In the world of the building and construction industry, the general rules of contracting are fairly simple. A supplier agrees to supply equipment or materials for a specific price and within a certain time frame, does so, and is paid an agreed sum. Likewise, contractors and subcontractors agree to build structures per plans and specifications within certain time frames and are paid accordingly. Pretty simple. But what happens when some outside event makes performance impossible or unduly expensive or substantially delayed? What happens, for example, if a ship is sitting off the coast of Long Beach for three months with equipment ordered for the project and it cannot be unloaded due to a labor shortage? What if government mandates cause factories that build needed equipment to close due to an epidemic or pandemic? What if the supply warehouse holding the equipment until it is ready for installation unexpectedly burns to the ground? What if a Russian missile blows up the factory in Ukraine where the intended equipment is being manufactured? What happens then? Who bears the financial consequence?
A properly constructed “force majeure” clause may provide the answer to these questions. The Marriam-Webster Dictionary defines “force majeure” as a literal translation from the French meaning “a superior or irresistible force.” It further defines the term as “an event or effect that cannot be reasonably anticipated or controlled.” The Oxford Dictionary defines force majeure as “unexpected circumstances, such as a war, that can be used as an excuse when they prevent somebody from doing something that is written in a contract.”
Using the above examples, which involve labor interruption, pandemic closure, catastrophic fire and war, the contractor, subcontractor or supplier would argue that none of those events are their fault, and they should not be responsible for the consequences. From the perspective of the property owner who contracted to have the building built and equipped, neither is it their fault. All things being equal, the property owner might argue that the risk of non-performance is generally on the contractor, subcontractor or supplier. After all, if equipment is stuck on a ship, or even if the factory is bombed or the supply warehouse burned down, then the owner will argue that the contractor, subcontractor or supplier is obliged to find another supplier not suffering from these problems. Each side claims an arguably reasonable position. The question therefore is not so much whether there will be a risk of non-performance due to outside causes. Such a danger always exists. Rather, the important question relates to allocation of risk. If someone must bear the financial burden of a failure to perform, who should that be? The party who includes a force majeure clause to allocate risk away from themselves, will have great advantage when unforeseen issues intervene.
Before moving along to some possible force majeure clauses for consideration, some related legal doctrines warrant mention. Among these doctrines are “impossibility,” “impracticability” and “frustration of purpose.” Without getting deeply into definitions on a tangential issue, “impossibility” might apply when events make the performance of the contracted for action impossible, for example, when a finish contractor cannot perform its work because the building where the work is to be performed has been destroyed through no fault of the contractor. “Impracticability” may possibly be established when unanticipated events cause the cost of performance to rise to such a degree that timely performance would put the contractor out of business. “Frustration of purpose” might be established where predecessor trades have not performed the work necessary for the finish contractor to perform its work in a timely manner. Each one of these legal doctrines might possibly come to the aid of the contractor to avoid liability, but great uncertainty remains. While arguments might be made on each of these three examples, there are numerous detailed articles on these legal doctrines that can be referenced. In any case, it is highly probable that each of these scenarios would benefit from an allocation of risk a force majeure clause might provide.
Set forth below are three options for contractors, subcontractors and suppliers to consider in dealing with future force majeure issues. Adding a clause like one of those listed below to a construction or supply contract or subcontract before it is signed allows a contractor, subcontractor or supplier to better protect themselves. While none of the three options may be appropriate for any particular circumstance, a review of them may be helpful to those who seek to add a protection on an issue which might unexpectedly arise at any time. The main difference between the three options presented is the length and complexity of each. Each example is drafted as between a “Contractor” and “Contracting Party.” For use of the examples, that Contracting Party might be defined elsewhere as an Owner, Subcontractor or Supplier.
Longer Version:
#___ FORCE MAJEURE Except with respect to payment obligations under this Agreement, no Party shall be liable for, nor shall such Party be considered in breach of this Agreement, due to any failure to perform its obligations under this Agreement as a result of a cause beyond its control, including but not limited to any act of God or a public enemy or terrorist, act of any military, civil or regulatory authority, change in any law or regulation, fire, flood, earthquake, storm or other like event, disruption or outage of communications, power or other utility, labor problem, unavailability of supplies, epidemic, pandemic, contagious illness of employee(s) causing reduction in workforce, delay or disruption, or other public health situation or resulting government actions or recommendations which restrain the ability of Contractor to commence, continue or complete performance of the Agreement. On reasonable notice, the time for performance shall be extended by the reasonable period of such delay. If the Project is delayed for more than sixty (60) continuous or intermittent days from the same Force Majeure cause, either Contractor or Contracting Party has the discretion to terminate the Contract without liability. Contractor shall be entitled to payment for work performed and materials supplied to the work site to the date of termination and for materials ordered if the order cannot reasonably be rescinded.
Shorter Version:
#___ FORCE MAJEURE No Party shall be liable for, nor shall such Party be considered in breach of this Agreement, due to any failure to perform its obligations under this Agreement as a result of a cause beyond its control, including but not limited to any act of God or a public enemy or terrorist, act of any military, civil or regulatory authority, change in any law or regulation, fire, flood, earthquake, storm or other like event, disruption or outage of communications, power or other utility, labor problem, unavailability of supplies, epidemic, pandemic or other public health situation or resulting government action or recommendation which restrains the ability of Contractor to commence, continue or complete performance of the Agreement. If the Project is delayed for more than sixty (60) continuous or intermittent days from the same Force Majeure cause, either Contractor or Contracting Party has the discretion to terminate the Contract without liability.
Shortest Version:
#___ FORCE MAJEURE No Party shall be liable for, nor shall such Party be considered in breach of this Agreement, due to any failure to perform its obligations under this Agreement as a result of a cause beyond its control, including but not limited to any act of God or a public enemy or terrorist, act of any military, civil or regulatory authority, change in any law or regulation, fire, flood, earthquake, storm or other like event, disruption or outage of communications, power or other utility, labor problem, unavailability of supplies, epidemic, pandemic or other public health situation or resulting government action.
Note: The shorter you make the clause, the more uncertainty you have on what to do when the situation arises.
Conclusion:
When contractors, subcontractors and suppliers encounter events not properly addressed by the terms of their current contracts and subcontracts, it is time to revise the operative document. Contractors, subcontractors and suppliers would do well to consider a clause to protect themselves from unforeseen events that impact on timely performance. Those who actively protect themselves with protective contract language are more likely to survive unforeseen events when others do not. Before using any clause in a legal document always be sure to have the clause and the legal document in which it is included reviewed by a licensed attorney familiar with the industry in question.
Article written by William L. Porter, Esq. in 2021. Mr. Porter is a principal in Porter Law Group, Inc. in Sacramento, California. He can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com and www.AppliedLegal.com
