Market Watch – The CoronaVirus – When is a Global Pandemic a Force Majeure Event?

A couple of weeks ago, I published an article discussing some of the additional costs Owners might see in the wake of the global CoronaVirus outbreak and government ordered quarantine.

In that article, I made the statement, “Contractually, this event falls under the Force Majeure clause…

While I still believe that the COVID-19 epidemic meets the definition and the intention of a Force Majeure clause, I recently read several articles that further refine my understanding of Force Majeure and how it can be applied.

As with any article where I address legal terms, such as Force Majeure, I defer 100% to professional legal advice and recommend you contact an attorney to discuss your specific circumstances before you take any action.

That advice notwithstanding, I did want to share with you some interesting points of view.

Force Majeure Definition

The American Bar association published an article on March 19th where they discuss the various ways in which a Force Majeure clause can be written.

Here is a sample clause the ABA published as an example of a clause you might find in a Real Estate Agreement:

If either party is delayed or hindered in or prevented from performing any term, covenant or act required hereunder by reasons of strikes, labor troubles, inability to procure materials or services, power failure, restrictive governmental laws or regulations, riots, insurrection, sabotage, terrorism, act of the public enemy, rebellion, war, act of God, or other reason whether of a like nature or not that is beyond the control of the party affected, financial inability excepted, then the performance of that term, covenant or act is excused for the period of the delay and the party delayed shall be entitled to perform such term, covenant or act within the appropriate time period after the expiration of the period of such delay.  Nothing in this Section, however, shall excuse Tenant from the prompt payment of any Rent or the obligation to open for business on the Commencement Date.

For additional context, I’ve also reproduced sample texts from commonly used construction templates.

Contract templates from the AIA don’t have a clause specifically addressing Force Majeure, but they address contractor delays as such:

If the contractor is delayed at any time in the commencement or progress of the Work by…labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions…or other causes beyond the Contractor’s control…then the Contract Time shall be extended for such reasonable time as the Architect may determine.

FIDIC Agreements use the term “Exceptional Event”.  The clause states;

If a Party is or will be prevented from performing any obligations under the Contract due to an Exceptional Event …the affected Party shall give a Notice to the other Party of such an Exceptional Event, and shall specify the obligations, the performance of which is or will be prevented…

Exceptional Events are defined as;

…an event or circumstance which:(i) is beyond a Party’s control;(ii) the Party could not reasonably have provided against before entering into the Contract;(iii) having arisen, such Party could not reasonably have avoided or overcome; and (iv) is not substantially attributable to the other Party.

FIDIC goes on to define Exceptional Events as;

…(a) war, hostilities (whether war be declared or not), invasion, act of foreign enemies; (b) rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war; (c) riot, commotion or disorder by persons other than the Contractor’s Personnel and other employees of the Contractor and Subcontractors; (d) strike or lockout not solely involving the Contractor’s Personnel and other employees of the Contractor and Subcontractors; (e) encountering munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio-activity; or (f) natural catastrophes such as earthquake, tsunami, volcanic activity, hurricane or typhoon.

While none of these clauses specific refer to a pandemic, the overarching principle is that the event must be “beyond a party’s control” and “could not reasonably have (been) avoided”.  The ABA article goes on to state “the event must not have been foreseeable”.

Given these principles, it seems reasonable to assume the recent COVID-19 outbreak would meet these standards and assuming that notice provisions were met, a Contractor would be able to make a Force Majeure claim.

This holds for any ongoing work that was in progress when the pandemic began, but what happens for new projects moving forward?

The New Normal

Another article published by a German Law Firm on Lexology raises the question of when does the occurrence of a pandemic become “normal” thereby removing the condition of an “unforeseen” event with conditions that were “unavoidable“.

The World is currently sheltered-in-place waiting for things to return to normal, but I suspect that COVID-19 will be with us for the foreseeable future.  Eventually, work stoppages will be lifted and construction will resume.  New projects will break ground and Contractors will need to find ways to get the work done.

Under these new “normal” circumstances, COVID-19 will no longer meet the conditions of Force Majeure and Owner’s will be entitled to rely on Contractor quotes to include mitigations addressing the impact of the virus.

To protect from abuse of Force Majeure we need to be sure that Contractors have contemplated and planned for potential delays from COVID-19.

I’ve begun requesting lists of COVID-19 mitigations with Contractor proposals.  Certainly this won’t prevent all potential conditions, but I think that asking for this kind of information is a signal to the Contractor that you expect them to have addressed these risks.

Closing

Everything has changed.

In just a few months we went from a mass of individuals congregating in a myriad of ways to a populace sheltered-in-place greeting loved one from 6 feet away.  Business in many places has been ground to a halt and hundreds of projects have been impacted.

As we learn to live with the new norms created by this virus, we will have to adjust to a variety of new conditions and circumstances.

For projects that were ongoing during the outbreak of Corona virus, we will need to be fair with each other and allow for a period of adjustment.  For new work that begins under the veil of our new reality, Owners still require a degree of confidence that commitments will be honored.

What about you?  How have you seen Construction change?  What changes have you made?  Tell me your stories.

Thanks for reading.  If you enjoyed this content, please feel free to browse my previous articles and please like, share, comment, and subscribe.  This helps promote my content and is greatly appreciated.

 

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