
violations of emissions regulations was insufficient. 54

In the context of pandemic-related government regulations, the more stringent state or local government stay-at-home orders that did not exempt construction activities could arguably be the type of regulation constituting an excusable event under an applicable force majeure provision. On the other hand, rumors of a general lockdown, or the temporary closure of a project site for repeat violations of personal protective health regulations,
would likely be inadequate.

The survey of Texas case law provides the reader with the current attitudes by the courts. However, seeing as how the analysis of force majeure provisions is a fact-specific inquiry based on the express language of the contract, it behooves the reader to scrutinize the typical force majeure
provisions prevalent in construction form contracts.

IV. COMMON FORCE MAJEURE PROVISIONS IN CONSTRUCTION FORM CONTRACTS

This section of the article will evaluate the force majeure provisions found in common industry standard form contracts and will include some suggested modifications to ensure the force majeure provision includes impacts to the project caused by COVID-19, or future pandemics and government shutdowns.

AIA A201 – 2017

§ 8.3 Delays and Extensions of Time

§ 8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered
in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section15.1.6.2, or other causes beyond the Contractor’s
control
; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may
determine. (emphasis added).

Commentary

The inclusion of “unusual delay in deliveries” and the catch all are strong points for a contractor whose work is delayed by COVID-19 to argue that such delays are excusable. However, in light of the current pandemic
and the subsequent government shutdowns throughout the country, there is no good reason for not expressly including “epidemics” and “adverse governmental actions” in this provision. Contractors should also insist that the provision be further modified to state that “…such time extensions should be affo ded whether or not the events or conditions were reasonably anticipated at the time and should be equitable and not subject to the Architect’s sole determination.”

ConsensusDocs 200 (2011, revised 2017)

6.3 Delays and Extensions of Time

6.3.1 If Constructor is delayed at any time in the commencement or progress of the Work by any cause beyond the control of Constructor, Constructor shall be entitled to an equitable extension of the Contract Time.
Examples of causes beyond the control of Constructor include, but are not limited to, the following: (a) acts or omissions of Owner, Design Professional, or Others; (b) changes in the Work or the sequencing of the Work ordered by Owner, or arising from decisions of Owner that impact
the time of performance of the Work; (c) encountering Hazardous Materials, or concealed or unknown conditions; (d) delay authorized by Owner pending dispute resolution or suspension by Owner under §11.1;
(e) transportation delays not reasonably foreseeable; (f) labor disputes not involving Constructor; (g) general labor disputes impacting the Project but not specifically related to the Worksite; (h) fi e; (i) Terrorism; (j) epidemics; (k) adverse governmental actions; (l) unavoidable accidents or circumstances; (m) adverse weather conditions not reasonably anticipated. Constructor shall submit any requests for equitable extensions of Contract Time in accordance with ARTICLE 8. (emphasis added).

Commentary

Since 6.3.1 explicitly mentions “epidemics” and “adverse governmental actions”, it would be difficul for an owner to successfully argue that delays to the work caused by COVID-19 are not excusable. To avoid all doubt on
whether foreseeability is a determining factor as to whether delays caused by COVID-19 are excusable, this provision should be modified to state: “If Constructor is delayed at any time in the commencement or progress of
the Work by any cause beyond the control of Constructor, Constructor shall be entitled to an equitable extension of the Contract Time, whether or not such event or condition is foreseeable unless otherwise stated herein.”

EJCDC C-700 (2018)

4.05.C Delays in Contractor’s Progress

If Contractor’s performance or progress is delayed, disrupted, or interfered with by unanticipated causes not the fault of and beyond the control of Owner, Contractor, and those for which they are responsible, then Contractor shall be entitled to an equitable adjustment in Contract Times. Such an adjustment will be Contractor’s sole and exclusive remedy for the delays, disruption, and interference described in this paragraph. Causes of
delay, disruption, or interference that may give rise to an adjustment in Contract Times under this paragraph include but are not limited to the following:

