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onstruct!Construction Litigation Committee

www.abanet.org/litigation/committee/construction/home.html

Winter 2006 Vol. 15 No. 2

Force Majeure: Risk Allocation forUnforeseeable Events

By Timothy S. Taylor and Allison O. Kahn

When a hurricane brings a constructionproject to a stop, who pays for the delay? When access to asecurity-sensitive construction site is severely restricted

because of newly promulgated, post-9/11 terrorism securi-ty measures, who pays for the contractors loss of produc-tivity? When worldwide natural disasters cause the price

of building materials to skyrocket, whoshould bear the extra costs? The answers to these questionsshould be found in the force majeure provisions of theparties contracts.

Force majeure, or the Latin expression vis major,describes the particular circumstances that may excuse per-

Timothy S. Taylor

Continued on a e 7

Allison O. Kah

Damages Issue

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Winter 2006 ABA Section of Litigation

formance under a contract when an actof God or some other superveningevent occurs beyond the control ofeither of the parties.1 In determiningwhether a force majeure event hasoccurred, the test is whether under theparticular circumstances there was suchan insuperable interference occurring

without the partys intervention ascould not have been prevented by theexercise of prudence, diligence andcare.

2In other words, the force majeure

event has to be (1) not reasonably fore-seeable in the ordinary course of theindustry and (2) beyond the reasonablecontrol of the party.

3

Drafting the Force Majeure ClauseForce majeure clauses can shift the riskallocation from the promisor, who is pro-

viding the labor, materials, or service, tothe promisee, who has agreed to pay forand accept the labor, materials, or serv-ice.4 For example, a contractor maydemand that a force majeure clause beinserted into the general contract to allo-

cate to the owner the risk of loss in theevent that unforeseeable delays occur forreasons beyond the control of the con-tractor. Similarly, a subcontractor or sup-plier may place a force majeure clause inits subcontract or supply contract to shiftthe risk to the contractor for unforesee-able delays that are beyond their control.In the absence of a force majeure clause,the performance risk is presumed to restwith the promisor.5

Enforceability of a force majeureclause is determined by the intent of theparties, which is evidenced by the lan-guage in the contract.

6The terms of the

contract will be enforced with commonlaw rules merely filling in gaps left bythe document.7 In other words, whenthe parties have themselves defined thecontours of force majeure in their agree-ment, those contours dictate the appli-cation, effect, and scope of forcemajeure.

8Consequently, parties to a

construction contract should draft the

force majeure provision with care,mindful of the risks that they mayencounter, especially in light of lessonslearned from recent disasters.

For example, a force majeure clausemay provide that:

Neither party will be liable for anybreach or failure to perform underthis Agreement or any other docu-ments incorporated by referenceherein if such breach or failure toperform is due to acts beyond thereasonable control of such party,which include by way of illustratioacts of God or public enemy, acts oFederal, state or local governmenteither in its sovereign or contractucapacity, fire, floods, civil disobedience, strikes, lock-outs, freightembargoes, inclement weather, orany other cause or conditions

beyond such partys reasonable cotrol; provided, however, that theparty which has been so affected w(i) promptly give written notice tothe other of the fact that it is unablto so perform and the cause(s) therfore; and (ii) resume its performanunder this Agreement immediatelupon the cessation of such cause(s

As illustrated in this example, forcemajeure clauses often contain catchalphrases such as or any other cause oconditions beyond such partys reasoable control. Such a catchall phrasemust be construed within the context

Force MajeureContinued from page 1

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established by the list of force majeureevents that precedes it.10 Although sucha broad term would suggest an expan-sive interpretation, the term will be lim-ited to events similar to those specifical-ly enumerated. In addition, the partyseeking relief under the force majeureclause must show it exercised reason-able diligence to avoid the event.

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Parties also should contract for theremedies available upon occurrence offorce majeure events. Often, construc-tion contracts and supply contracts willgrant time extensions but no monetaryrelief. For example, a force majeureclause may permit an extension of thecompletion date but prohibit a contrac-tor from claiming damages resultingfrom delay.12 However, parties are freeto contract otherwise. The negotiationof a force majeure clause should accu-rately reflect the ability of the parties to

accept and allocate risk. Therefore, acontractor in a project located in a statewhere extreme weather conditions arepossible may want to build a contin-gency risk into the price of the contractor negotiate terms for monetary reliefin the event of delays resulting fromsuch events.

Hurricanes and Natural DisastersParties to a construction contractshould also consider whether to makeprovision for the impact of force

majeure events on the cost of con-struction supplies.

