Why Force Majeure Provisions Deserve Your Attention

In light of multiple recent natural disasters that have taken place, it is important to understand the impact of a poorly drafted force majeure provision. Force majeure concerns are most likely to arise due to partial performance, delayed performance, or non-performance as a result of a force majeure event such as a tornado, hurricane, or flood.  While force majeure provisions appear in most construction contracts, they are often overlooked and treated as a standard provision.  Parties should carefully analyze the force majeure provisions in their contracts in order to understand their rights and obligations should a force majeure event occur.

A typical force majeure provision allows an affected party to suspend or terminate the performance of its obligations, depending on how long the event lasts and when certain circumstances beyond the affected party’s control commence, making performance impracticable, impossible, or illegal. To be enforceable, a force majeure provision must specifically name the event or generally refer to the circumstances that rendered the party’s inability to perform under the contract.  Furthermore, there must be a causal connection between the event and the party’s inability to perform.  Merely making performance more difficult, burdensome, or expensive is not enough to excuse the affected party’s performance.

While catchall language may broaden the sphere of what qualifies as a force majeure event, it can often create ambiguity and confusion. It is important to identify specific force majeure events that are tailored to specific circumstances that could arise under the contract.  The language of a contract is determinative as to whether a force majeure event has occurred.  In Texas, an “act of God” does not relieve the parties of their contractual obligations absent an applicable force majeure clause. See, e.g., GT & MC, Inc. v. Texas City Ref., Inc., 822 S.W.2d 252, 259 (Tex. App.—Houston [1st Dist.] 1991, writ denied).  In addition to naming specific events that will be considered force majeure events when drafting this provision, it is important to specify the rights and obligations of the parties.  It is also important to specify the steps to be taken by both parties in order to minimize the effects of the force majeure event such as delay or damages caused by such events.

A force majeure provision should include the following: (1) very detailed and specific examples of the force majeure events; (2) explicit explanation of what happens when an event occurs; (3) what roles the parties have and exactly who is allowed to suspend performance and when; (4) who has a duty to mitigate; and (5) what the consequences are if the event continues for more than a specified amount of time.   Another consideration should be whether to include requirements that certain actions must be taken by the affected party in order to invoke the force majeure provision.  Force majeure provisions often have notice requirements that must be satisfied within a specific timeframe by the party seeking to claim force majeure.  If notice is not adequately provided within the specified timeframe, then the affected party will not be afforded the protections under the force majeure provision.

When drafting the notice portion of the force majeure provision, the drafter should address the following issues: (1) the circumstances in which the event is deemed to have occurred; (2) time limits within which the notice is to be sent; (3) consequences of failure to timely give notice; (4) whether the notice becomes effective on dispatch or on receipt; and (5) whether to provide an alternate notice address to cover the possibility of the original notice address location not being available in the event of a force majeure event. In Texas, it is particularly important to draft this provision properly because an “act of God” does not relieve the parties of their contractual obligations absent an applicable force majeure clause.

Under Texas law, the terms of the contractual force majeure clause generally controls the breadth of the affected party’s defense. Virginia Power Energy Mktg., Inc. v. Apache Corp., 297 S.W.3d 397, 402 (Tex. App.—Houston [14th Dist.] 2009, pet. denied) (stating “[t]he scope and effect of a ‘force majeure’ clause depends on the specific contract language, and not on any traditional definition of the term”).  However, if a contract does not contain a force majeure provision, then the affected party can look to the doctrine of commercial impracticability which excuses performance because of circumstances that are not possible to overcome or the doctrine of frustration of purpose that excuses performance because of something controllable or not reasonably foreseeable, causing extreme and consequential hardship or unreasonable expense or difficulty.  Under the commercial impracticability doctrine, contractual performance is excused where: (1) an event renders performance impracticable; (2) its non-occurrence was a basic assumption of the contract; and (3) the risk of the event is not allocated by custom or contract.

While it is difficult and often impossible to avoid catastrophic events, these events can have huge impacts on the price of materials and the cost of labor which can ultimately affect the construction project. In addition to having a force majeure clause in the contract, owners and contractors can utilize builder’s risk insurance to mitigate the aftermath of force majeure events.

The purpose of construction contracts is to designate responsibilities and allocate risk. In the context of risk allocation, force majeure plays a very important role that all parties must take into consideration.  Force majeure clauses exclude liability where events beyond a party’s control prevent that party from performing its contractual obligations.  Though traditionally, the concept is a purely contractual right to allow the suspension or release of a party’s contractual obligations upon the occurrence of a defined event, it has morphed into a risk allocation tool.  Force majeure clauses are now used to help anticipate risks that are uneconomical, inconvenient, or uninsurable.   These provisions permit a much greater degree of flexibility by allowing certain obligations to suspend while still maintaining and requiring certain contractual obligations to continue during the force majeure event.

It is crucial that these provisions are well drafted as courts interpret force majeure clauses in a very narrow manner. Many construction contracts broadly address any cause beyond the control of the invoking party and do not name specific force majeure events.  If a contract does not have a force majeure provision then they are often interpreted under the doctrines of impossibility, frustration of purpose, and impracticability, which does not excuse nonperformance. See Castor Petroleum Ltd. v. Petroterminal De Panama, S.A., 2012 WL 4844458 (N.Y.Sup.).  In order for a party to invoke a force majeure provision, the following four key components should be addressed: (1) a specified description of events that can trigger force majeure (such as labor and material shortages); (2) terms that define and specify the duration of the specific event; (3) a notice provision describing how the occurrence of a force majeure event is to be communicated; and (4) a description of the effects that a force majeure event will have on the contractual obligations of the parties. The last component is very important in determining and separating the contractual obligations that are suspended from those that are not. Additionally, reliance on a force majeure provision requires one or more of the following conditions: (a) the specified event is beyond the control of the claiming parties; (b) the force majeure event prevents or delays, whether completely or partially, the performance of the contract; (c) the force majeure event makes performance of the contract significantly more difficult; (d) the force majeure event was not due to the claiming party's fault or negligence; and (e) the claiming party has exercised reasonable diligence to mitigate or overcome the specified force majeure event.

In addition to including a force majeure provision in a contract, it is prudent to incorporate builder’s risk insurance requirements as another method of mitigation. Although a project is usually covered by “all-risk” insurance which is provided by the contractor, it typically only covers the expense of repairing the work that is already in place. It does not provide coverage for damages sustained by the owner as a result of the contractor’s delay in completing the project. Builder’s risk insurance is a type of specialized property insurance used during construction projects to provide monetary relief for economic or property damage suffered as a result of a force majeure event (typically a covered cause) during construction. Typically, builder’s risk insurance covers damaged or destroyed materials and equipment, hard costs of construction, soft costs of construction, and lost rent. This type of coverage not only includes contractors performing the work but also the owner, the lender, and others involved in the construction phase.

All too often, builder’s risk insurance is an afterthought as it is purchased after the contract has been signed. Even if a builder’s risk policy is in place, it may not fully address the all the risks facing that particular construction project. Typically, builder’s risk policies are written on an all-perils basis or a “special causes of loss” form. Coverage applies to physical loss or damage from any cause of loss, unless that loss is limited or caused by a peril that is specifically excluded. Therefore, it is very important to review the policy language and make certain that the coverage is adequate for that particular project and addresses and covers all the possible risks (i.e., hurricane, flood, etc.) during the construction period and doesn’t specifically exclude any type of force majeure event that could possibly take place.