The Contractor’s Approach to Risk Allocation V: Force Majeure Clauses

This article is the fifth in my series of discussions about contractual risk allocation.  This installment focuses on force majeure clauses and discusses the manner in which certain contracts allocate the risks associated with force majeure. While occurrences of force majeure events are foreseeable, their type, scope, length, and overall impact on a project are unpredictable.

Most contracts address force majeure events as fire, floods, epidemics, abnormal weather conditions, or Acts of God. Predicting these events is virtually impossible.  As such, the risk of these events should be borne by both the owner and contactor.  Unfortunately, in too many contracts, the risk of force majeure events is shifted to the contractor.

The occurrence of a force majeure event can have significant effects on a project and can result in significant costs and delays.  With respect to costs resulting from a force majeure event, each of these risks is insurable and some or all damages resulting from a force majeure event may be covered by insurance policies.  However, not all costs resulting therefrom are insurable.  Also, delays incurred because of these events are not typically insurable.

The two most widely used form contracts in the industry treat force majeure similarly.  Both the AIA A201-2007 and the EJCDC C-700 create situations that favor the owner in that it gives the design professional and owner’s representative control over time extensions arising from force majeure events.

The AIA A201-2007 §8.3.1 reads as follows:

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

The language used in section 8.3.1 places complete control with the architect and leaves no opportunity for the contractor to establish delay.  If delay occurs, this clause makes it difficult for the contractor to receive an extension.

A more equitable alternative would remove the architect’s discretion.  Because force majeure events are uncontrollable and unavoidable, any delays incurred as a result of such events should be grounds for a time extension without condition.  Modifying the contract language to reflect this reality would provide an equitable and shared allocation of risk.

The EJCDC language seems more favorable on first glance, but an investigation into the clauses governing delay demonstrates that contractors using these documents are equally prejudiced.  Section 12.03 of the EJCDC C-700 reads as follows:

A. Where Contractor is prevented from completing any part of the Work within the Contract Times due to delay beyond the control of Contractor, the Contract Times will be extended in an amount equal to the time lost due to such delay if a Claim is made therefor as provided in Paragraph 12.02.A. Delays beyond the control of Contractor shall include, but not be limited to, acts or neglect by Owner, acts or neglect of utility owners or other contractors performing other work as contemplated by Article 7, fires, floods, epidemics, abnormal weather conditions, or acts of God.

Section 12.03 goes on to read:

C. If Contractor is delayed in the performance or progress of the Work by fire, flood, epidemic, abnormal weather conditions, acts of God, acts or failures to act of utility owners not under the control of Owner, or other causes not the fault of and beyond control of Owner and Contractor, then Contractor shall be entitled to an equitable adjustment in Contract Times, if such adjustment is essential to Contractor’s ability to complete the Work within the Contract Times. Such an adjustment shall be Contractor’s sole and exclusive remedy for the delays described in this Paragraph 12.03.C.

This language is problematic because it allows the engineer sole discretion in determining whether the extension is essential to the contractor’s timely completion. If, for instance, the delay occurs early in the project when there is ample float in the schedule, the engineer may refuse to grant an extension.  Later, if other events of delay occur that could have used the float, the contractor may be prejudiced because of the engineer’s earlier decision.

Another problem with the language above is the reference to “abnormal weather conditions” in 12.03.A.  Without a definition or explanation of what constitutes abnormal weather, this language is ambiguous and creates an opportunity for an engineer to deprive the contractor of weather days.  Without specific criteria, a contractor may not be able to provide sufficient documentation to establish entitlement to the extension, thereby creating a schedule concern later in the project.

More equitable language in place of 12.03.C. would entitle the contractor to an extension as a result of any act of force majeure regardless of the impact. An alternative version of the clause could remove the discretion from the Engineer while still requiring the contractor to request an extension and provide support for such request.

Another equitable improvement to 12.03.C. would remove the exclusivity of remedies from the contract time extension. Like the owner, it is probable that a force majeure event will result in added costs for the contractor. Such costs may not be reimbursable from an insurance policy. 12.03.C eliminates the possibility that an increase in contract sum will be allowed to compensate for such an occurrence.  Better language would require the contractor to mitigate any costs incurred as a result of a force majeure event, while allowing an adjustment to the contract sum to the extent the mitigation efforts failed to fully absorb the costs.

These two examples provide an brief view of the inequities present in many force majeure clauses.  With fairly minor modifications, the risk covered by these clauses can be shifted back to a more equitable and shared risk between the owner and contractor.

 

TexasContractor-Logo new

 

2014-10-16T19:52:07-06:00News & Events, Publications|