Force Majeure Events and Contract Clauses

Recent events have again demonstrated the fragility of the network of overseas suppliers for industries ranging from automobile manufacturers to big-box retailers. Supply disruptions can be caused by labor disputes at port facilities; by piracy, cyclones or other events that disrupt goods-in-transit; and by natural or man-made events such as earthquakes or armed conflicts that disrupt production or transportation in an overseas country. Unfortunately, the construction industry is not immune to disruptions in the supply of goods from foreign sources.

Most construction contracts include a force majeure provision; however, not all such provisions are created equal. Some provisions do not use the term force majeure, and broadly apply to almost any delay that is beyond the control of the invoking party (See, e.g. AIA A201-2007, § 8.3.1: “If the Contractor is delayed . . . by . . . other causes beyond Contractor’s control”), while other provisions are expressly limited to specific events that constitute a force majeure event (See U.S. v. Panhandle Eastern Corp., 693 F.Supp. 88 (D.Del 1988) (force majeure clause limited to events affecting LNG export facility). Importantly, courts narrowly interpret force majeure provisions, so even a seemingly broad provision may not be so.  See Castor Petroleum Ltd. v. Petroterminal De Panama, S.A., 2012 NY Slip Op. 33533 (2012).

Many force majeure provisions require the invoking party to give notice of the delaying event, while someplace additional burdens on the invoking party. See, e.g., United States v. BASF-Inmont Corp., 819 F.Supp. 601 (E.D. Mich. 1993) (force majeure clause required submission of mitigation plan within 20 days of giving notice of force majeure event). Additionally, some force majeure provisions may allow the invoking party to cancel the entire contract (see, e.g., UCC § 2-615 allowing cancellation when performance becomes unforeseeably impracticable), while other force majeure clauses simply excuse delay in performance during the duration of the force majeure event. See, e.g., Toyomenka Pacific Petroleum, Inc. v. Hess Oil Virgin Islands Corp., 771 F.Supp. 63 (S.D.N.Y. 1991).

During contract negotiations, the force majeure clause is too often treated as boilerplate, and not specifically negotiated. Parties also commonly take on force majeure risk without investigating whether insurance is available for some or all of that risk. Given the potential economic consequences of a force majeure event, the risk allocation resulting from such a contractual provision should not be overlooked.

For more information on this topic, contact your Construction Law counsel at Smith, Gambrell & Russell.

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