Interpreting Force Majeure in the Wake of Disaster
In general terms, force majeure is considered to be “an act of God” or an occurrence outside the control of the parties which impacts or delays the project. Force majeure includes issues such as unusually severe weather, labor strikes, natural disasters, or governmental actions/changes in law that negatively impact the work. Typically, force majeure is not considered to be a compensable delay, meaning neither party is entitled to compensation as a result of the impact of the force majeure event. The recent Gulf Coast hurricanes have raised some interesting and complex issues associated with defining force majeure.
Typically, force majeure contract clauses include language that defines the force majeure event, including notice requirements and the terms of the schedule extension. Events such as unusually severe weather or a labor strike have clear start and end dates. It gets more complicated when there is a major event that not only directly impacts the work but also creates potentially changed working conditions after work resumes. This leads to several questions regarding the contractual language with respect to allowable project extensions, responsibility for mitigating the event’s impacts, as well as the costs associated with mitigation efforts. There are two primary difficulties in defining force majeure events that encompass the magnitude of events like hurricanes Katrina and Rita:
- Dealing with continuing impacts associated with the disasters (i.e., reduced labor force and reduced labor productivity)
- Defining the responsibility for mitigating the event’s immediate and continuing impacts
For many of the projects that were in the hurricanes’ paths, a force majeure event was declared, project personnel secured the site, and the workforce left the project site until the hurricanes had passed. However, the hurricanes devastated large areas along the Gulf Coast, leading to massive evacuations; destroying houses and buildings; and demolishing infrastructure and utilities such as roads, power lines, gas lines, running water, etc. Although, by strict definition of most force majeure clauses, the event had ended, the impacts continued delaying and disrupting these projects. With reduced labor availability, no available housing for the labor, limited utilities, higher paying jobs for cleanup/repair, and transportation and communication issues, these projects have suffered and could continue to suffer productivity impacts and schedule delays. Do the continuing impacts of such events constitute force majeure? Is the contractor entitled to additional schedule extensions as a result of these impacts? There are no clear-cut answers to these questions, and they are likely not addressed in the contract. Contracts that do address these issues substantially increase the likelihood of mitigating the impact of the event. Force majeure clauses should clearly define what constitutes a force majeure event as well as what is considered the end of the event.
Contract language dealing with force majeure events should consider the type of force majeure event as a major determinant of when it ends. Although a hurricane may continue to affect the contractor’s ability to perform the work as it had originally planned, this issue is separate from the actual force majeure event. The force majeure event should end at the time work is allowed to resume, even in a limited capacity. The affected party should be allowed a schedule extension, without compensable damages, for this time period, unless the contract language indicates otherwise. In areas that could be massively affected by force majeure events, such as hurricanes or earthquakes, the parties should consider additional contractual language to address a force majeure event’s continuing impacts to the work progress. This separate language should address issues such as:
- Reduced labor availability and productivity
- Impacts to utilities necessary to perform the work
- Lack of basic utilities and housing for labor
- Site availability
- Impacts to material and equipment suppliers
Because the basic premise behind force majeure provisions is that none of the parties should be liable for damages associated with the event, it may be in the parties’ best interest to establish conditions in which they both bear some responsibility for costs associated with extraordinary force majeure events. For instance, they may assume responsibility for the following:
- Making a fair determination of schedule extensions/liquidated damages
- Making allowances for productivity impacts
- Providing living/transportation facilities
- Increasing labor rates
- Providing basic utilities
- Improving site access
Implementing contractual language can more clearly define force majeure events as well as what the parties accept as risk. This can lead to amicable resolutions and lessen the potential for conflict. It does, however, lead to the question of what constitutes reasonable mitigation efforts during the force majeure event.
