FORCE MAJEURE CLAIMS

HOW TO MANAGE CONSTRUCTION DISPUTES TO MINIMIZE SURETY AND CONSTRUCTION CLAIMS. PART 3: FORCE MAJEURE CLAIMS.

Construction is a business fraught with risk. Disputes over even the smallest of issues can quickly escalate, with crippling consequences to the project and the parties. Over the years, the construction industry has developed various methods of contractually allocating the risk of project delay and disruption. Some of these methods include liquidated damages provisions, "no damages for delay" clauses, mutual waivers of consequential damages, provisions that limit liability, claims notice provisions, and provisions addressing responsibility for the adequacy of the construction plans and specifications. Parties frequently litigate the sufficiency of these risk-shifting efforts in conjunction with the underlying merits of delay and disruption disputes.

Construction Claims & Disputes

In Part I of our series of how to manage construction disputes to minimize surety and construction claims, we addressed the construction delay claims and the methods typically used to analyze them.

We indicated there that the most frequently encountered claims include:

1. Construction Delay Claims

2. Disruption and Loss of Labor Productivity Claims

3. Design and Construction Defect Claims

4. Force Majeure Claims

5. Acceleration or Compression of the Schedule Claims

6. Suspension, Termination and Default Claims

7. Differing Site Conditions Claims

8. Change Order and Extra Work Claims

9. Cost Overrun Claims

10. Unacceptable Workmanship or Substituted Material Claims

11. Non-payment Claims (stop notice (or Notice to Withhold) claims, mechanics’ lien (only for private construction projects) and payment bond claims)

Part III of this series discusses item 4 above: Force Majeure Claims

Third Party / Force Majeure

Those engaged in construction or other closely related fields know that the wording of a contract can make or break your entire business. Some contractors will create their own agreements to bind themselves and clients together while some will utilize a standard industry form contract purchased from a third party. Either of the scenarios can yield unfavorable results if due care isn't taken in ensuring that certain clauses are included and are written correctly.

When contractors and other construction professionals hear "force majeure," many think of an "act of god" or visions of lightning strikes or an earthquake. But force majeure can mean so much more. A well-drafted contract or agreement will define exactly what a force majeure is and what will happen if such circumstances arise.

The direct translation of force majeure is “greater force”, or in other words a force that is out of the hands of any party to the contract. Typically, these clauses are inserted into contracts to excuse a party from liability if an event which could not be foreseen prevents that party from fulfilling its contractual obligations. See Pacific Vegetable Oil Corp. v. C.S.T., Ltd. (1991) 29 Cal.2d 228). Examples of typical force majeure events include natural disasters, insurrections, war or “Acts of God”. The Supreme Court of the United States has indicated that a force majeure event is one that is “…unexpected, something beyond reasonable foresight and skill.”

Force Majeure are those unforeseen events with causes beyond the contractor’s control, for which the contractor is deemed excusable in their failure to perform within the required time limits. Force Majeure schedule impacts are commonly known as unforeseen events, causes beyond the contractor’s control, and events without fault or negligence. Contracting Common examples of delays that are beyond the control and without the fault of the contractor include but are not limited to:

•Acts of God or of the public enemy

•Acts of the Government in either its sovereign or contractual capacity

•Fires

• Epidemics

• Quarantine restrictions

• Strikes

• Freight embargoes

• Unusually severe weather. See Wickwire, J.M., T.J. Driscoll, S.B. Hurlbut , and S. B. Hillman (2003), “Construction Scheduling: Preparation, Liability, and Claims, Construction Library Law”, 2nd ed., Aspen Publishers, USA.

Under such provisions, the contractor is entitled to an extension of time to complete work if the delay is deemed excusable. An Act of God typically refers to a natural occurrence caused directly and exclusively by natural forces without any human intervention, which could not have been reasonably foreseen or prevented by the contractor or any other party to the contract. This category includes earthquakes, landslides, tornadoes, hurricanes, lightning, and floods. Liquidated damages are not to be assessed during this extended performance period, provided the delay is not directly or indirectly the fault of the contractor.

Abnormal weather conditions can greatly influence the execution of activities, in turn affecting completion of the project on time. Most contract documents state that the only weather that should impact the completion of the project within schedule is “unusually severe” weather conditions. Weather can have both a direct and indirect impact on construction. For example, if unusually severe rainfall amounts stop all earthwork activities, there is a direct effect and stoppage of work. In addition to the days that the rain has taken place, the indirect effect of the rain is that the earthwork activity cannot be started until the soil has dropped to a workable moisture content.