  1. Severe and unavoidable natural catastrophes such as fires, floods, epidemics, and earthquakes;
  2. Abnormal weather conditions;
  3. Acts or failures to act of third-party utility owners or other third-party entities (other than those third-party utility owners or other third-party entities performing other work at or adjacent to the Site as arranged by or under contract with Owner, as contemplated in Article 8); and
  4. Acts of war or terrorism.
    (emphasis added). Commentary
    At first glance, this provision seems to adequately address impacts caused by pandemics such as COVID-19. However, the use of the word “severe” is problematic because it is subjective, and the word “unavoidable” is too strong and certain. Hopefully COVID-19 will be less
    severe towards the end of 2021, but the disease may still impact construction activities if it spreads onsite, thus requiring quarantine. As for “unavoidable,” what does that really mean? If COVID-19 could have been avoided had our federal and state governments acted faster or
    taken more extreme measures to curb the spread, does that mean COVID-19 was avoidable and not subject to this provision? What if the workforce refuses to get vaccinated despite ease of access to vaccines? Does this mean COVID-19 is avoidable and not subject to this provision? The inclusion of those words creates confusion and uncertainty, so they should be struck.
    The inclusion of “unanticipated causes” will also cause problems for contractors whose work may be impacted by COVID-19 if the contract was executed after March 11, 2020, the date the World Health Organization declared COVID-19 a global pandemic. It would be wise for
    contractors to strike “unanticipated causes” and replace it th “whether or not such event or condition is foreseeable unless otherwise stated herein.”
    DBIA Document No. 535 (2010)
    1.2.8
    Force Majeure Events are those events that are beyond the control of both Design-Builder and Owner, including the events of war, floods, labor disputes, earthquakes, epidemics, adverse weather conditions not reasonably anticipated, and other acts of God. (emphasis added).
    8.2 Delays to the Work
    8.2.1
    If Design-Builder is delayed in the performance of the Work due to acts, omissions, conditions, events, or circumstances beyond its control and due to no fault of its own or those for whom Design-Builder is responsible, the Contract Time(s) for performance shall be reasonably
    extended by Change Order. By way of example, events that will entitle Design-Builder to an extension of the Contract Time(s) include acts or omissions of Owner or anyone under Owner’s control (including separate contractors), changes in the Work, Differing Site Conditions, Hazardous Conditions, and Force Majeure Events.
    8.2.2 In addition to Design-Builder’s right to a time extension for those events set forth in Section 8.2.1 above, Design-Builder shall also be entitled to an appropriate adjustment of the Contract Price provided, however, that the Contract Price shall not be adjusted for Force Majeure
    Events unless otherwise provided in the Agreement.
    Commentary
    Similar to ConsensusDocs and EJCDC, the inclusion of “epidemics” makes clear that COVID-19 would constitute a Force Majeure Event and that any delays caused by such an event would be excusable. Similar to the above provisions, to remove any doubt as to whether a foreseeable delay caused by COVID-19 constitutes a Force Majeure Event, contractors should make appropriate modifications, so they get the benefit of the force majeure relief.
    V. CONCLUSION
    During contract negotiations, careful consideration should be given to drafting the force majeure provision to provide entitlement to excused performance and equitable relief. A well-drafted force majeure provision
    will help ensure that project participants stand a better chance of mitigating their risks, and potentially reducing the likelihood of protracted litigation.
  1. Matt Moore is the Managing Partner in Peckar & Abramson’s Houston office. Mr. Moore represents general contractors, construction managers, sureties, owners, developers, and subcontractors in all phases of construction and on a wide variety of construction-related issue. Matt also regularly reviews, drafts, and negotiates construction contracts. Mr. Moore has been selected each year beginning in 2012 to the Texas Super Lawyers and Rising Stars lists in the area of Construction Law. He is also among the first attorneys in Texas to become Board Certified in the area of Construction Law by the Texas Board of Legal Specialization. Lee Banta is a Senior Associate in Peckar & Abramson’s Houston office. Lee has experience with lien and bond claim disputes, construction defect
    litigation, and general commercial matters. He has represented owners, contractors, subcontractors, and materialmen at all stages in the litigation process.
  2. Sun Operating P’ship v. Holt, 984 S.W.2d 277, 282 (Tex. App.—Amarillo 1998, pet. denied).
  3. Paradine v. Jane, 82 Eng. Rep. 897 (1647).
  4. Hinde v. Whitehouse, 103 Eng. Rep. 216 (1806).
  5. Fred R. Pletcher & Anthony A. Zoobkoff, FORCE MAJEURE (AND OTHER USEFUL FRENCH PROFANITIES) IN RESOURCE AGREEMENTS,
    59 Rocky Mtn. Min. L. Inst ., 17-3 to 17-4 (2013).
  6. Alphonse M. Squillante & Felice M. Congalton, FORCE MAJEURE, 80 Com. L.J. 4, 5 (1975) (“[t]here is no ground for damages and interest, when by consequence of a superior force or of a fortuitous occurrence, the debtor has been prevented from [performing]. . .”) (quoting § 1148 of the French
    Civil Code from which the concept of force majeure is derived.).
  7. Pletcher & Zoobkoff, supra note 5, at 17-3 to 17-4. For this reason, force majeure provisions are sometimes referred to by the Latin phrase “vis
    major”.
  8. Arthur L. Corbin, Corbin on Contracts § 1324 (One vol. ed. 1952).
  9. Pletcher & Zoobkoff, supra note 5, at 17-2.
