Force Majeure Clauses In Construction Contracts

The primary purposes of construction contracts are to clarify responsibilities (including performance and payment obligations) and to allocate risk. It is in regard to the latter purpose that the concept of force majeure plays an important role. Such clauses serve to deal with the risk of events which fall short of frustration. Such clauses can be successfully employed to recognize industry or project specific risks. By way of example, a number of years ago the writer dealt with a pipeline claim that arose from the delayed completion of a series of compressor stations and a connecting pipeline through the southern interior of British Columbia. Perhaps the biggest risk on that, and perhaps on any pipeline project, was the inability to reasonably manoeuvre and work on the pipeline right away. As matters transpired, the work was done during an extremely rainy summer. Although very unusual, the amount of rain did not approach one in one hundred year or other bunch numbers that would have clearly have resulted in a force majeure event having been triggered. Nevertheless, the work became very slow and very expensive to complete. Only after extensive negotiation and litigation preparation were the potential claims arising from the cost and time of performance resolved. Had the force majeure clause in the contract been drafted with the specific project and type of work risk in mind, the dispute could have readily been avoided.

At the time of writing, there are serious shortages of both labour and certain materials in Canada, though the shortages are more acute in some areas of the country than others. Oilsands project construction in Alberta, pre‐Olympic construction in British Columbia and general economic expansion in Saskatchewan have all lead to shortages in Western Canada. On other hand, the competition for steel, specialty metals and specialty pressure vessels throughout North America, arguably caused in part by competition from the rapidly expanding economies of both China and India, has focused the need for the careful examination and drafting of both force majeure and other risk allocation clauses within construction contracts.

The issue is highlighted in Alberta where there is a fear that labour shortage could be advanced as a force majeure event. These circumstances have sparked some owners of large projects to specifically exclude labour shortage as an event of force majeure. This, apparently, despite such shortage neither falling within the idea of the "...unexpected, something beyond reasonable foresight or skill"1 and despite the fact that many cases in all three of Canada, England and the United States have held the changes in market conditions are not sufficient to fall within a standard force majeure clause.2

In other areas, rather than face arguments that a force majeure event has occurred due to the material shortage, risk allocation clauses have been formulated to specifically address shortages of such materials as steel. For example, a provision written on behalf of the American Institute of Steel Construction provides as follows:

The subcontract price is based upon the agreed prices and surcharges for the steel types and shapes necessary for the project and posted and made publicly available by [steel mill] on [date]. Notwithstanding anything herein to the contrary, any increases or decreases in the price of the steel ordered by subcontractor for the project, or any additional surcharges imposed on the steel ordered by subcontractor for the project, after [date] shall result in a corresponding dollar‐for‐dollar increase (or decrease) in the subcontract price.3

It is the intention of this article to highlight elements that require careful and specific consideration of the drafting of force majeure clauses.

1. Purpose of Force Majeure Clauses

   Force majeure clauses exist to exclude liability where unforeseen events beyond a party's control prevent the performance of its contractual obligations. The Supreme Court of Canada in Atlantic Paper Stock Ltd. v. St. Anne‐Nackwawic Pulp & Paper Co.,4 the leading Canadian force majeure decision, describe the purpose of force majeure clauses as follows:

   [A force majeure clause] generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.5

   The term "force majeure" has been variously described elsewhere as meaning an "irresistible force", an "unforeseen event", an "over powering force", or "a fact or accident which human prudence can neither foresee nor prevent."6 Put another way, force majeure events are generally considered to be events "beyond the control and without the fault or negligence" of the party excused.7

   While the "irresistible" forces contemplated by force majeure clauses typically include such things as wars, natural disasters (and other "acts of God") they can also include more conventional commercial events such as the failure of supplies, forms of labour unrest and equipment failure.

   The term "force majeure" is derived from civilian law and encompasses a concept now entrenched in several legal traditions, including the lex mercatoria.8 Its presence in Anglo‐American contract law can be directly traced to French Code Civil.9 Force majeure is based on the concept that it is fair to allow a party to escape contractual obligations without fault when satisfaction of those obligations is made impossible. Rather than being a universally applicable concept as in French jurisprudence, however, "force majeure" in the Anglo‐American tradition is a purely contractual right to the suspension or release of one's contractual obligations upon the happening of certain defined events.

   Though related to the common law doctrine of contractual frustration, force majeure can be applied much more broadly and flexibly. The late 19th century Queen's Bench decision in Jacobs v. Credit Lyonnaise10 illustrates this point. There, the defendant shippers claimed force majeure after it failed to deliver esparto shipments owing to a war that had broken out in Algeria. Under French law, then in force in Algeria, the defendant would not have been subject to claims of damages "when, by means of a superior force (force majeure) or an accident, the obligor has been prevented from giving or doing that which he was bound to give or do."11 The English Court found that while French law may have given relief, English law applied and there was no equivalent common law principle (including frustration) that could ground relief. While the intervening war had disrupted performance, it did not destroy the "entire subject matter" of the contract or the underlying rational for the bargain as was required for relief under the doctrine of frustration. The contract did not provide force majeure, and the defendant shippers were held liable.

   About the same time and likely in recognition of the harshness of the result in Jacobs, explicit force majeure provisions began to appear regularly in English contracts.12 The emergence of contractual force majeure provisions arose, at least in part, as a means to provide relief from contractual obligations where performance is rendered impossible or unfeasible, but where the strict technical requirements for a defence of frustration are not met.

   While the use of such clauses is now of long standing usage in common law jurisdictions, the foreign nature of these clauses may, in part, explain the difficulty common law courts have had in dealing with such clauses as is stated in a 1999 article:

   The force majeure clause is antithetical to common law principles. Under force majeure clauses parties avoid contractual obligations and fault or liability as ascribed to neither party to the contract, but rather to a cause beyond the control of either of the parties. Given the great divergence between common law values and force majeure clauses, it is not surprising that our courts have repeatedly shown great reticence in giving effect to these clauses.13

   In the U.S., reference is not made to force majeure at all, but rather "to impracticability" as arising from the doctrine of impossibility of performance. The US. approach was described by William Lyman as follows:

   The rule, as often quoted, is that absent a contract provision to the contrary, "[w]here one agrees to do, for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation, because unforeseen difficulties are encountered. (Dugan & Meyers Construction Co., Inc. v. State of Ohio, 162 Ohio App. 3d 491 at 503).14

   The doctrine [of impossibility of performance] is invented by the court in order to supplement the defects of the actual contract. The parties did not anticipate fully and completely, if at all, or provide for what actually happened. Some factors determining the applicability of an impracticability defense include: foreseeability of the contingency, whether the means of performance will be entirely different than that agreed to, whether the risk of the contingency was allocated to a party, and whether the cost of performance will be vastly increased. It is essentially an equitable defense to the general rule that an obligor must bear the risk that the performance of a contract may become more burdensome or less desirable. Or, said another way in the same decision, the elements for impossibility of performance were the unexpected occurrence of an intervening act, such occurrence was of such a character that its non‐occurrence was a basic assumption of the agreement of the parties, and that occurrence made performance impracticable.15

   Impossibility means not only strict impossibility but impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved. Restatement (First) of Contracts, §454.16 [and]...