Until recently, the inflation in build-ing materials has been driven in largepart by the rapid industrialization ofnations like China and India, as well as

by the enormous reconstruction effortsin Iraq and Afghanistan.13 However, thedevastation of hurricanes and other nat-ural disasters in the 2004 and 2005 hur-ricane seasons has caused fuel prices toskyrocket, and costs for lumber, ply-

wood, cement, and steel are also expect-ed to rise. Past natural disasters, such asHurricane Andrew in 1992, inflated theprice of building materials. HurricaneAndrew destroyed more than 28,000housing units and was largely responsi-

ble for pushing the cost of plywood up44.6 percent and the price of Southernpine framing lumber up 16.7 percent,according to the National Association ofHome Builders. Compare those statis-tics with the roughly 200,000 homes

destroyed in the City of New Orleansby Hurricane Katrina and the picturestarts to become clear. We can expectincreases in the costs of most construc-tion materials, including concrete, lum-

ber, steel, and drywall. Furthermore, therising fuel prices will no doubt increasethe production and distribution costs ofthese materials.

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There can be no mistake that hurri-canes and similar natural disasters willtrigger a force majeure clause in a con-tract. However, a contract that onlyallows for time extensions is of no helpto contractors, subcontractors, and sup-pliers facing potentially record-breakingincreases in material costs and fuel

expenses. Similarly, a contract thatallows a contractor an extension of timeor damages for delay usually will not

cover the costs of construction materialsthat increase drastically as a result of theforce majeure event. Consequently, to beprotected, the party responsible for sup-plying such materials needs to includeseparate escalation clauses in its con-tract to absorb increases to material orlabor costs. These clauses usually refer-ence a general inflation index or a spe-cific materials/industry index to beadjusted at specific intervals, that is,monthly, annually, and so on.

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Therefore, in the event that a projectsuffers massive increases in materialscosts, such a provision allows the contractor to seek an increase in the agreeupon price for these materials.

Terrorism and Government PolicySince the unfortunate events ofSeptember 11, 2001, terrorism has

become a well-known force majeureevent. Terrorism can impact a constrution project directly, as was the case inNew York City, or indirectly, by affecting market conditions and increasinggovernment security and regulation.

The issue of whether increased governmental antiterrorism security measures constitute a force majeure excusfor contractor delay was at issue in threcent decision of Broward County v.Brooks Builders, Inc.16 Brooks Builders,the contractor, filed suit against

Broward County seeking compensatifor delay damages on a project for construction of a fire station adjacent to thFort Lauderdale airport. Although theproject was not inherently complex, itlocationadjacent to an active airporrunwaypresented significant chal-lenges and numerous delays. Some othe delays were caused by a considerable increase in security measures onthe active airport runway after theSeptember 11, 2001, terrorist attacks.These delays occurred daily as the co

struction workers spent a substantialamount of time gaining access to theworksite through the security gates. Tcontract expressly required the contrator to comply with all airport securitymeasures, but the contractor argued icould not have anticipated the extrameasures put in place after 9/11.

The court found that although theparties may not have foreseen theextraordinary delays due to theSeptember 11 terrorist attacks, their co

tract nonetheless had multiple provi-sions suggesting that the risk of loss funexpected delays was to be borne bythe contractor. Nevertheless, the con-tractor claimed relief under the following force majeure provision:

In the event that the Contractor isordered by the Engineer, in writingto suspend work for some unfore-seen cause not otherwise providedfor in the contract and over whichthe Contractor has no control, the

Courtstraditionallyhave found thatgovernmentpolicies thatindirectly affectthe economicconditions and

profitabilityof a contractare not forcemajeure events.

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acts of God, acts of the public enemy,acts of Government, labor disputes,fires, insurrections or floods.

Seaboard sought to invoke the forcemajeure clause for acts of Govern-ment that made its timber contractcostly and unprofitable. Specifically,Seaboard argued that there were a num-

ber of government acts that occurred

during the early 1980s that affected itscontractfor example, new monetarycontrol procedures and the deregulationof savings institutionswhich led to anincrease in interest rates and a slump inthe timber market.

The court found that the forcemajeure clause listing acts ofGovernment as an excuse for per-formance was not to be interpreted so

broadly as to include government fis-cal or monetary policy. Governmentacts or policies that were complained

of had no more than an attenuatedeffect on the contract at issue and atmost made performance of the con-tract unprofitable. Government poli-cies that affect the profitability of acontract but do not preclude perform-ance should not be considered actsof Government in the context offorce majeure. Finally, the court reas-sured, A force majeure clause is notintended to buffer a party against thenormal risks of a contract. The normalrisk of a fixed-price contract is thatthe market price will change.18

Force Majeure InsuranceAlmost by definition, the damagesresulting from a force majeure event can

be disastrous. However, perhaps thebest solution for allocating risk is for theowner to assume the risk and theninsure against it. Force majeure insur-ance may include coverage for projectcompletion, performance coverage, anddelayed completion.19 Although a proj-

ect is usually protected by all-riskinsurance provided by the contractor,all-risk insurance usually does nothingmore than cover the expense of repair-ing the work in place. However, it doesnot provide coverage for damagesincurred by the owner for the delaysincurred in completing the project,which often can be substantial.Therefore, force majeure insurance may

be the best way to protect owners whoare concerned about their investment

from unforeseen delay damages resuling from force majeure events.