  10. See, e.g., Matsoukis v. Priestman & Co. [1915] 1 K.B. 681, 685 (noting that it was not clear whether a British court applying British law would be
    bound or entitled to give the words the full meaning as they have under French law); see also Thomas Bortwick (Glasgow) Ltd. v. Faure Fairclought Ltd. [1968] 1 Lloyd’s Rep. 16, 28 (commenting that “the recise meaning of this term, if it has one, has eluded lawyers for years”).
  11. Pletcher & Zoobkoff, supra note 5, at 17-9.
  12. See, e.g., Koltermann, Inc. v. Underream Piling Co., 563 S.W.2d 950, 957 (Tex. Civ. App.—San Antonio 1977, writ ref’d n.r.e.) (“Where the obligation to perform is absolute, impossibility of performance occurring after the contract was made is not an excuse for nonperformance if the
    impossibility might have reasonably been anticipated and guarded against in the contract.”).
  13. See Sun Operating P’ship v. Holt, 984 S.W.2d 277, 283 (Tex. App.—Amarillo 1998, pet. denied) (“Force majeure, is now little more than a
    descriptive phrase without much inherent substance. Indeed, its scope and application, for the most part, is utterly dependent upon the terms of the contract in which it appears.”); see also N. Irr. Co. v. Dodd, 162 S.W. 946, 948–49 (Tex. Civ. App.—Austin 1913, writ ref’d) (“‘[W]here the party of his own contract creates a duty or charge upon himself, he is bound to make good, notwithstanding any accident by inevitable necessity, because he ought to have provided against it by his contract.’”)
  14. See GT & MC, Inc. v. Texas City Ref., Inc., 822 S.W.2d 252, 258 –59 (Tex. App.—Houston [1st Dist.] 1991, writ denied); see also N. Irr. Co., 162
    S.W. at 948–49 (“‘It is a well-established rule of law that, where a person creates a charge or obligation upon himself by express contract, he will not be permitted to excuse himself therefrom by pleading an act of God rendering such performance impossible.’”) (quoting 1 Am. & Eng. Ency. Law, p. 588).
  15. Metrocon Const. Co., Inc. v. Gregory Const. Co., Inc., 663 S.W.2d 460, 462–63 (Tex. App.—Dallas 1983, writ ref’d n.r.e.) (defendant-builder
    assumed the risk of failure to timely construct a wall due to the occurrence of high winds).
  16. See N. Irr. Co., 162 S.W.at 948–49 (noting that the performance of a contract is prevented by law as an exception to the general rule that a promisor is not discharged where the performance becomes impossible subsequent to the making of the contract).
  17. Centex Corp. v. Dalton, 840 S.W.2d 952, 954–55 (Tex. 1992) (quoting Rest atement (Sec ond) of Contra ct s § 261 (1981)).
  18. Key Energy Servs., Inc. v. Eustace, 290 S.W.3d 332, 340 (Tex. App.—Eastland 2009, no pet.).
  19. Tractebel Energy Mktg., Inc. v. E.I. Du Pont De Nemours & Co., 118 S.W.3d 60, 69–70 (Tex. App.—Houston [14th Dist.] 2003) (disallowing
    impossibility defense where party to the contract dismissed legal challenge to agency decision because the party did not believe the case could be won in time to effectuate the contract).
  20. Walden v. Affiliated Comput. Servs., Inc., 97 S.W.3d 303, 325 (Tex. App.—Houston [14th Dist.] 2003, pet. denied).
  21. Id.
  22. R & B Falcon Corp. v. Am. Expl. Co., 154 F.Supp.2d 969, 974 (S.D. Tex. 2001) (applying Texas law) (quoting BLACK’S LAW DICTIONARY 33 (6th ed.1990)); accord N. Irr. Co., 162 S.W. at 948–49 (defining “Act of God” as being “the result of such natural causes as could not reasonably have
    been foreseen and provided against”).
  23. N. Irr. Co., 162 S.W. at 948–49 (the lack of a severe drought for the ten years preceding the contract did not constitute an act of God excusing the
    defendant from failing to furnish water for irrigation). Of course, more leniency may be shown for a flu-like pandemic, which has not occurred on such a scale in over a century.
  24. Metrocon Const. Co. v. Gregory Const. Co., 663 S.W.2d 460, 461 (Tex. App.—Dallas 1983, writ ref’d n.r.e.).
  25. Id. at 462–63.
  26. Id.
  27. Id.
  28. Gulf, C. & S.F. Ry. Co. v. McCorquodale, 9 S.W. 80, 80–81 (Tex. 1888) (unprecedented flood that washed away a bridge an act of God but shipment of cattle would have passed the juncture prior to the casualty if the shipment left at its original departure time)
  29. See, e.g., TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176, 179 (Tex. App.—Houston [1st Dist.] 2018, pet. denied).
  30. See id. at 186. (specifically identifying “fire, flood, storm, act of God, governmental authority, labor disputes, [or] war . . . .” as force majeure events).
  31. R & B Falcon Corp. v. Am. Expl. Co., 154 F.Supp.2d 969, 974 (S.D. Tex. 001).
  32. Id.
  33. Id.
  34. Id. at 975.
  35. TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176, 179 (Tex. App.—Houston [1st Dist.] 2018, pet. denied).
  36. See id. (“Should either Party be prevented or hindered from complying with any obligation created under this Agreement . . . by reason of fire, flood, storm, act of God, governmental authority, labor disputes, war or any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected . . . ”).
  37. Id. at 186.
  38. Id.
  39. Id.
  40. See, e.g., Sherwin Alumina L.P. v. AluChem, Inc., 512 F.Supp.2d 957, 966 (S.D. Tex. 2007) (listing “unforeseen shortages or unavailability of fuel, power, transportation, raw materials or supplies, inability to obtain or delay in obtaining necessary equipment . . . ” among the specifically
    enumerated force majeure events).
  41. Id. at 960.
  42. Id
  43. Id. at 961–62.
  44. Id.at 967–974.
  45. Id. at 966.
  46. Id. at 967.
  47. Id.
  48. Compare the cases discussed in section II above, with those in this ection.
  49. Hydrocarbon Mgmt., Inc. v. Tracker Expl., Inc., 861 S.W.2d 427, 435 (Tex. App.—Amarillo 1993, no writ).
  50. Id.
  51. Id. at 436.
  52. See Sherwin Alumina, 512 F.Supp.2d at 960–69 (discussing opinion in the context of specifically identified commercial events).
  53. Id. at 968.
  54. Id. at 968–69.

