Updating Force Majeure Clauses for Today's Construction Project Risks

Force majeure clauses have long been an important part of allocating risks when an unforeseeable event beyond the parties’ control impacts performance requirements of a contract.  These clauses and their enforcement have changed significantly since COVID-19, because courts more carefully scrutinize whether the delay or inability to perform is truly an “act of God” or other unforeseen event.

A force majeure clause is a contractual provision that excuses a party from performance under the contract, either in whole or part for the duration of the force majeure event, when a covered event that is beyond the control of either party to the contract occurs. What constitutes a force majeure event is exclusively defined by the contract. However, simply because a force majeure event takes place does not mean that the provision is automatically triggered and the parties are excused from performing; instead, the event must also render performance of the contract impossible or impracticable.

Because force majeure clauses are drafted by the contracting parties, they are narrowly construed by the courts. When evaluating whether a certain event excuses performance under a force majeure clause, a court will look at the language in the parties’ contract and try to decipher what the parties specifically bargained for to determine the parties’ intent at the timing of contracting, rather than resorting to any traditional definition of the term “force majeure”.  When evaluating generic terms used in a force majeure clause, such as “extreme weather”, the court will consider whether the event that allegedly delayed a nonperforming party’s ability to perform was foreseeable at the time of contracting.

The COVID-19 pandemic, changing tariffs, and the recent conflict in Iran have highlighted the importance of updating boilerplate language that includes words like “government action”, “extreme weather” or “pandemic” and tailoring force majeure clauses on a project-by-project basis to reflect modern day unforeseen contracting risks. Project owners and subcontractors need to clearly and outline what events are covered by a force majeure clause and which events are specifically excluded.

Pandemics or Public Health Emergencies

Parties need to clearly contemplate whether public health emergencies are covered by force majeure clauses and specifically outline what public health emergencies will trigger the clause, if at all.

In the construction industry alone, the COVID-19 pandemic caused project delays due to government restrictions on number of employees in a given area, with some states, such as New York, halting projects altogether unless the project concerned essential infrastructure such as roads and highways. Beyond state executive orders shutting down businesses or restricting the number of people in a given area, the construction industry faced massive supply-chain issues caused by the pandemic.

Because a pandemic or public health emergency can implicate so many different issues, such as supply chains to worksite restrictions to increased costs, the parties should not reply on vague language such as “pandemic” or “act of God” when allocating risks. Instead, the parties should clearly consider what risks are covered under the force majeure clause. For example, the parties may agree that supply chain due to government shutdowns may excuse non-performance, but a party’s economic hardship does not.  

Increased Costs

Increased costs or economic hardship historically has not been sufficient to excuse performance under a force majeure clause. Courts have traditionally considered increased costs a normal part of doing business and something a sophisticated project owner or subcontractor should reasonably anticipate. Indeed, COVID-19 era lawsuits attempting to invoke force majeure clauses on the basis of economic hardship alone tended to fail unless the party seeking to enforce the clause could demonstrate a clear link between the pandemic and economic hardship.

Likewise, sharp and sudden increases in tariffs that result in increased costs will not excuse performance absent specific contractual language to the contrary. While tariffs could conceivably fall under the umbrella term “governmental act” that often appears in boilerplate force majeure clauses, courts are not always inclined to broadly construe this phrase to include tariff increases. Courts also consider tariffs—and the fact that they may change—a foreseeable cost of doing business. Although tariffs in general are foreseeable, parties may still negotiate a force majeure clause to cover the risks associated with dramatic tariff changes by clearly outlining how to allocate the risks between the parties.

Supply Chain Issues

The logistical disruptions caused by the COVID-19 pandemic set off shockwaves that continue to be felt to this day and continue to be compounded by changing tariffs and international conflicts. Materials shortages and supply chain issues caused by unforeseen circumstances such as war or public health crises may be enough to trigger boilerplate language such as “acts of God” or “acts of war”, but economic hardship is likely not enough. Project owners and subcontractors should consider how supply chain issues could impact the project. For example, the parties should consider the length of the delay, the type of delay, the cause of delay, and whether reasonable alternative sources exist when drafting force majeure clauses.