Frank G. Adams, PE – President Christopher J. Sullivan – Vice President – Operations Interface Consulting International, Inc.

FRANK G. ADAMS, PE o

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Over 40 years of engineering and construction experience on projects in over 50 countries Arbitrator on construction, engineering, and intellectual property disputes Speaker and educator in construction management and claims preparation and analysis

CHRISTOPHER J. SULLIVAN o

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Over 25 years of engineering, procurement, and construction experience Worked in the US and across Europe, South America, Africa, the Middle East, and Pacific Rim countries

Numerous publications and speaking engagements

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Force Majeure Defined Force Majeure Clauses Force Majeure Impacts Force Majeure Implications Force Majeure Dispute Resolution Force Majeure in Energy Contracts Force Majeure Risk Mitigation Force Majeure in Troubled Times

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Black’s Law Dictionary defines force majeure as an event or effect that can neither be anticipated nor controlled. The term includes both acts of nature and acts of people. A contract doctrine that is usually applied as a defense to breach of contract or nonperformance claims that relieves a party from ongoing performance obligations due events that could not be anticipated and/or are beyond their control.

Under most national laws, force majeure events must meet four criteria: 1.

The event must be external to the contract and the parties;

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the event must render the party’s performance radically different from what the parties originally contemplated;

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the event must have been unforeseeable; and

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the occurrence of the event must be beyond the control of the party seeking to use force majeure as an excuse for nonperformance.

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Force majeure means whatever the contract says it means. Always look to the contract first to see if a specific event is covered.

TYPICALLY, FORCE MAJEURE IS: o o

War, terrorism, strikes, riots, crimes, etc. “Acts of God” • Including hurricanes, named storms, flooding, earthquakes, volcanos, etc.

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Inability to obtain resources due to loss of goods in transit, force majeure event, shortages, etc. New laws, regulations, or embargos Whatever the contract says it is

FORCE MAJEURE IS NOT: o

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If a contract defines force majeure events, then an event not specified in the clause may not excuse nonperformance. If the contract defines force majeure as a flood or hurricane, then unusually high winds or heavy rain may not excuse nonperformance. A phrase such as “including without limitation” included in the clause can mitigate the risk of lack of definition.

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Contractual force majeure clauses routinely enumerate a list of extraordinary events that parties consider to be beyond their control. Should be defined clearly in order to get a true scope of coverage. All parties should know the precise definition, scope of its usage, and limitation of the clause.

Force majeure clauses have four key components: 1. A description of events that can trigger a force majeure condition. 2. Terms that define the duration of that condition.

3. A notice provision describing how a declaration of force majeure is to be communicated. 4. A description of the effects that a force majeure event will have on contractual obligations of the parties.

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The contracting parties shall for a certain period of time be totally or 2 partially excused from their obligations to perform under this Agreement in cases of force majeure by reference herein if such breach or failure to perform is due to acts beyond the reasonable control of such party, which include by way of illustration, acts of God or public enemy, acts of Federal, state or local government, either in its sovereign or contractual capacity, fire, floods, civil disobedience, strikes, lock-outs, freight embargoes, inclement weather, or any other cause or conditions beyond such party’s reasonable control; provided, however, that the party which has been so affected will (i) promptly give written notice to the other of 3 the fact that it is unable to so perform and the cause(s) therefore; and (ii) resume its performance under this Agreement immediately upon the cessation of such cause(s).

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Force majeure clauses often contain catchall phrases such as “or any other cause or conditions beyond such party’s reasonable control.” The catchall phrase must be construed within the context established by the list of force majeure events that precedes it. The phrase is typically limited to events similar to those specifically listed.

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While a force majeure event, such as a hurricane, may directly damage the project site, it may also cause other indirect damages, such as: • Work Scope • Costs to repair damage • Cost to finish original project • Material shortages • Labor shortages • Increase material prices • Increase labor prices • Supply obligations • Schedule Deadlines

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What work was delayed and/or disrupted?

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Was unfinished or finished work damaged?

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Were material or equipment shipments delayed and/or disrupted? Was there an impact to labor • Was the labor pool reduced? • Was the labor poor unable to reside there?

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Some owners allow price increases for changes in the scope of work caused by force majeure events. This is based on the premise that they would like the contractor to bid solely on the work described. Traditional contract matters usually require a change order to address the effect of force majeure. Many owners do not allow price increases for force majeure generated changes and limit contractor relief to schedule time extensions.

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A time extension is of limited help to contractors facing increases in labor, material, and other expenses, such as fuel, worker housing, temporary facilities, etc. Time extensions will not cover the costs of materials or labor that increase drastically as a result of a force majeure event. The party responsible for supplying materials and labor could include a separate escalation clause in its contract to absorb increases to material or labor costs. Escalation is difficult to estimate until after the force majeure event.

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Escalation clauses can reference a general inflation index or a specific materials/industry index to be adjusted for severity of a force majeure event. Although severe weather can impact materials prices, a force majeure clause is not intended to protect a party against the normal risks of delay and disruption. The typical risk of a fixed-price contract is that the price to perform the contract work scope will increase without the owner granting the contractor relief.

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The party affected by force majeure is not in breach of the contract. Force majeure only suspends a party’s performance and obligations for the duration of the force majeure. The contractor is typically entitled to the extension of time, and sometimes compensation, for the delay depending on the wording of the contract clause.

