March 26, 2020

Force Majeure and COVID-19: Understanding the Contract Clause Often Lost in Translation

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The construction project is going great and then life turns upside down – COVID-19. You couldn’t have predicted it. You probably didn’t plan for it. So, is the project protected against it? The answer lies in the contract. Agreements may not specify circumstances related to viruses or pandemics outright, but most commercial contracts include a clause called “force majeure.” Ensuring this French term doesn’t get lost in translation serves as a good safeguard for preventing your project from saying “Au revoir!” under current conditions. 

What is force majeure? 

Force majeure translates to “superior force.” The clause excuses a party’s contractual performance obligations when circumstances beyond control make work impractical, inadvisable, impossible, or illegal. Contract language varies, but clauses typically either use broad language such as “unforeseeable events arising through no fault and beyond reasonable control” or provide a more specific list of qualifying events. Commonly included incidents are epidemics and pandemics, war and terrorist attacks, strikes, fire, and natural disasters. 

Force majeure events often are synonymous with or include the legal term “acts of God” because they are seen as outside human control. However, governmental action preventing or prohibiting work also may apply. 

Does COVID-19 qualify for force majeure? 

COVID-19 typically must meet three criteria to achieve force majeure eligibility: 

  1. COVID-19 must fall within the contract’s defined qualifying events, 
  2. The virus and resulting pandemic must be the direct cause of the company’s inability to fulfill its contractual obligations, and
  3. COVID-19 represents a legal or physical restraint rather than just a financial obligation for performing work. 

Note that while some contracts may include general language defining applicable events, courts often apply a narrow definition to specifically listed items. Should a force majeure contract claim require litigation, judges will examine if the event was reasonably foreseeable and planned for appropriately. Courts also consider if non-performance was unavoidable or could have been conducted in an alternative way without a contract breach. 

What information is needed when invoking a force majeure clause? 

When a contract allows for COVID-19 as a triggering event for non-performance, gather additional information before using force majeure. Failure to comply with contract requirements may nullify the clause. Also, citing force majeure may create a negative impact on the overall project more detrimental than the event itself, such as termination. Understand the contract and proceed with caution. 

  • How quickly must the contract’s counterparty be notified? 

Project timelines make or break a construction project. The contract may stipulate a timeframe for invoking a force majeure clause. Failure to provide a timely notice can void the clause and cancel a contractor’s ability to seek relief for delayed work. 

  • How long can a project delay last without a contract cancellation? 

Some contracts allow counterparties to cancel the agreement if a delay extends beyond a certain number of days. Weigh the risk of a contract cancellation against the anticipated delay COVID-19 may cause before resorting to force majeure. Collaborate with the counterparty on a mutually beneficial solution first before leveraging the clause. 

  • Is there an alternative means of performance? 

Investigate if the contract allows for a Plan B to complete the work. For example, if COVID-19 is causing parts and materials shortages or delayed deliveries, seek alternative product sourcing. The value of keeping the project close to its original schedule may outweigh the costs or compromises of using alternative materials. Business contingency plans also may include revised schedules or alternative timelines for completing the work. 

  • What are the contractor’s obligations after a triggering event? 

Seek guidance on how the contract applies to the project following a force majeure event. Understand if the contract is cancelled or delayed. Discuss when construction will resume and consider the implications for your company’s other project deadlines. Understand revised timelines and how they could impact project budgets. 

Moving forward with force majeure?

It may be just a matter of time until COVID-19 affects most construction projects across the US with workforce shortages, overdue material deliveries, or delayed project schedules. While the virus creates new challenges, use the project’s contract to take charge. Know the contractual rights and remedies afforded for the things you cannot control and plan for the things you can. For help along the way, look to myCOI. Our insurance tracking technology helps manage risk so you can get back to business.

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