Force majeure clauses during COVID-19: Tips and takeaways for the construction industry
The COVID-19 pandemic has created much uncertainty in the construction industry, particularly in relation to supply chains and the impact of the use of force majeure clauses in major project construction contracts. The growing effects of COVID-19 continue to impede on parties' contractual obligations, leaving unease and doubt across the industry.
To date, the market continues to experience significant disruption to supply chains and inaccessibility to labour. Principals, contractors, subcontractors and consultants face ongoing challenges in delivering their contractual obligations on major infrastructure and construction projects. Minimising these ongoing impacts requires well thought-out and considered approaches when entering new contractual agreements.
In this short bulletin, we provide practical tips on administering and interpreting existing construction contracts and provide focussed advice on how parties should negotiate new contracts in the post-COVID world. Further, we explore and highlight the importance of reviewing insurance policies to determine whether any will respond to losses resulting directly from COVID-19.
Ensuring your force majeure clause is operative in the current climate
If you are already party to a contract or entering into a new contract, market uncertainty demands that you familiarise yourself with what the force majeure clause specifically states or, in the latter case, consider the inclusion of a force majeure clause. This applies to local contracts and international contracts. In most circumstances, international service contracts are likely to be administered by the common law system, whereby the only way to claim relief as a result of circumstances beyond either party's control is by frustration or force majeure.
Put simply, a force majeure clause is a contractual mechanism that relieves a party from performing its contractual obligations where the party is unable to do so due to a disruptive event typically specified in the contract. Such an event must be unforeseeable and beyond the control of either party.
Force majeure concepts are addressed in contractual terms (rather than in common law or statute). Parties usually will have the liberty to negotiate force majeure clauses as they see appropriate, meaning there is no strict rule on how these clauses are included or applied. However, in most circumstances a force majeure event will include events such as: "natural disasters", "an act of god", "national emergencies", "government intervention", and "acts of war". Wording should always be carefully considered and drafted. In some circumstances, having a separate force majeure clause is not enough; including a force majeure definition goes further to ensure parties are "covered".
It is also significant to note that just because a contract contains a force majeure clause does not mean it will entitle a party to relief under a claim due to a COVID-19 disruption. Whether parties have contracted to a bespoke or amended standard form contract, principals and contractors must consider whether any of the force majeure events as defined in the contract respond to disruptions resulting directly from COVID-19 impacts.
To determine whether parties are entitled to trigger force majeure clauses (particularly in relation to COVID-19), the parties should consider whether the clause uses language such as, "epidemic", "pandemic", "pestilence", or "infectious disease". Other considerations should be given as to whether force majeure clauses include wording to events such as "government action", and/or "national emergency". Using this type of terminology would apply to a circumstance relating to COVID-19, due to a government directive and the impact this action has had on the scarcity of labour and the like.
Furthermore, it is paramount to establish a causal link between the event that has triggered the disruption and COVID-19. Without this causal link, force majeure clauses will not always be activated.
Principals, contractors, consultants and subcontractors should maintain good contract hygiene to ensure they are familiar with their insurance policies to determine whether their policies will cover losses and liabilities as a direct result of the impact of COVID-19.
For example, contract works insurance for material damage and project delays during a construction period may not provide the necessary cover or, if it does, it may be very limited. Parties should always look to ensure their policies will protect them from delays to projects, especially in circumstances where there has been a loss of access to the work site or alternatively, loss of use of the work site.
- If entering into a new contract, review the termination clauses in detail and think about the likely impacts they can and more importantly won't have;
- If you are in the process of drafting a contract, ensure that there is a clear and precise definition of a force majeure event - consider a mutually beneficial position for all parties to the contract;
- Consider including clear and precise obligations on the parties if a force majeure event is triggered;
- Check that the notification periods are fair and reasonable for all parties;
- Consider whether it is worth reconsidering current supply chains and the use of subcontractors as a result of new risks;
- Adjust business strategies to accommodate to the new normal; and
- Consider whether it would be appropriate to terminate the contract without penalty if these periods are drawn out.
To establish whether a force majeure clause provides protection for parties impacted by the disruption of COVID-19, consider two questions:
- Firstly, does the contract include a force majeure clause? and
- Does the language used in the force majeure clause allow entitlement to claim for disruption from COVID-19?
COVID-19 has and will continue to have lasting impacts on both the local and global economy. Whether you are entering into new contracts or have existing contracts on foot, your immediate action should be to review and consider the effects of any force majeure clauses and particularly focus on whether these clauses can be triggered by the current unprecedented climate.
It is important to be aware of the implications these clauses may have on business and/or major infrastructure and construction projects. Knowing potential liability can prompt well thought-out planning to minimise these impacts as much as practically possible on projects and on local and international businesses.
Authors: Anastasia Stathis, Lawyer and Ralph Bankes, Special Counsel
All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.