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Force majeure may be declared for a party’s what longerterm consequences might flow from its decision to declare force majeure. Can lead to disputes with a party to the contract that opposes the existence of the force majeure event. Remember, the clause may be declared by any parties to the contract.

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A declaration of force majeure is sometimes made for the party’s strategic benefit. A contractor or owner may obtain a beneficial time extension by declaring force majeure and extending the period available to meet its commitments.

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There is as widespread lack of clarity in the formulation of the clause, which can impair dispute resolution. Disputes usually stem from different interpretations of the contract, improper terms being used in the contract clause, and certain omissions in the contract clause. Disputes also typically pertain to the duration of the force majeure event and liability issues for repair or replacement of finished or unfinished work.

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Declaring force majeure protects the party from breach of contract claims only if the force majeure clause was adhered to and the event is listed in the clause. The most disputed issue of force majeure is the threshold issue of which events fit within its definition and excuse performance. Parties frequently write into the contract the remedies available upon occurrence of force majeure events.

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Negligence and fault should be defined separately in the contract to avoid being regarded as a force majeure event. The party seeking relief under the force majeure clause must show it exercised reasonable diligence to avoid the event. If another company affected by the same disruption has found an alternative way to fulfill its commitments that method could become the benchmark for establishing what should have been done to avoid or mitigate the event

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A force majeure clause may permit an extension of the completion date, but prohibit a contractor from claiming damages resulting from delay. However, parties are free to contract otherwise.

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An energy contract may include provisions aimed at ensuring performance in case of force majeure. Some long-term oil and gas supply contracts provide for the restoration of quantities in force majeure clauses. For example, an alternative obligation clause may provide for “replacement” pipeline gas in place of LNG delivery.

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Energy contracts are unique in that there can be multiple buyers and sellers of products. Also differ from typical construction contracts in that there may not be construction involved at all – often involves transporting, refining, and selling goods.

For example, a force majeure clause in a contract for the sale of liquefied natural gas (LNG) the seller(s) and the buyer(s) can include the standard language of force majeure and add potential accidents related to the production and transport of natural gas.

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Typical contract language may start off saying: The contracting parties shall for a certain period of time be totally or partially excused from their obligations in cases of force majeure, such as, in particular: fire, flood, atmospheric disturbances, storm, tornado, earthquake, washing away of soil, landslide, lightning, epidemic, war, riots, civil war, insurrection, actions of public enemies, government action, strikes, lockout, with the burden upon the party relying upon it to supply proof of the force majeure nature of such event; and in the following circumstances, This is very similar to the other example shown earlier.

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Then it may go on to list events unique to energy contracts: Serious accidents affecting the exploitation of the natural gas deposit, the transport by pipeline in [seller's country], the handling, the liquefaction, the storage, the loading operations, the transport by LNG carriers, the discharge, the storage, the regasification, the transport by the principal pipeline(s) from the regasification facility and intended for the transport of the Natural Gas that is the subject of the present contract, such that their consequences cannot be remedied through the implementation of reasonable means at a reasonable cost. This language is specific to the LNG industry.

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Take the example of a gas pipeline operator declaring force majeure after its pipeline is damaged in an explosion and they must repair the damage, return the pipeline to service, and provide an alternative supply in the meantime. Whether the duty to mitigate the effects of the explosion on the pipeline also includes a duty to mitigate the effects of the force majeure event by providing alternative gas supply is not always as clear. Force majeure risks affecting a gas supplier with multiple off-takers might raise additional difficulties, such as order of relief.

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Could the pipeline operator be required to have the pipeline repaired as soon as possible, regardless of cost? If the pipeline operator is required to source alternate gas for a buyer, is the cost or inconvenience of doing so relevant?

Some agreements deal with such issues explicitly while many others are silent. Major disputes apply the “commercial reasonableness” standard, which is frequently not defined in the contract.

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Force majeure events are typically not a problematic source in the contract negotiation. A contractor may require that a force majeure clause be inserted into the contract in a manner that allocates the risk of loss and increased cost of performance to the owner.

A subcontractor may use a force majeure clause to shift the risk to the contractor for unforeseeable delays that are beyond their control. In the absence of a force majeure clause, the performance risk is presumed to rest with both parties equally.

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While “Acts of God,” like hurricanes, are likely to be a specified force majeure event, a court may not excuse a party’s performance due to a hurricane warning or evacuation notice. The owner may seek to have a “hurricane” notice included as a force majeure event. The contractor may counter to have “other severe weather and weather warnings” negotiated into the clause as well.

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Be mindful of risks events, like weather conditions, commonly associated with the project location. A contractor located in areas where extreme weather conditions will negotiate terms for monetary relief in the event of delays resulting from those events. A contractor performing work in a region where extreme blizzards are highly likely should make sure “blizzards” and “extreme weather conditions” are written into the contract or include this risk event into their bid price.

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Was the civil turmoil in Egypt, Syria, Liberia, or Tunisia a foreseeable force majeure event? Were the bail outs in Cyprus a foreseeable force majeure event? What about the potential bankruptcy of Greece and Portugal?

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What about the volcanic eruption in Iceland in 2011 that delayed planes and transportation of materials here in the US? The BP oil spill had more far reaching effects than just the rig explosion. What other indirect force majeure effects were there? Rig and vessel construction were halted due to new laws and regulations.