COVID-19: The Evolution of Force Majeure Clauses in Unprecedented Times
Construction contracts typically state that a party’s force majeure remedy is a schedule extension equal to the duration of the force majeure event. However, given the unprecedented global economic shutdown due to the coronavirus pandemic, future contract negotiators will likely attempt to revise the definition of a force majeure event to account for the unforeseeable consequences of a global pandemic.
As recently discussed in the second article of Interface’s series on the coronavirus’s effects on the construction industry, when compared with typical force majeure events such as labor strikes or unusually severe weather, the ongoing pandemic will likely lead to a longer and costlier period of returning to normalcy. This will likely make clear contractual language dealing with the event’s continuing impacts, as well as defining each party’s “reasonable” responsibility for mitigation efforts, a priority for future force majeure contract clauses.
Many force majeure clauses define the conclusion of a given event, such as the resolution of a labor strike or the end of a severe weather event. In the case of this pandemic, it might be when the government stop-work restriction is lifted. However, the pandemic’s vast and long-lasting impacts will likely result in additional contractual guidelines to more clearly define what is considered the end of the event’s continuing impacts, as that is proving to be, contractually, a very essential question from the coronavirus pandemic.
While force majeure events are typically considered non-compensable, there will be costs associated with the continuing impacts of such severe occurrences. Establishing conditions in which each party bears certain financial responsibilities will likely aid in progressing the project during the time of uncertainty. When negotiating future force majeure clauses, the parties may wish to consider how to fairly address the following:
- Schedule extensions and liquidated damages
- Cost allowances for schedule acceleration
- Cost allowances for productivity impacts
- Cost allowances for permanent material impacts
- Cost allowances for increasing labor rates
- Cost allowances for the unplanned demobilization and subsequent remobilization
- Either party’s ability to terminate the contract without cause if force majeure impacts continue beyond a pre-agreed duration
During a force majeure response, each party typically has a responsibility to take reasonable efforts to mitigate the effects. While clear contractual language may help distinguish each party’s risks, this leads to the question of what each party’s responsibility is as defined by “reasonable mitigation efforts.”
Each Party’s “Reasonable” Mitigation Responsibility
The premise of force majeure is that no party should be liable for delays resulting from an event that is outside its control. Due to this and a concept called “commercial impracticability,” each party typically has the right to not expend “excessive” money in its mitigation efforts, along with the responsibility to implement a “reasonable” level of effort to lessen the impacts. All parties may want to ensure future contracts include language which applies to both the immediate impacts as well as the continuing impacts.
Typical force majeure language defining the non-compensable schedule extension may be sufficient regarding the event’s immediate effects. A contractor may incur additional overhead costs as a result of a project extension, and the owner may incur costs from the delayed completion, delayed sales, and therefore delayed revenue. However, the owner typically concedes liquidated damages for the schedule extension period in exchange for the expectation that the contractor will make all “reasonable” efforts to mitigate the effects.
One potential issue with current contract provisions is that the inclusion of terms such as “reasonable” and “commercially impracticable” may be even more subjective in the case of a pandemic’s long-lasting implications. Each party will likely have different expectations of what “reasonable” or “commercially impracticable” means for the other party. While it may be fairly uncontroversial that a contractor will absorb costs associated with securing the jobsite and demobilizing equipment pre-shutdown, or even increased cleaning costs associated with daily sanitization to support ongoing work, each party will likely differ in its expectations of what is a “reasonable” or “commercially practicable” cost to bear concerning a pandemic’s continuing impacts. Depending on what dispute resolution is outlined in the contract, these disagreements may lead to arbitration or litigation for a judge, jury, or panel to decide.
Once again, clear contractual language may assist both parties in avoiding or resolving claims. The following lists some questions that may help to ensure the agreement is clear:
- How should the impact period be determined? Should a metric be set comparing performance to pre-force majeure levels?
- What is considered a clear definition of “reasonable” as it relates to costs to bear?
- What are some potential mitigation efforts that might be necessary?
- Do other contract provisions outline potential mitigation efforts?
- Are these mitigation effort costs shared, or is a specific party responsible? Should there be some agreement on cost sharing of post-force majeure increased costs, such as increased labor rates?
- Is there a maximum exposure before responsibility is reassessed? Should a cap on force majeure expenses should be considered, after which such expenses are shared in some pre-agreed manner?
- How do mitigation efforts impact potential schedule extensions?
Contractual implications may be clearer in contracts that have addressed these questions. In the wake of the coronavirus pandemic, parties may benefit from carefully analyzing these and other questions, as unclear contractual language will likely be interpreted against the party that drafted the contract.
We all strive to constantly improve based on our “lessons learned.” Many such lessons will likely be learned in the wake of the unprecedented coronavirus pandemic, including how to improve future force majeure contract clauses. The clearer a contract can define the event, as well as each party’s risks and responsibilities, the better the chance that all parties will agree on an equitable mitigation effort in a timely manner. In the meantime, Interface Consulting’s experts remain available to answer any questions and assist with your ongoing mitigation and dispute resolution efforts.1 This article is intended as a discussion of force majeure issues from the perspective of an industry professional in the engineering and construction industry. Interface Consulting does not offer legal advice. For specific legal advice, we advise you consult a construction attorney in your area.