Pandemic Creates Cause to Rethink Overlooked Contract Provisions

Zachary Davis | Ahead of Schedule

The last time my byline appeared in this column, we were just a few weeks into the government-ordered lockdown, and I pondered whether construction projects could — or should — continue. In the year since, the construction industry proved adaptable as owners and general and trade contractors worked closely to ensure that work continued while keeping workers safe and complying with the various government-ordered and -recommended practices intended to slow the spread of COVID-19.

While we are still many months from being past the pandemic, we have at least neared the light at the end of the tunnel. Most adults in Oregon are now or will soon be eligible for vaccination, and there are signs of normalcy as kids return to school and the various pandemic-related restrictions that had become the new normal are slowly lifted. As our industry and communities enter this new stage of what is hopefully recovery and resurrection from the pandemic, the time is right to look back at lessons learned over the past 12 months.

Contracting Considerations

Prior to March 2020, I cannot remember spending more than five minutes negotiating force majeure language in a construction or design contract. When advising owners, I often recommended a handful of modifications to the force majeure provisions of the various industry standard forms, which were typically accepted without comment or revision by the other party.

Post-March 2020, the force majeure provision is easily the one that is most closely scrutinized — at least in terms of time and red ink. And for parties negotiating new agreements, the range of solutions has run a broad spectrum as contracting parties have looked for fair — and sometimes creative — ways to allocate the numerous risks that the ever-changing pandemic presented (and still presents).

Of course, for contracts negotiated over the past year, the parties have been in the unique position of negotiating during an ongoing force majeure event — or at least force majeurelike circumstances. Because the pandemic is ongoing, contracting parties should — at least to some degree — be able to account in both price and schedule for the known impacts of the pandemic as of the date of contracting. Thus, the challenge is drafting a provision in the midst of a pandemic that is flexible enough to differentiate between those known risks — e.g., the impacts of existing government orders and restrictions — and the unknown risks — e.g., future government orders strengthening restrictions or imposing new lockdowns due to a surge. While the rule traditionally followed in construction contracting is that the occurrence of a force majeure event gives the contractor the right to additional time — but not necessarily money, many owners have agreed to include a remedy for additional costs as part of pandemic-specific force majeure provisions. On the flip side, many such owners also want the opportunity to share in any savings in the event the work gets less expensive due to, for example, a loosening of government restrictions that comes earlier than anticipated.

But while force majeure has claimed the spotlight, there are other contract clauses that were similarly overlooked pre-pandemic that are proving equally worthy of scrutiny. One such example is the “change in law” provision. Executive orders and agency-level directives may or may not qualify as a “change in law” depending on, among other things, (a) how “law” is defined by the contract (if at all), and (b) whether the contract permits a remedy for all such changes in the law or for just a certain class of changes.

The other challenge is determining how these provisions and remedies interact within the broader context of the contract. For instance, if a new government order that imposes additional social distancing requirements does not meet the contractual definition of a “change in law,” that may not necessarily mean that the impacted party is without a remedy under another provision. Thus, contracting parties may want to include language that, for example, clarifies whether they intend that the “change in law” provision is the exclusive remedy for impacts involving government orders. While that conclusion might be inferable from a holistic reading of the contract, including express language ensures that the parties’ intent is honored.

Managing Impacts and Claims During a Pandemic

The flip side of drafting a contract that allocates risk for unexpected events such as a pandemic is how the parties implement that agreement when those risks arise during performance. For instance, most contracts require an impacted party to provide timely notice to the other party of an event or circumstance that triggers a contractual remedy. While a force majeure provision may excuse performance of certain contract obligations, it is unlikely to excuse notice requirements — even in the event of a global pandemic.

And, of course, the occurrence of a force majeure event is not a blank check for the impacted party and does not provide a remedy or excuse performance for obligations not causally impacted by the event. For instance, a contractor submitting a request for an extension of time due to a force majeure event should expect that the owner will want a critical path analysis showing that the claimed event actually caused a delay and that the delayed activity was in fact on the project’s critical path. In my experience, owners who were initially sympathetic to their contractors at the outset of the pandemic — and thus less inclined to strictly enforce their contracts — are far less willing to overlook shortcomings now that both sides have lived through pandemic conditions for more than a year.

As we emerge from a year of lockdown and conducting business in unprecedented conditions, the events of the past year will leave their mark for generations. The construction industry — like society at large — has learned important lessons that will make it better prepared to face future challenges.

Force Majeure: What are the Chances for Relief?

Kent B. Scott | Babcock, Scott & Babcock

Introduction

Is a substantial increase in the cost of materials covered by a force majeure provision?

