On March 11, 2020, the World Health Organization (the “WHO”) declared a global pandemic as a result of the coronavirus (“COVID-19”) outbreak. On the heels of the WHO’s declaration, and as the outbreak has continued to grow, federal, state, and local governments imposed travel bans and shelter-in-place restrictions requiring non-essential employees to stay at home. Most recently, on April 16, 2020, Wisconsin extended its “Safer at Home” order to May 26, 2020. As a result, many businesses will (and already have) grind to a halt and unexpectedly face situations in which they (or the businesses with whom they have contracted) will be unable to perform contracts that they entered into prior to the COVID-19 outbreak.
The construction industry will unquestionably be impacted by these developments. Among other things, there will likely be massive labor shortages and substantial delays in the supply chain that will prevent contractors from completing construction projects on time, if at all. Even if a contractor’s failure to perform is entirely beyond its control, there could still be significant legal ramifications for the contractor as a result of its failure.
For example, imagine a scenario where a general contractor was hired to build a shopping center and its contract with the owner contains a liquidated damages provision that requires the contractor to pay the owner a certain sum of money for each day that the project is not completed. Such provisions are frequently included in construction contracts to incentivize contractors to timely complete projects so that the owner can open as soon as possible and begin generating income. But, if the contractor cannot complete the project solely because of COVID-19 (whether because the labor pool has evaporated or because it cannot secure the necessary building materials), will the contractor be on the hook for liquidated damages during what could be a lengthy (and uncertain) period of time given that the failure to perform was outside the contractor’s control and completely unforeseeable?
The answer to this question will likely depend on whether the construction contract contains a force majeure clause.
Force Majeure Clauses in General
A force majeure clause (“a superior force”) is a contractual provision that excuses one or more parties from having to perform their obligations under the contract when unexpected events arise that are beyond the control of the parties and makes performance impossible or impracticable. Examples of force majeure events that might excuse the party from having to perform include “Acts of God” (e.g., floods, earthquakes and hurricanes), war, terrorism and labor strikes. In effect, force majeure clauses allocate risk between the parties to a contract if an unexpected and uncontrollable event occurs that prevents a party from performing.
A typical force majeure clause in a construction contract might provide as follows:
FORCE MAJEURE. If Contractor fails to perform any of Contractor’s obligations under this Agreement as a result of Acts of God, wars, strikes, unavailability of materials, government regulations and acts, or other causes beyond the Contractor’s reasonable control, then the time for the performance of any such obligation so delayed must be extended for the period of such delay.
The Actual Language of the Force Majeure Clause Governs
Not all force majeure clauses are created equal—the parties to a contract are free to decide between themselves what unexpected events (if any) will excuse one or both from having to perform if that unexpected event occurs. Certain clauses, like the example given above, do not relieve a party from its contractual obligations but only suspend performance until the force majeure event ceases. Therefore, in determining whether a force majeure event triggers the clause, courts will interpret the actual clause at issue and give effect to the intent of the parties as determined by the language that they agreed to use.
Some force majeure clauses identify specific events that will relieve a party from performance, whereas other versions merely state that performance is excused due to “circumstances making it impossible to perform the contract,” or some other similar language. This language would make it much more difficult for a contractor to avoid its contractual obligations because the contractor would necessarily have to prove that performance was “impossible,” which can be a difficult burden. Conversely, a force majeure clause that identifies specific events or even expressly provides that it applies to “communicable diseases, pandemics or epidemics,” would provide the contractor with a much stronger argument that performance should be excused. And even if specific events are not identified, some force majeure provisions contain “catch-all” language that applies, for example, to “other causes beyond the party’s reasonable control.” Thus, even if the clause does not specifically enumerate “pandemics” as a force majeure event, a contractor would still have a strong argument that COVID-19 falls within the “catch-all” language.
Construction contracts frequently contain “choice-of-law” provisions that provide which jurisdiction’s law applies in the event that the parties later have a dispute over the contract. For example, a property developer located outside of Wisconsin who hires a Wisconsin-based general contractor for a construction project in Wisconsin might insist that another state’s law governs the contract. As a consequence, it is important to not only review the force majeure clause, but also the “choice-of-law” provision and any other relevant portions of the contract.
Force majeure clauses also frequently contain notice provisions that set forth how a party seeking to invoke the clause must notify the other party that the clause is triggered, sometimes with an additional requirement that notice be provided within a certain number of days after the party learns that it cannot perform the contract. A contractor who might otherwise be able to rely on a force majeure clause to avoid its contractual obligations could be out of luck if notice is not properly or timely given. Time is therefore of the essence for any contractor that finds itself in such a situation.
Relief May Still be Available Even in the Absence of a Force Majeure Clause
Not all construction contracts contain force majeure clauses, but that does not necessarily mean that a contractor has no recourse. In Wisconsin and many other jurisdictions, the doctrine of impossibility in the common law of contracts excuses performance when it would be impossible for a party to carry out its contractual obligations. If the doctrine is successfully invoked, the contract can be rescinded without liability, even in the absence of a force majeure clause.
However, as noted above, proving that performance is “impossible” can be a difficult task, and a contractor will have a much stronger position if it can point to a specific event listed in the clause as the basis for being excused from contractual performance.
Whether to Invoke a Force Majeure Clause
A contractor’s decision to invoke a force majeure clause can be a dicey proposition—if not done correctly, the contractor could be deemed to have breached the contract and the other party would be entitled to terminate the contract and seek damages from the contractor. Additionally, the contractor would be walking away from a balance of the contract. Therefore, if possible, serious consideration should be given to working with the other party to figure out a way to collectively weather the storm so that both parties might be able to eventually receive what they bargained for—even if the parties don’t receive those benefits until later than they expected.
For more information, contact Brian C. Tokarz at (414) 273-1300 or email@example.com.