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

clause2.

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. Crédit

   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 U.S.

   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]...