In short, the answer is dependent on the terms of the specific contract. If a contract is a fixed price contract, an increase in the cost of materials likely will not be covered by a force majeure provision. Moreover, if a contract is a fixed price contract and it contains a “no damage for delay” provision, then it is very likely an increase in the cost of material will not be covered by a force majeure provision. Since it is unlikely a substantial increase in the cost of materials will trigger a force majeure provision, it is not necessary to determine what the appropriate remedy would be.

Analysis

Applying Florida law, the Eleventh Circuit found that a contractor who entered into a fixed price contract with a property owner and subsequently saw a substantial increase in its costs due to effects of a series of hurricanes, which caused a shortage of labor and material, was precluded from recovering additional labor and material costs from the force majeure events – i.e., the hurricanes. S&B/BIBB Hines PB 3 Joint Venture v. Progress Energy Fla., Inc., 365 Fed. Appx. 202, 203, 205 (11th Cir. 2010). In S&B, the parties’ contract required the contractor to “provide pricing for [all material, equipment, workmanship, labor, engineering, and any other items or labor performed or furnished] at a firm fixed price.” Id.at 203. The contract further contained a “no damage for delay” provision that provided “that in no event shall Contractor be entitled to any increased costs, additional compensation, or damages of any type resulting from such Force Majeure delaysId. at 204. The court ultimately found that:

it would subvert the entire purpose of a fixed price contract to allow [the contractor] to recover additional labor and materials costs when the benefit of a fixed price contract is to protect against price increases, labor shortages, material shortages, and the like. In contracting for the fixed price construction job, ‘the parties thoroughly addressed and allocated the risks’ inherent in the project, and [the contractor] could have increased its prices to reflect the risks it was assuming.”

Id. at 205-06 (quoting Marriot Corp. v. Dasta Const. Co., 26 F.3d 1057, 1065-66, 1066 (11th Cir. 1994)). The court reasoned that “[t]he contract made plain that [the contractor] bore the risk of these additional expenses and could have negotiated an alternate contract containing an escalation clause, a cost-plus arrangement, or a higher fixed price to protect against unforeseen expenses or increased its contract price to account for such risks.” Id. at 206.

The Fourth Circuit similarly held that a force majeure clause does not protect against changes in market price. Langham-Hill Petroleum Inc. v. S. Fuels Co., 813 F.2d 1327, 1330 (4th Cir. 1987). In Langham-Hill, two parties entered into a fixed price contract for a lump sum number of barrels of oil, which would be purchased at the fixed contract price over four monthly installments. Id. at 1329. The first three installments concluded without dispute. Id. However, prior to the fourth and final installment there was a substantial drop in the world oil prices. Id. The purchaser invoked the contract’s force majeure clause and refused to perform any further obligations under the contract. Id. The Fourth Circuit reasoned that “[i]f fixed-price contracts can be avoided due to fluctuations in price, then the entire purpose of fixed-price contracts, which is to protect both the buyer and the seller from the risks of the market, is defeated. Id. at 1330.

Utah courts seem to follow this reasoning. In Kilgore Pavement Maintenance, LLC v. West Jordan City, 2011 UT App 165, ¶ 2, 257 P.3d 460, a pavement contractor provided a city with a fixed price bid that was based on liquid asphalt oil being priced at $350 per ton, which the city accepted, and the two parties subsequently entered into a contract. Id. Shortly after the parties entered into the contract, the price of liquid asphalt increased to $1005 per ton. Id. at ¶ 3. The court ultimately held that the contractor “assumed responsibility for supplying all materials necessary for its performance, and therefore, assumed the risk of supply cost increaser”, which ultimately precluded the contractor from relying on a claim of impossibility or commercial impracticability. Id. at ¶8, 12. While a force majeure clause is absent from the reasoning in Kilgore, Kilgore does provide that under Utah law, a fixed price contract is prima facie evidence of an allocation of risk of the change in the contracted material’s market price.

Conclusion

It is important to note that although it is likely a claimant is precluded from relying on a force majeure provision, it may still have a claim under an excuse doctrine, such as “frustration of purpose, impossibility, and commercial impracticability.” § 7:322. Relief from disruption caused by COVID-19 pandemic, 2A Bruner & O’Connor Construction Law § 7:322. However, pursuant to Kilgore, it is unlikely such a claim would be successful. 2011 UT App 165, ¶ 8, 12, 257 P.3d 460.

Is Coronavirus a Force Majeure Event?

Michael Kelley | Shutts

Coronavirus (or COVID-19) is already causing significant disruption to businesses around the world, including quarantines and travel bans affecting trade and commerce, manufacturing, construction, hospitality and service industries in an unprecedented way. Now the disruptions are impacting society-at-large, from the closing of restaurants and attractions to remote work models for corporate staff members, “social distancing” and now even mandatory lockdowns in some locations. With this heightened sense of precaution (which is good) bordering on anxiety and panic (which can be very bad), it is crucial for businesses to apply the same level-headed approach to their dealings as they always have. The fact is that COVID-19 would likely not excuse non-performance or even cancel existing contracts, with very rare exceptions.

