Discourse surrounding force majeure clauses skyrocketed in the wake of COVID-19. Parties to contracts were confronted with the uncertainty of promising future performance when the future was far from certain. In particular, construction contracts felt the impact of this uncertainty through price escalations, tariffs, material scarcity, price gouging, supply chain issues, labor shortages, and myriad other problems.
Construction executives must recognize how future uncertainties can affect their business in order to move into the future equipped with knowledge to address critical problems from a position of understanding. Uncertainty is mitigated by recognizing the contractual mechanisms specifically designed to address it, such as force majeure clauses and the law of impossibility.
Generally, force majeure clauses are narrowly construed by the court and will not excuse performance absent conditions explicitly addressed in the force majeure provision. Broad or “catch-all” force majeure clause may be enforced, but courts are hesitant to excuse performance without greater contractual specificity.
Where a contract lacks a force majeure clause and performance has become impossible to provide, courts may look to the common law doctrines of impossibility or impracticability. In either circumstance, uncertainty is best mitigated through careful drafting at the outset.
- Typical Force Majeure Provisions
Force majeure clauses allocate risk by excusing or suspending performance when unforeseen events beyond a party’s control prevent or delay performance.
A typical force majeure clause might read as follows:
Neither party shall be liable or responsible to the other party, nor be deemed to have defaulted under or breached this Agreement, for any failure or delay in fulfilling or performing any term of this Agreement if such failure or delay is caused by or results from acts beyond a party’s control, including, but not limited to, the following force majeure events: (a) acts of God; (b) a natural disaster (fires, explosions, earthquakes, hurricane, flooding, storms, explosions, infestations), epidemic, or pandemic; (c) war, invasion, hostilities (whether war is declared or not), terrorist threats or acts, riot or other civil unrest; (d) government order or law; (e) actions, embargoes or blockades in effect on or after the date of this Agreement; (f) action by any governmental authority; (g) national or regional emergency; (h) strikes, labor stoppages or slowdowns, or other industrial disturbances; and (i) shortage of adequate power or transportation facilities.
Most state law treats force majeure clauses as a creature of contract, guided by contractual principles such as party intent at the time of drafting. Because force majeure events could have been anticipated and addressed at the time of contracting, courts are hesitant to read them into the contract “Catch-all” provisions are interpreted under the principle of ejusdem generis, requiring courts to look to the other items included in the force majeure clause and determine that any catch-all provisions were meant only to include occurring events of a similar type to those that are specifically listed. Certain terms, such as “act of God” and “natural disaster” are terms of art, acquiring jurisdiction-specific meaning over time. The interpretation and applicability of such terms varies, sometimes drastically, depending on the jurisdiction.
Due to the ambiguity of these standard terms and differing judicial interpretations, force majeure clauses do not inherently excuse performance. Often, a court must determine what conduct, if any, is excused pursuant to the clause. Accordingly, case law of the jurisdiction sets the standard for applicability of a force majeure clause. The more specific a contract is with respect to future events excusing performance, the more likely the court is to enforce a force majeure clause.
Consider the following two scenarios:
- Price Escalations
Price escalations and economic hardship rarely qualify as force majeure events because increased cost alone is generally foreseeable and does not excuse performance. Courts are more receptive where price increases are extreme, unexpected, and tied to qualifying events recognized in their own right. For example, COVID-19 resulted in a 500 percent increase in the cost of PVC pipes[i] as critical manufacturing plants shut down or operated at limited capacity during the pandemic.[ii] This dramatic price escalation was unforeseeable and resulted from an event recognized in its own right—the global pandemic. Force majeure clauses should avoid vague terms such as “economic hardship” and instead explicitly identify qualifying events or define objective thresholds, such as material cost increases exceeding a specified percentage.
- Government Action
Whether a governmental regulation qualifies as a force majeure event depends on a fact-specific analysis driven primarily by the contract’s language and the causal link between the government action and the claimed nonperformance. Courts evaluate whether the clause contemplates or encompasses such actions and whether they directly caused the alleged damages. Parties may tie their nonperformance to concrete governmental action and resulting, already incurred impacts. For example, a party may show that COVID-19 regulations or geopolitical actions such as international wars directly caused supply chain disruptions, material shortages, or cost increases that rendered performance impossible or commercially impracticable without imposing severe financial hardship on the parties.
- Impossibility
Impossibility of performance is a common law doctrine, recognized by most states, wherein performance is excused despite continued contractual obligation to perform. Essentially, “impossibility” is a force majeure event without a force majeure clause, therefore leaving the ultimate determination of performance up to the court.
There are two broad categories:
Original impossibility excuses performance when the contract was impossible to perform from the outset due to conditions unknown to the obligor at contract formation. Events arising after formation, such as COVID-19 labor disruptions, generally fall under supervening impossibility. Parties alleging the events existed at contract formation risk undermining both impossibility and force majeure claims if they do not succeed in proving original impossibility.
Supervening impossibility excuses performance due to circumstances arising after formation. Performance may be excused when an unforeseeable event, not caused by the party, fundamentally alters a basic assumption of the contract and renders performance impossible or unduly burdensome. Most state and federal courts make clear that ordinary cost increases and foreseeable risks do not excuse performance. The party asserting impossibility bears the burden of proving extraordinary, unforeseeable hardship well beyond normal market fluctuations despite reasonable efforts to perform.
Courts generally view impossibility, impracticability, and frustration of purpose as related doctrines requiring an unforeseeable event whose nonoccurrence was a basic assumption of the contract, and which renders performance impracticable rather than merely inconvenient or costly. Federal courts treat impracticability as a form of constructive change, requiring extreme and unreasonable cost or difficulty. Federal courts often analyze which party bore contractual risk, drafted specifications, or possessed greater expertise. While many states recognize the doctrine of commercial impracticability, courts rarely label it as such and instead subsume it within the law of impossibility.
Conclusion
Successful construction contracts require stability in the marketplace and labor supply. Unexpected changes in market conditions, rework necessitated by acts of God, labor shortages, and myriad other problems can frustrate the commercial viability of the project. Forward-looking drafting that contemplates the unexpected can protect all parties to the contract or excuse parties where continued performance would be commercially unviable
About the Authors
Benton T. Wheatley practices in the area of construction law with a focus on construction, design and engineering disputes and transactions and fiduciary responsibilities in the real estate development construction process. In addition to construction law matters, Mr. Wheatley handles administrative matters related to the construction and design industry, as well as environmental and commercial litigation.
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Anna Spicer is an associate in the firm’s Trial Practice Group.
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