Timothy S. Taylor is a member of the Con-struction Litigation Practice Group in the

Miami office of Carlton Fields, P.A. He can breached at ttaylor@carltonfields.com or(305) 530-0050.

Allison Oasis Kahn is a member of the Labor a

Employment and Appellate Practice and TrialSupport groups in the West Palm Beach officeCarlton Fields. She can be reached atakahn@carltonfields.com

Endnotes

1. See R&B Falcon Corp. v. Am.Exploration Co., 154 F. Supp. 2d 969, 973(S.D. Tex. 2001).

2. See Mathes v. City of Long Beach, 26P.2d 472, 477 (Cal. Ct. App. 1953).

3. See Stroud v. Forest Gate Dev. Corp.,2004 WL 1087373 (Del. Ch. 2004).

4. See In re Westinghouse Elec. Corp.

Uranium Contracts Litig., 517 F. Supp. 440459 (E.D. Va. 1981) (the risk of a contin-gency that affects performance is presumeto rest on the promisor. However, the partmay agree to shift a particular risk to thepromisee, or to allocate the various risks

between them as they see fit.).5. Id.6. See R&B Falcon Corp., 154 F. Supp. 2d

at 973.7. Id.8. Id. citing Sun Operating Ltd. v. Holt,

984 S.W.2d 277, 283 (Tex. App. 1998).9. 12 WESTS PENNSYLVANIA FORMS,

COMMERCIAL TRANSACTIONS 2301, form 1

10. See Stroud, 2004 WL1087373 at 5; sealso Matador Drilling Co. v. Post, 662 F.2d1190, 1198 (5th Cir. 1981) (requiring partyclaiming force majeure to demonstrate thaevent of same general character as thosespecifically listed in clause occurred).

11. See Stroud, 2004 WL1087373 at 5.12. Wm. Cary Wright, Force Majeure

Clauses and the Insurability of Force MajeureRisks, CONSTR. LAW., Fall 2003, at 17.

13. James Temple, Cost of BuildingExpected to Rise, CONTRA COSTA TIMES (S.F.)Sept. 9, 2005, at 2.

14. The Katrina Premium: Facing HigherConstruction Costs, Governments Need to

Scrutinize Needs More Closely, FORT WAYNENEWS SENTINEL, Sept. 13, 2005, at A6.15. Laurence P. Lubka, What Can I Do

About Those Steel Prices?, CLAIMS RESOURCEFall 2004.

16. 908 So. 2d 536 (Fla. 4th Dist. Ct. Ap2005).

17. 308 F.3d 1283 (Fed. Cir. 2002).18. Id. citing N. Ind. Pub. Serv. Co. v.

Barbon County Coal Co., 799 F.2d 265, 275(7th Cir. 1986).

19. PHIL BRUNER & PATRICK OCONNORBRUNER AND OCONNOR ON CONSTRUCTIONLAW, 11.126 (2002); Wright, supra note 13

Contractor may be reimbursed foractual money expended on the workduring that period for shutdown.. . . No provision of this article shall

be construed as entitling theContractor to compensation fordelays due to inclement weather, forsuspensions made at the request ofthe Contractor, or for any other delay

provided for in the contract, plans,or specifications.The court disagreed with the con-

tractors interpretation of this provision,because the gate access delays resultedfrom the increased security measuresimplemented by the government, notfrom any order by the engineer.However, the courts ruling suggeststhat had the contract contained a forcemajeure clause allocating risk of govern-mental interference to the county, thenthe contractor could have recovered

damages resulting from delay.Courts traditionally have found that

government policies that indirectlyaffect the economic conditions and prof-itability of a contract are not forcemajeure events. For example, inSeaboard Lumber Co. v. United States,17

Seaboard entered into a timber contractwith the U.S. government to harvesttimber on government lands. At thetime the contracts were executed inSeptember 1980, there was a housing

boom, and the price of timber was high.However, between 1981 and 1983, thegovernment allowed interest rates torise in order to combat inflation, whichled to a softening of the housing andlumber markets. This arguably causedmany contractors to run into financialdifficulties. Seaboard sought relief fromthe courts in order to invoke a forcemajeure clause in its contract for acts ofGovernment, which granted relief tothe contractor where

[the contractor] experiences delay in

starting scheduled operations orinterruption in active operationseither of which stops removal ofIncluded Timber from Sale Areathrough curtailment in felling and

buckling, yarding, skidding andloading, hauling or road construc-tion, as scheduled under B6.31, for 10or more consecutive calendar daysduring a Normal Operating Seasondue to causes beyond Purchaserscontrol, including but not limited to

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