So what does the coronavirus mean for business, particularly in real estate development, finance and construction? How does it impact real estate transactions, acquisition and finance closings? Are you in breach if you cannot fulfill your agreement, even if your inability is linked to effects – even extraordinary government action – that are linked to COVID-19? While some may assume that the craziness of the pandemic excuses performance altogether, effectively canceling agreements, the reality is that, unless you are dealing with an extremely rare situation, any valid agreement is not simply canceled as a result of coronavirus. Businesses need to carefully review the language of their agreements, which may (or may not) provide for any relief – or the contracted relief may be challenged. And if the contract doesn’t have the right language, one cannot assume any certainty about the consequences of failure to perform.  More than likely, businesses are going to be expected to take action to fulfill their contractual obligations, and the failure to be proactive may end up costing them dearly. How folks need to treat and respond to what certainly appears to be a pandemic will in the vast majority of cases depend solely on the specific language of the contracts involved, including upfront contingencies agreed to by both parties, provisions granting certain relief to either party, and, the hot topic circulating the internet right now, “Force Majeure.”

What is a force majeure clause?

A force majeure clause is commonly included in commercial contracts, addressing what parties are supposed to do under certain defined force majeure (“superior force”) circumstances.  These are recognized events that prevent performance of contracts.  They are usually “acts of God” (earthquakes, floods, tsunamis) and certain disruptive, unplanned acts of people (war, labor strikes, terrorism). These clauses are unique to most contracts and have very specific language identifying the types of events covered, the process for claiming or notifying the other party of the force majeure event, and what to do going forward (excused from performance / suspended performance / additional time and/or money / termination, etc.).

In common law jurisdictions, like the overwhelming majority of the U.S., force majeure is not implied as a matter of law – that is, there’s no common understanding of what a force majeure is such that it could be applied by judges or tribunals to normal contract interpretation.  Force majeure clauses must be express, and they will be interpreted strictly according to their precise language. Even a widely-worded force majeure clause may not necessarily capture events such as COVID-19, and the party relying on the clause will still likely need to prove that the event was not “reasonably contemplated” by the parties when making the contract, and that the event is “beyond reasonable control” of the party seeking relief.

What should my next steps be?

Review – In light on the current pandemic, it is important to review every contract you have that requires some form of fulfillment of goods or services, or some sort of financial action or commitment over the next 90 days.

Be proactive – It is also important to be proactive in seeking information and communications from your business relationships (suppliers, contractors, customers, owners) regarding the impact of the virus and how best to avoid or mitigate potential disruptions.

Seek legal advice – If you or your real estate investment, development, or construction business is at risk, contact a construction attorney with significant experience in contract delay litigation, insurance coverage disputes, bonding issues – performance and payment challenges, and particularly force majeure clauses. An experienced attorney with a solid understanding of how these events are likely to be resolved by the courts can help avoid potential disasters to existing business and long-term relationships.

Managing Project Risk Associated With The Coronavirus Outbreak Through Force Majeure Provisions

Sara Beiro Farabow | Seyfarth

Globally, many developers and contractors are scrambling to identify available contractual relief as the Coronavirus (COVID-19) disrupts cross-border supply chains. US businesses will recall a similar effort just eighteen months ago, when the Trump Administration announced increased tariffs on $300 billion of Chinese goods. That trade war prompted companies to scrutinize remedies and mitigate associated project risks by tapping alternative sources originating in other Asian countries and Canada. Once again, construction industry stakeholders should reexamine delay provisions in pending and future contracts to mitigate risks arising from project disruptions caused by COVID-19.

This article provides an overview of US case law interpreting the doctrine of force majeure in the context of disease-related delay claims. Drawing on that guidance, we then identify practical considerations for applying existing force majeure or related delay provisions and how they may be modified for future projects.

Project Risk Associated with the Spread of the Coronavirus

Reports of a slowdown in the construction industry have been growing in the past weeks across multiple respected industry publications, including Engineering News-Record.1 Because of its severity, the Coronavirus outbreak is expected to disrupt supply chains across the globe in the construction industry, as well as in manufacturing and other sectors. This ranges from worker shortages, transportation disruptions, and closures of production plants and ports of entry to restrictive governmental action, such as bans on travel and mandated quarantines. Yet the full impact remains largely speculative as scientists and construction executives assess the daily breaking news. As recently observed by the Chief Economist of the Associated General Contractors of America (AGC):

The coronavirus outbreak continues to spread globally each day but the impact on U.S. construction remains speculative. So far, there do not appear to be any reports of cancelled, deferred or interrupted construction projects, nor of delays or shortages of construction equipment, parts or materials. However, the disruption to Chinese production and shipping is increasing, adding to the likelihood that some construction products and projects will be affected.2

To cut out much of the media’s speculation and potential misinformation, readers may check the official CDC and WHO guidelines at CDC Coronavirus Disease 2019 (COVID-19) and WHO Coronavirus Disease (COVID-19) Outbreak webpages.

What is a Force Majeure Provision and Where is it Buried in Your Contracts?