Not all unexpected events or conditions, however, are situations that will excuse performance of a contractual obligation. To obtain relief under the force majeure clause the contractor must generally clear three hurdles: First, something unexpected must occur. Second, the risk of the unexpected occurrence must not have been allocated to either party by the agreement. Finally, the unexpected occurrence must render performance commercially impracticable. If a contractor fails to protect itself from a foreseeable contingency, it has assumed that risk. Furthermore, a contractor is expected to take measures to prevent the harmful effects of uncontrollable events whenever reasonable - known as "mitigation." Reasonable weather protection measures should be employed even if the contractor has no notice of a "freak" storm brewing.

If no Force Majeure Clause, then the Contractor bears the Risk

When there is no force majeure clause in the contract, the risk of loss for any unexpected or unforeseen event generally falls on the contractor. Since force majeure events are generally acts of nature (or God), it is said "because the same rain falls on the owner's head as on the contractor's" both parties share the risk; therefore, the contractor is entitled to a time extension, but not compensation. Therefore, if the event causes a delay in performance, a contractor could be allowed to raise the doctrine of force majeure to obtain an extension of time without penalty and as a defense against assessment of liquidated damages. Nevertheless, the contractor will not normally be permitted to recover losses or damages resulting from that delay. Moreover, contractors typically bear the costs to demobilize and remobilize, or repair work caused by an "Act of God" event.

It is not uncommon, therefore, for parties to include a force majeure clause in their contracts to limit the risk that a future event will prevent them from performing and subject them to liability. Force majeure provisions serve two purposes: allocating risk and providing notice to the parties of events that may suspend or excuse performance. If an event that triggers a force majeure clause occurs, theoretically, the burden will be borne by the party that assumed the risk.

Parties seeking to limit their exposure to a force majeure event should be careful, however, to use specific and detailed language in defining the scope and effect of a force majeure clause. Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d 277, 283 (Tex. App. Amarillo 1998, pet. denied); see also Maralex Res., Inc. v. Gilbreath, 76 P.3d 626, 636 (N.M. 2003); R&B Falcon Drilling Co. v. Am. Exploration Co., 154 F. Supp. 2d 969, 973 (S.D. Tex. 2000). The traditional boilerplate language contained in most force majeure clauses is too general and vague for modern circumstances because courts tend to narrowly interpret such language and limit its application to the events specifically listed.

Even if a force majeure clause properly and adequately describes the types of incidents that are covered by the clause, problems could still exist if the clause is not completely clear. For example, if a contractor is laying a building's foundation, and a flood would be considered a force majeure, if a flood occurs, what is the course of action for the contractor to take? And what happens to his contract? Does it terminate, or does the contractor have the ability to continue work? If additional work is needed how much compensation is due to the contractor? These provisions should also address important questions, such as: What are all the events or conditions that are considered force majeure? Who is allowed to invoke the clause? What is the appropriate remedy where the clause is invoked? Which contractual obligations are covered by the clause? How should the parties determine whether the event creates an inability to perform?

A properly written force majeure clause will address these questions and more to protect the contractor from exposure to unexpected liability.

Much of the jurisprudence surrounding the interpretation of force majeure clauses is rooted in the cases addressing the doctrines of impossibility and commercial impracticability (including Section 2-615 of the U.C.C.). More importantly, these doctrines often set the default rules around which the parties to a contract may bargain for more or less protection. In dispute resolution, courts evaluate weather delays on a case-by-case basis, considering such factors as the job site’s geographic location, the nature of the work performed, the contractor’s previous experience in the area, and the contractor’s reasonable anticipation of weather conditions [Wickwire et al. 2003]. Anticipating weather can be done by looking at historical data for typical “rain days” in the same geographic location, accounting not only for the time of year, but also for that specific location.

Weather impacts are not strictly limited to rain and the rainy season; also included but not limited to abnormal humidity, frozen earth, winter weather, extreme heat, severe weather outbreaks, wind, and hurricanes. See Bramble, B.B. and Callahan, M.T. Construction Delay Claims. Third Edition. New York: Construction Law Library, Aspen Publishers, 2000; Bramble, B.B., D’Onofrio, M.F., and Stetson, J.B. Avoiding & Resolving Construction Claims. Kingston, Massachusetts: R.S. Means Co., 1990.

What is not a force majeure?

Often, if a contract defines force majeure events, unless language expands that list by stating “including without limitation,” then an event not specified in the clause may not excuse nonperformance. For example, if the contract defines force majeure as a flood or hurricane, then a lightning strike may not excuse nonperformance unless a phrase such as “including without limitation” is in the force majeure clause.

Most force majeure clauses only provide relief in the form of an extension of time without penalty or without assessment of liquidated damages for a period equal to the force majeure. Clauses seldom provide any compensation for the costs to demobilize and remobilize; to repair work; for the escalation of material and labor prices; or the premium demanded by transporters still operating in the affected areas. However, the contractor should review the changes or claims clause to see if it may still be able to recoup costs.

