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Force majeure clauses have been standard in contracts dating back hundreds of years in the United States—and even longer in Europe. “Force majeure,” which is French for “greater force,” removes liability for unforeseen events that prevent parties from fulfilling contractual obligations.

In a year defined by the COVID-19 pandemic, these clauses have gone from boilerplate basics to something worthy of further examination and attention in order to minimize risk for all parties involved in a construction project. Prior to COVID-19, drafters might have considered a localized or regional event that would lead to invoking a force majeure clause. It is doubtful, however, that anybody envisioned the impact on such a world-wide scale.

Understanding the Agreements

Force majeure clauses cover unforeseen events, a broad term that encompasses both acts of God and human-caused incidents. These range from natural disasters like earthquakes and hurricanes to acts of terrorism, strikes, political strife, government actions, war and other difficult- or impossible-to-predict disruptions. When such an event occurs, the force majeure clause attempts to remove, or at least reduce, uncertainty as to the rights and liabilities of the parties to the agreement.

Sureties issue performance bonds, which are intended to provide additional assurance that a contractor will perform the terms and conditions of a construction contract. If, for example, a bonded contractor goes out of business, the surety may be obligated to step in and complete the construction project, find a replacement contractor or make a payout to the owner. Whether the surety’s obligation is triggered is dependent upon several factors that are defined by the underlying contract, the terms of the performance bond and applicable legal concepts.

Takeover and completion agreements are a contractual mechanism through which a surety may be involved in the completion of a construction project. The takeover agreement is generally between the project owner and the surety, and it provides that the surety will arrange for completion of the construction project. A completion agreement may be a separate agreement that is generally with a completion contractor who has been retained to perform the original scope of work. 

The Impact of COVID-19 

The fallout from COVID-19 has been extensive. International and domestic supply chains have been disrupted, which can have an impact on the ability of some contractors to complete projects on time or even at all. Workers exposed to COVID-19 may fall ill or may be in mandatory quarantine for a lengthy period if they are exposed to the coronavirus, causing labor-related delays. 

If the contract doesn’t contain a force majeure provision or if the provision doesn’t specifically mention epidemics or pandemics, the contractor may be exposed to liability without a contractual remedy for extensions of time or increases in compensation. In this case, the obligee may have an argument that the contractor must still perform the work. Then again, the contractor may argue that its performance should be excused for reasons including an impossibility, impracticability or frustration of purpose argument. 

The ambiguity of a force majeure clause or lack thereof may result in lengthy and expensive litigation, which is undesirable to all parties. This has become an issue for sureties as bonded construction companies are terminated and sureties are being asked to perform, despite facing some of the same challenges that may have led to the termination. When negotiating takeover and completion agreements under such circumstances, a surety must consider the labor and supply chain disruptions, increased costs and scheduling impacts resulting from the pandemic.  

In addition to labor shortages caused by illness or quarantine requirements, in some jurisdictions significant shutdowns have been required by governmental executive action, which may result in delays. In some cases, owners are still demanding that the surety meet scheduling deadlines and obtain labor and materials without allowance for the COVID-19 impact. 

The surety should attempt to address and negotiate these issues up front, both regarding prior impacts and potential future impacts that may arise as the pandemic continues. In the alternative, the surety should attempt to include a clear reservation of rights and its own force majeure clause that addresses COVID-19 as a means to preserve its rights to negotiate, arbitrate or litigate these issues when the project is complete. 

Mitigating Risk When Disasters Strike and Before Termination

When an unforeseen and arguably force majeure-level event disrupts a construction project, the best outcome usually occurs when all parties—the surety, principal and obligee—work together toward a mutually beneficial resolution before termination. This often requires flexibility of terms.

For example, a paving contractor on a major municipal project had dozens of crew members out of work as a direct result of COVID-19. This put the future of the project at risk. To continue work with limited crew members would mean the project would take longer to complete. More importantly, this would increase expenses as the contractor would need to extend the rental of necessary equipment and keep traffic control staff on the payroll for a longer period. The surety, contractor and municipality agreed the best approach would be to temporarily cease work until a full crew was available to do the work as planned rather than argue about change orders related to inefficient work and extended general conditions. 

Another project involving a bonded HVAC contractor was going to be delayed when a contractually required material was not obtainable due to the government shutdown and resultant supply chain impact. Rather than insisting upon the specifically sourced material, the interested parties were able to agree to accept a substituted material from another vendor. 

In general, cooperative solutions to COVID-19-related project disruptions involve extensions of time as opposed to financial change orders. No matter what the solution, the best results occur when all parties are flexible and work together. 

The Future of Contracts

Force majeure provisions are often written in general language. For a long time, this was considered enough, as entities often agree on what constitutes a standard unforeseeable event and the provision is infrequently activated. However, the onset of the COVID-19 pandemic and its far-reaching impacts underscore the need to further consider the language within a force majeure clause. 

To limit exposure, it is important to consider a force majeure clause to ensure it provides specific language about pandemics, epidemics and other public health emergencies. This language must be clear to limit liability, especially during a time when a global pandemic is no longer an abstract possibility but rather a foregone reality. The ability to foresee a pandemic and its fallout allows for the argument that the force majeure clause no longer covers its impacts, unless the clause explicitly includes a pandemic as a force majeure event.

The COVID-19 pandemic is a reminder that all parties should regularly revisit standard clauses and provisions to ensure they are offering the best protection possible against shifting risks. 

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