Force majeure clauses operate to excuse performance obligations or to extend time of performance on a contract when an unforeseeable event, or one that is “beyond the contractor’s control,” causes project delay. While not well standardized in the United States, such provisions often include both “acts of God” and “acts of Governmental Entities,” as well as an assortment of other possible delaying events. Two of the most commonly-used industry published contracts forms—The ConsensusDocs© Coalition (ConsensusDocs©) and the American Institute of Architects (AIA®)—do not use the term “force majeure.” Instead, the operative language is in the overall delay provisions of the contracts.

In the AIA® suite of contracts, the delay provision is found in the AIA Document A201″ – 2017, “General Conditions of the Contract for Construction,” incorporated into many of the contract forms. In particular, Section 8.3.1, “Delays and Extensions of Time,” describes some force majeure-type events which may permit an extension to the Contract Time:

§ 8.3 Delays and Extensions of Time

§ 8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section 15.1.6.2, or other causes beyond the Contractor’s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.

§ 8.3.2 Claims relating to time shall be made in accordance with applicable provisions of Article 15.

§ 8.3.3 This Section 8.3 does not preclude recovery of damages for delay by either party under other provisions of the Contract Documents.

Similarly, ConsensusDocs© describes various force majeure type events in the main agreement between the Owner and Constructor—but also specifically identifies “epidemics.” The ConsensusDocs© 200, “Standard Agreement and General Conditions Between Owner and Constructor (©2011, Revised May 2017) includes a non­exclusive list of thirteen force majeure events in Section 6.3.1, “Delays and Extensions of Time.” This provision cites “epidemics” in addition to a more general reference to “transportation delays not reasonably foreseeable” as shown below in the excerpted provision:

6.3. DELAYS AND EXTENSIONS OF TIME

6.3.1 If Constructor is delayed at any time in the commencement or progress of the Work by any cause beyond the control of Constructor, Constructor shall be entitled to an equitable extension of the Contract Time. Examples of causes beyond the control of Constructor include, but are not limited to, the following: (a) acts or omissions of Owner, Design Professional, or Others; (b) changes in the Work or the sequencing of the Work ordered by Owner, or arising from decisions of Owner that impact the time of performance of the Work; (c) encountering Hazardous Materials, or concealed or unknown conditions; (d) delay authorized by Owner pending dispute resolution or suspension by Owner under §11.1; (e) transportation delays not reasonably foreseeable; (f) labor disputes not involving Constructor; (g) general labor disputes impacting the Project but not specifically related to the Worksite; (h) fire; (i) Terrorism; (j) epidemics; (k) adverse governmental actions; (l) unavoidable accidents or circumstances; (m) adverse weather conditions not reasonably anticipated. Constructor shall submit any requests for equitable extensions of Contract Time in accordance with ARTICLE 8.

6.3.2 In addition, if Constructor incurs additional costs as a result of a delay that is caused by items (a) through (d) immediately above, Constructor shall be entitled to an equitable adjustment in the Contract Price subject to §6.6.

6.3.3 NOTICE OF DELAYS If delays to the Work are encountered for any reason, Constructor shall provide prompt written notice to Owner of the cause of such delays after Constructor first recognizes the delay. The Parties each agree to take reasonable steps to mitigate the effect of such delays.

The nine causes listed in ConsensusDocs© Section 6.3.1’s subsections (e) through (m) are customary force majeure events. Like the AIA®, the above Section 6.3.2 of the ConsensusDocs© provides for an equitable adjustment to the contract time, but not the contract price, should a force majeure event occur.

US Case Law Interpreting Delay Claims Predicated Upon Disease Outbreak

While the question of whether a particular disease outbreak constitutes a force majeure event turns on the language of the provision and applicable law, there is not extensive published case law in the United States involving disease outbreak. In the relatively small number of judicial opinions that have analyzed whether a certain disease outbreak constituted a force majeure event, courts have focused on the extent to which the outbreak was an unforeseeable event precipitating a dramatic change in market conditions.

In a 2003 case involving the supply of hogs from three farms, the court noted that an outbreak of Porcine Reproductive and Respiratory Syndrome (PRRS) which affected hog production constituted a force majeure event for purposes of summary judgment.3 In SNB Farms, Inc. v. Swift & Co., the contract at issue provided: “[w]here either party claims an excuse for nonperformance under this Section, it must give prompt telephonic notice, promptly confirmed by written notice, of the occurrence and estimated duration of the Force Majeure Event to the other party; and shall give prompt written notice when the Force Majeure Event has been remedied and performance can recommence hereunder”4 (applying Colorado law). At issue on summary judgment was whether the non-performing parties had provided sufficient notice, as required under the force majeure clause, to be entitled to the excuse of force majeure. For one breaching party that had notified the non-breaching party of PRRS in a letter and orally, the court held that the notification question was appropriate for a jury to decide.5 However, for the remaining two breaching parties, who did not raise the PRRS issue or claim force majeure in their quarterly estimates, the court held that they were precluded from asserting the defense.6 Accordingly, summary judgment was appropriate against those two entities.

