As the COVID-19 pandemic batters construction projects – sidelining workers, shutting down supply chains, strangling cash flow – owners and contractors alike are scrambling for refuge. Understandably, many are digging through their construction contracts looking for relief. And in those contracts some find, and then try to invoke, force majeure clauses.
“Force majeure” is French for “superior force”. An event of force majeure, then, is an event that can be neither expected nor controlled – literally, an event caused by a superior force or power. And a force majeure clause in a contract is a clause that excuses defaults or delays that result from such an event.
A simple force majeure clause might say something like this:
“Neither party is responsible for any delay or breach caused by an event of force majeure....”
A more fulsome clause could go on for several paragraphs or even pages. Regardless, when appraising a force majeure clause, there are three factors to keep in mind.
First, whether COVID-19 (or any unforeseen event) is an event of force majeure depends entirely on the wording of a given clause in a given contract. There is no single, common, or universal definition for what constitutes an event of force majeure. Rather, each contract is different, and it is the definition in a particular contract that will govern whether a particular event (such as COVID-19) is covered.
As an example, here are two court cases, and although neither is about COVID-19, they show just how crucial the definition of force majeure can be.
In one case – Transcanada Pipeline Ltd. v. Northern and Central Gas Corp. Ltd. (1983) 146 D.L.R. (3d) 293 – a utility company signed a contract to buy natural gas, which it then sold to its own customers. Later, through no fault of its own (something to do with strikes and explosions), the utility company lost its market and so stopped taking delivery of gas it didn’t need and couldn’t sell. However, the contract required the utility company to continue to pay certain charges regardless of whether it took any gas. To avoid these charges, the utility company invoked force majeure. It argued that the loss of its market was caught by the definition of force majeure, and as a result, it shouldn’t have to pay. Unfortunately for the utility company, the court disagreed. After carefully analyzing the words of that contract, the court came to the conclusion that force majeure – as defined by those words – did not extend to that situation.
However, different words in a different contract led to a different result in the case of M.A. Hanna Co. v. Sydney Steel Corp. (1995), 136 N.S.R. (2d) 241. The contract in this case was for steel. It was a long-term contract for set deliveries at specified prices. However, years of evolving technology and eroding markets made it uneconomical for the steel company to continue to buy. But in this case, the force majeure clause might apply and protect the steel company “if, by reason of any impediment of whatsoever nature… the Buyer cannot take delivery”. The court held that this very broad wording covered the situation the steel company faced and granted the company the relief it needed.
These two cases had different definitions of force majeure. And that brings us to COVID-19. Simply put, whether a given force majeure clause will cover the effects of COVID-19 will depend entirely on how that contract defines force majeure.
Not surprisingly, until now few contracts expressly defined force majeure to include “pandemic”, and none mentioned “COVID-19” – though that is rapidly changing. Rather, for many existing contracts the question will turn on whether the definition is wide and sweeping, as opposed to narrow and specific. For example, a contract which broadly defines an event of force majeure as “any event, which is unexpected and beyond a parties reasonable control” has a much better chance of applying to COVID-19 than a definition built on a limited list of specific events such as “... earthquake, war, or civil unrest.” Further, in some cases the tipping point might be whether the effect of COVID-19 is captured by the definition (e.g. travel restrictions, border closures, government decrees) rather than the disease itself.
The second factor to consider is the nature of the relief the force majeure clause bestows. Here, again, different contracts do different things. At its simplest, a given force majeure clause might forgive a delay or default that would otherwise trigger legal consequences. Consider, for example, a missed milestone. The ripple effects of a COVID-19-caused shutdown in the middle of a project might delay multiple contractors and subcontractors, pushing up their operating costs, and possibly exposing them to liquidated damages from above and delay claims below. A force majeure clause protecting the parties from each other would act as a shield against their mutual claims.
Other contracts, however, might go further. In addition to shielding the parties from legal liability from each other, a suitably worded force majeure could expressly extend deadlines, adjust obligations, or even grant compensation for some or all losses or expenses they might suffer because of the unexpected event. It might provide, for example, that a contractor gets some of its increased direct costs (but no overhead) during a delay; it might say that the owner can defer payment but must pay interest; or, conversely, it might say that everyone takes their own knocks. Again, it depends on what the parties negotiated and put into the contract in the first place.
Further yet, some contracts might provide the ultimate relief of allowing one side or the other to terminate the contract – that is, to walk away if the unexpected event upends the project to the point where it is no longer viable.
The third factor to consider is the process for invoking the force majeure clause and claiming its protection. Most contracts require some sort of notice: the party claiming force majeure must tell the other side. But contracts vary wildly in how and when that notice is to be given. Sometimes, the notice has to be in a prescribed form, delivered within a precise period, containing specific information. In other cases, the process might be looser and more casual. In yet other cases, there might be positive obligations to minimize and mitigate the effects. In all cases, these rules need to be understood, respected, and followed.
There is one final consideration. At the risk of belabouring the point, the scope and effect of a force majeure clause depends entirely on the contract. But what if a contract does not have one? What if the parties didn’t negotiate and put one in? Unfortunately, in that case the parties must contend with a harsh legal reality: the fact that a contract becomes more onerous, or more difficult, or more expensive, or even impossible, does not in or of itself forgive or excuse the failure to perform. If the parties didn’t give themselves a way out – that is, they did not negotiate and include a force majeure clause – the law assumes that it was their choice to do so and could conclude that they intended to be bound by and responsible for their obligations, even if a superior power got in the way.