Is force majeure the appropriate cure for Covid-19 disruptions?

Perspectives

Is force majeure the appropriate cure for Covid-19 disruptions?

31 March 2020 | By law firm Squire Patton Boggs | 6 Comments

Force majeure developed in response to limited, local events. The reliefs it offers come at a cost, and will be swamped by the prolonged, global coronavirus pandemic. We’re in a new age and everyone’s affected, so it may be better for builders and owners to roll up their sleeves and just work it out.

Construction projects the world over are feeling the impacts of Covid-19. Work is stopping as governments issue lockdown orders and suspend all non-essential activities, and even where works continue, many construction projects are reporting slowdowns.

Not surprisingly, the floodgates are open and Covid-19 force majeure notices are pouring in.

But the usual forms of relief for force majeure available under contracts and the law—extension of time, avoidance of penalties, termination for convenience and cancellation, or even judicial revision or rescission of contracts—may not enable the recalibration necessary to meet the unique challenges Covid-19 has brought to construction projects.

Contracts typically limit relief for force majeure to an extension of time for performance of non-monetary obligations and/or avoidance of penalties for late performance. Performance is delayed, but not excused, with each party eating its delay costs.

If Covid-19’s impacts continue to prevent performance for a long time, parties to construction contracts experiencing force majeure could face terminations for convenience, with both parties scrambling to settle obligations under partially completed contracts, and to find a way to move forward in a substantially changed market.

30-90 days?

Most construction contracts permit either party to terminate when a force majeure event continues for a substantial period—usually anywhere from 30-90 days of continuous interruption or a higher cumulative number of days (typically 120 and up) for multiple interruptions.

Contractors should receive payment for work completed to date and demobilisation costs, but usually will not recoup lost profits or other costs arising from the force majeure event.

The actual amount a contractor is due in a termination for convenience is ripe for disputes, especially when the termination occurs late in the contract.

Likewise, these provisions may not address additional owner expenses resulting from a contractor’s termination, such as the costs of preserving the works following the termination, assuming subcontracts, or obtaining replacement contractors in a substantially changed market.

Watch out for local law

The impact of local law on force majeure can lead to even more drastic results: if force majeure makes performance impossible, a court or arbitral tribunal may have authority to cancel the contract completely or in part.

Additionally, in many civil law jurisdictions, if only certain parts of performance are made impossible, as an alternative to termination, the owner can demand the performance of those portions of the contract that are still possible.

Some civil codes go even further, and will deem all or part of the contract rescinded and require restoring parties to their pre-contractual positions.

These remedies are easy to draft in a statute or contract, but much more complicated to implement on a partially completed construction project.

Here comes the judge

Significantly, in the face of force majeure, contracts can be rewritten by someone other than the parties. Some civil codes allow judicial revision where exceptional events make contract performance so excessively onerous as to threaten exorbitant loss to the performing party.

These are mandatory laws that parties cannot contract around.

Judicial revision of a contract undoes carefully negotiated risk allocation arrangements, often reallocating risks in a way neither party contemplated or would have agreed.

A judge or arbitral tribunal’s rewriting of a contract is going to be problematic on any construction project, but particularly so for public-private partnerships, where contracts have carefully calibrated and interdependent risk allocations that may require regulatory approval to change.

Bigger than a hurricane

Both contracts and the law have developed from force majeure events that are limited in impact—such as a conflict or an unusual weather event that affects only a certain region or sector of the supply chain.

While the risk allocations associated with force majeure are familiar to the construction industry, these are unfamiliar times.

Covid-19 disruptions to performance are going to be different. Covid-19 has already had, and will continue to have, global impact across every sector of the economy of every country, and is likely to affect every level of a construction project.

It is time to take a hard look at contracts and local law and figure out whether the existing risk allocation schemes, rights and remedies adequately meet the current crisis.

Workarounds that might work

Parties may be better served by negotiating short- and long-term changes to their contracts that fit the “new normal,” than by limiting their view to conventional remedies in these unconventional circumstances.

Such adaptations might include: identifying design changes to circumvent limitations on available materials or specialist trades; agreeing suspensions to certain parts of work and acceleration of others; or collaborating on immediate schedule mitigation measures and working together on a full schedule revision as the situation evolves in the coming months.

As heard recently on a project facing these Covid-19 issues: “everybody just needs a win”. Bringing one home in these unprecedented times is likely to require thinking beyond the usual measures.

  • The authors are Meagan Bachman, Jonathan Taunton, Josh Lindsay and Lily Geyer of Squire Patton Boggs.

Image ©GCR, illustration by Denis Carrier