There is no doubt that we’re living in uncertain times. The COVID-19 pandemic has prompted a worldwide economic standstill. In order to flatten the curve, government authorities are calling on people to stay at home and avoid the risk of exposure. So, what does this mean for government construction projects? Supply chain disruptions, illness among workers, and other factors can all influence your original intended timeline. Whether drafting new agreements or revising existing ones, the importance of a force majeure clause is top of mind for many. As an essential clause in many contracts, this is what you should know about a force majeure clause and how it can protect your business.
What is a force majeure clause?
In U.S. common and civil law, this term refers to natural and unavoidable catastrophes that affect contract performance. In many contracts, the description may reference an “act of God.” The force majeure legal definition itself is stated as “superior or irresistible force.”
Most construction contracts don’t specifically outline a force majeure definition. Relief for this type of situation will usually be addressed in delay and time extension remedial clauses. However, the purpose of the language remains the same.
What is force majeure risk?
Force majeure risk refers to the risk that there will be an interruption of the performance of contractual obligations due to the occurrence of an unforeseeable event that is beyond the control of the project’s sponsors. In the case of COVID-19, the pandemic and subsequent government shut-downs may certainly apply.
When you’re thinking of force majeure risk, it’s important to remember that your own provisions aren’t the only factor. The contracts you have with businesses in your supply chain may also contain a force majeure clause. This may have a significant impact on your operations.
How do you use force majeure?
Now that we have the actual legal definitions out of the way, how does a force majeure clause affect you?
In the midst of a force majeure situation, like COVID-19, it’s important to closely review the contract in question. This will help you determine what relief you are entitled to and how to claim this relief. In order to take advantage of a force majeure clause, you’ll need to take a few key actions:
- Identify and document the impacts you are facing. What is the current status of your operation? Perhaps you are experiencing disruptions in your supply chain that makes it extremely difficult or impossible to find the materials you need to complete the work. Are employees unable to work due to illness? Be thorough about documenting these delays and how they will impact your business in the coming months.
- Devise a plan. Develop a plan to continue making progress while mitigating risk as much as possible. Are there any areas of your current project that can continue? Find ways to lessen the impact of this disruption. You should also consider making changes to your client’s payment schedule due to the delays.
- Communicate and inform. In situations like these, it is best to rely on factual and formal communication put in writing. Be open and honest about the issues you are encountering in light of the situation. Ask for patience and understanding as you continue to find ways to move forward on the project, even if delays are inevitable. It’s best to consider how your communication will look to a third party in the event of a dispute. Remain professional and reasonable, ensuring you don't promise something you can't deliver.
The weight of a force majeure clause will come down to the wording and application of local and state laws. As with any legal issue, you should consult with an attorney to ensure you have a solid force majeure clause or to discuss your case if an issue arises.
How long is force majeure in effect?
As noted, it’s important to follow your clause carefully when it comes to notification. In general, most clauses will state a given amount of time between the event and notification of interested parties. This is typically somewhere between five and ten days.
After, the duration of a force majeure is difficult to quantify, especially due to the changing nature of these types of events.
Does force majeure need to be in a contract?
While a force majeure clause isn’t a requirement, it is certainly beneficial and often included in many contracts. It’s also important to be detailed if you want your force majeure clause to stand against a range of different instances. The broader you can be, the better.
However, the ability to invoke a force majeure clause will often depend heavily on your local state laws. For example, under Florida law, you must prove that a force majeure was indeed unforeseeable and completely outside of your control. On the other hand, some states, including Texas, do not require that the force majeure event be unforeseeable. Most states will also require you to show that the disruption in contractual obligations was actually caused by the force majeure event.
Whether you have the right to invoke a force majeure clause is usually determined on a case-by-case basis. It is important to follow the requirements put forth in your contract whether it’s regarding proper notice or time limits. Most states are strict about compliance with these aspects of a force majeure clause.
If you need to draft a force majeure clause, important elements to include:
- A list of any and all potential events, as well as a “catch-all” clause to protect you from extraordinary events that would be unforeseeable (like a worldwide pandemic)
- Standard procedures for handling these events, such as reimbursements or delays in timeline
- Notification provisions that determine guidelines for when and how you will invoke the force majeure clause if it becomes necessary
It may be rare that you find yourself in need of invoking a force majeure clause. Nonetheless, every word matters.
Does insurance cover force majeure?
Most construction companies carry a wide range of insurance policies to protect themselves from substantial losses. Force majeure clause insurance may come in several different forms. For example, some policies that would possibly cover force majeure losses include:
- Commercial general liability insurance: A broad type of insurance policy which provides liability insurance for general business risks
- Business interruption insurance: Helps protect against lost income and extra expenses after a covered peril affects a business
- Supply chain insurance: Insurance that may reimburse your business for lost profits and related costs due to disruptions in your supply chain
It’s important to note that the wording of your specific insurance policy will determine approval of your claim. In light of COVID-19, there are several ongoing lawsuits that come down to this very dispute as it's a complicated area.
At Gray Surety, we offer a wide range of contract and commercial surety bond services for established and emerging contractors. Our team is also here to help you make sense of complex issues, like the recent need for invoking force majeure clauses for your existing contracts.
Have questions or concerns? Let us help. Contact Gray Surety today.
The foregoing information does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. For more information, we encourage you to consult with your attorney.