The majority of jurisdictions hold that a force majeure event discharges the party’s performance even if there is no force majeure clause because the party did not assume the risk of performance under any and all circumstances. A minority of jurisdictions hold that, in the absence of a force majeure clause, the party prevented from performing will be held liable for nonperformance consistent with the terms of the contract addressing default or nonperformance

Classifying Schedule Impacts

Once recognized that an event has occurred in the as-built completion of a project that differs from the established schedule of record, which potentially has an impact on the schedule and is attributable to a party, the next step is to classify the delay, so that a schedule impact technique can be applied. Delays are classified into one of the following four categories:

1. Excusable, Non-Compensable Delays

2. Excusable, Compensable Delays

3. Non-Excusable, Non-Compensable Delays

4. Non-Excusable, Compensable Delays

Identifying the category of each delay is essential before applying a schedule impact analysis technique. Each of these four categories is attributable to the owner, contractor, or third party / force majeure , and will be explained in further detail.

In the northern part of the United States, the start of spring after a long cold winter is traditionally a welcome event. However, in recent years, the start of spring has become synonymous with another, less welcome event: flood season.

This spring, several areas of the United States are dealing with record high water levels and many areas of the Province have faced difficulties with flooding.

For the construction industry, flooding and other adverse weather events may have severe impacts on project schedules and costs. If you’re faced with a situation where your work will be impacted by causes outside of your control, you will want to consult the force majeure provisions in your contract.

Aside from being an occurrence which is truly unforeseen, a force majeure event must be of such significance that the failure to perform in accordance with the contract could not be overcome by the reasonable efforts of the party claiming relief.

The essential purpose of the force majeure clause is to allocate the risk for unexpected events between the owner and contractor (or contractor and sub-contractor or supplier). Generally speaking, an owner will want a tightly worded force majeure clause which limits the events considered to be force majeure to specifically enumerated events like natural disasters and wars. On the other hand, a contractor will generally be looking for a more inclusive (or loosely worded) clause which would leave the definition of force majeure open to other events, including the failure of third parties to perform services or supply materials.

Apart from the issue of agreeing as to what constitutes a force majeure event, parties to a contract should also ensure that their agreement includes specific provisions on what happens if a force majeure event occurs. Is the contractor entitled to an extension of time and additional costs? Just an extension of time - or just additional costs? If an extension of time and/or additional costs are to be awarded, do the parties use a change order procedure or is there a separate procedure to account for these claims? Are there specific notice requirements for a party advancing a force majeure claim? All of these questions should be answered in a good force majeure clause.

Parties should be aware that even where a force majeure event occurs, parties are not released from their obligations completely - they remain under a positive duty to take reasonable steps to mitigate the damage caused by the event.

So if you find yourself on the wrong side of Mother Nature, fires, epidemics, embargos and so on and need guidance as to whether you’ve got a valid claim for additional time and/or costs, look to the force majeure provisions of your contract.

ASSISTANCE IN DEVELOPING A CONSTRUCTION CLAIM

Metropolitan provides valuable guidance in developing, analyzing, defending, and negotiating construction claims. In the highly competitive engineering and construction industry, construction claims management has become an increasingly integral element to maintaining project profitability. Our construction experts have successfully resolved a broad range of construction claims on a variety of projects located throughout the United States and internationally.

Although there are many programs available on the legal aspects of construction claims, few of these focus sufficiently on the practical aspects of claim entitlement, documentation, preparation, analysis, and negotiation. .

Successful assertion of a construction claim depends on first establishing entitlement, then properly pricing the claim by assessing both direct and indirect costs.

Our construction experts guide and assist our clients in identifying and developing a basic claim "theme" that is consistent with the contract, the facts and established construction practices.

The experts at Metropolitan Forensics will:

· provide leadership and support by analyzing contract requirements

· provide assistance in assessing actual costs, project delays, and impacts when reviewing a claim

· help identify and develop necessary documentation and data on the project to accurately express the client's claim "theme"

· provide guidance in assessing claim options and counterclaims

· assist clients in calculating the costs incurred by pursuing a claim

· prepare claim text and exhibits and provide continuing support

ASSISTANCE IN CONSTRUCTION CLAIMS ANALYSIS

Metropolitan project review and construction claims analysis will provide an objective, independent appraisal of the strengths and weaknesses of a construction claim.

Our construction experts provide clients with significant insight as to their potential liability and accordingly, a recommended course of action. We help clients develop and implement effective strategies for either asserting or defending construction claims.

NEGOTIATING AND RESOLVING A CONSTRUCTION CLAIM

Metropolitan provides valuable guidance in the negotiation of construction claims so that clients may avoid costly litigation and still obtain an equitable claim settlement.

· Our construction experts proven negotiation techniques facilitate active pursuit of the claim without creating excessive adversary positions

· We assist in the development and pursuit of successful claim negotiating strategies

· We lead claim negotiations as authorized by our clients and participate in settlement negotiations on behalf of our clients