By contrast, in Rexing Quality Eggs v. Rembrandt Enterprises, Inc., a federal court in Indiana applying Iowa law held that falling consumer demand did not constitute a force majeure clause.7 In reaching its holding, however, the court noted “[u]nlike the avian flu example, which may plausibly constitute an unforeseeable event precipitating a dramatic change in market conditions, a change in purchaser demand—even a substantial change—is a foreseeable part of doing business.”8

Regardless of whether it is ultimately declared a pandemic, courts may logically find the Coronavirus outbreak to be beyond the “reasonable control of the party” and fall within the meaning of “acts of God.”9 If the quarantines and travel restrictions put into place by governments render the contractor or subcontractor unable to perform, these actions may constitute a valid “Governmental Entities” act excusing performance.10 For some construction project stakeholders holding contracts that are silent with respect to disease-related delay, they must rely upon these more general contractual language referring to events beyond its control, acts of God or Governmental Entities.

A more compelling claim of force majeure delay caused by the Coronavirus outbreak is found in construction contracts that specifically identify “disease,” “epidemic,” or “pandemic” in the definition of a force majeure or delay event. This is especially crucial in some jurisdictions, such as New York, where courts have ruled that a delay beyond the control of the claiming party may only excuse performance if the event has been expressly listed in the governing delay or force majeure clause.11

The fact that currently 61 countries have reported COVID-19 cases to the World Health Organization distinguishes it from other epidemics.12 With that, courts in the United States may be more willing to find that both the outbreak and governmental responses were unforeseeable or beyond the control of either party. Notably, this is only the sixth time that the WHO has declared a disease outbreak to be a Public Health Emergency of International Concern (PHEIC) since being vested with that authority in 2005, two years after the SARS outbreak.

Practical Considerations for Modifying Force Majeure-Related Provisions

Below are some practical issues businesses should consider when reviewing or re-negotiating their force majeure clauses:

  • Does your contract specifically include some reference to delay caused by disease, such as quarantine, outbreak of disease, epidemic, or pandemic? Or does it only generally reference events that are beyond the parties’ control?
  • If a force majeure event occurs, does it entitle the contractor to an equitable adjustment in the contract time?
  • If a force majeure event occurs, is the contractor also entitled to an equitable adjustment in the contract price? Should any entitlement to an increase in the contract price be limited to the contractor’s direct costs?
  • Consider whether the contractual definition of a force majeure event should include both epidemic and an increase in tariffs, given the recent volatility in the tariff wars and the extent to which the project’s supply chain originates outside of the United States.

Below we provide a sample robust definition of force majeure that includes both disease and tariffs:

Force Majeure Event includes, but is not limited to, any intervening act of God or public enemy, war, invasion, act of terror, hurricane force winds, tornados, strikes or labor disputes, riot or other public disorder, disease outbreak, epidemic, pandemic, or other declaration of public health emergency, quarantine restriction, and any act of any governmental body or authority that results in the imposition of a tariff or duty on imported materials required under the Contract Documents which was not applicable as of the Effective Date of this Agreement.”

Owners, contractors, and subcontractors should carefully negotiate the definition of force majeure to allocate the risk in a commercially reasonable manner. Rather than seeking to shift the risk disproportionately to the party with the weaker bargaining strength, parties should consider an allocation of risk that is both fair and furthers the shared goal of achieving successful project delivery.

Seyfarth Shaw’s Workplace Safety and Environmental Group has organized a Coronavirus task force that presented a webinar, “Coronavirus Part 2: Preparing for a Potential Pandemic — New Employer Challenges,” on March 2, 2020. This webinar updated employers about the latest information on coronavirus. You can view the slides and view to the recording.

Footnotes

[1] https://www.enr.com/articles/48595-supply-chain-impacts-rise-as-china-coronavirus-spreads.

[2] Ken Simonson, Coronavirus impacts loom but have yet to affect construction inputs or projects, AGC Data Digest, Vol. 20, No. 8, Feb 17-28, 2020.

[3] No. C01-2077, 2003 WL 22232881, at *10 (N.D. Iowa 2003).

[4] Id.

[5] Id.

[6] Id.

[7] 360 F. Supp. 3d 817, 841-42 (S.D. Ind. 2018).

[8] Id. at 841 (emphasis added).

[9] See, e.g.Am. Nat. Red Cross v. Vinton Roofing Co., 629 F. Supp. 2d 5, 9 (D.D.C. 2009) (“‘[a]n Act of God’ is the result of the direct, immediate and exclusive operation of the forces of nature, uncontrolled or uninfluenced by the power of man and without human intervention, and is of such character that it could not have been prevented or avoided by foresight or prudence”).

[10] See, e.g.Harriscom Svenska, AB v. Harris Corp., 3 F.3d 576, 580 (2d Cir. 1993) (finding that government’s prohibition on sale of goods classified as military equipment to be “government interference” within the meaning force majeure clause).

[11] See, e.g.Phibro Energy, Inc. v. Empresa De Polimeros De Sines Sarl, 720 F. Supp. 312, 318 (S.D.N.Y. 1989) (citing Kel Kim Corp. v. Central Markets, Inc., 524 N.Y.S.2d 384, 385 (1987)).

[12] https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—2-march-2020 (WHO Director-General’s Opening Remarks at Media Briefing on COFID-19, March 2, 2020)