Responsibility for mitigating immediate and continuing impacts
A vast majority of force majeure provisions include language concerning mitigation (i.e., “…the Contractor shall use all reasonable effort to mitigate the impact of the force majeure event on the project.”). What constitutes “reasonable effort to mitigate” and, if there are continuing impacts, who is responsible for the costs associated with mitigating those impacts? These efforts could include simply securing the site or involve more complex efforts such as building temporary housing, providing utilities and basic necessities, increasing wage rates/per diems, and accelerating the work. Obviously these solutions cost money, and the purpose of force majeure provisions is to protect the parties from financial damage resulting from the force majeure event.
At what point does the contractor’s responsibility to perform the work under the terms of the agreement supersede the force majeure provisions, and when does “reasonable” exceed the amount of money the contractor is willing to expend to mitigate the event’s impacts? Under traditional force majeure clauses, the contractor has the right not to expend excessive money as a result of the event. Although the contractor is entitled to non-compensable schedule extensions, which may cost the contractor project extension costs, the owner also has every right to expect the contractor to meet the terms of the contract. If the contractor does not, the owner may suffer losses in revenue from late product production (i.e., oil/gas or late product availability, office space/rental property, etc.). The contractor should expect schedule extensions and the suspension of liquidated damages as a result of the project’s delay. Alternatively, the owner should expect that the contractor will make all reasonable efforts to complete the work in a timely fashion to mitigate impacts to future revenue expected from the project.
By implementing additional contract language concerning continuing impacts, some of these issues can be avoided; however, it still does not address responsibility for mitigating damages with “reasonable” effort. The problem is that current force majeure contract provisions do not adequately address the parties’ responsibilities for mitigating the impacts of force majeure events and subjective terms such as “reasonable” are used to describe the parties’ responsibilities. What is “reasonable” to the contractor may not be “reasonable” to the owner. Both parties are expecting a profitable project, so the requirements defined by “reasonable effort” do not address whether mitigation efforts require direct costs to limit the impact of the force majeure event. The contractor will naturally absorb costs to demobilize/remobilize resources, secure the facility, and store equipment, and the owner also incurs additional costs associated with late completion of the project. Therefore, each party has a different definition of “reasonable” mitigation efforts.
The most effective way the parties can protect their interests is to clarify contract language regarding reasonable mitigation efforts. In this case, the parties can adequately identify potential risks associated with performing the work. If the contract language is unclear, it is nearly impossible to accurately assess potential risks associated with performing a project. In turn, the parties may underestimate the potential risks which may lead to disputes. Some of the questions that should be considered by the parties when determining force majeure mitigation efforts include the following:
- What is a clear definition of “reasonable?”
- What are considered reasonable mitigation costs for force majeure events?
- What mitigation efforts might be necessary (i.e., securing the facilities, employee living costs, hourly rate increases, temporary housing, etc.), and when should they be employed?
- Which party or parties are responsible for these costs, and are they shared?
- Are potential mitigation efforts included in other contract provisions?
- How long should one party incur these costs?
- What impact do these mitigation efforts have on potential schedule extensions?
Obviously these, and other, questions should be considered by the parties when writing a force majeure contract clause. The parties must ask themselves if their requests are reasonable regarding the contract language. One-sided contractual language is not beneficial to successful projects and often leads to the parties feeling they are unfairly treated. If the contract language does not agree with their position, parties may look to recover costs in other ways. It is important to remember that the contractual language, if unclear or ambiguous, will be construed against the party that drafted the contract.
Force majeure events are anticipated on construction projects, yet the potential impact of these events cannot be foreseen. As a result, unclear contractual language is often associated with force majeure events. Recent force majeure events, such as hurricanes Katrina and Rita, have raised an awareness regarding the importance of clear contractual language defining these events. Including specific contractual language to address issues such as defining the end of force majeure events and outlining mitigation responsibilities can help clarify ambiguity and reduce potential conflicts. By increasing risk awareness, clarifying responsibilities, and reducing the potential for significant conflicts, all parties can successfully endure the event and its immediate and prolonged impacts.
Source: Interface Consulting International, Inc.
Released: August 02nd, 2007 10:00 AM
Phone: (713) 626-2525
Fax: (713) 626-2555