A Guide to Force Majeure Clauses
So all the work at the construction site must stop, now what?
Covid-19 has taught us a lot about our reliance on being able to attend work and obtain the required goods and materials to execute our jobs. This is particularly crucial in the commercial construction sector where there are multiple sub-trades, all interdependent on one another, and all working to a strict timeframe which penalises those who hold things up. But what happens when a major health event like the Covid-19 lockdown brings everything to an abrupt stop?
Unfortunately insurance is not helpful, so a business interruption policy won’t be of any use to a main contractor or sub-contractor with this predicament. Modern policies exclude notifiable infectious diseases, pandemics and epidemics; and this is thanks to the SARS outbreak of the early 2000’s, which frightened underwriters enough to exclude losses associated with illness and disease from all of their insurance policies.
So that said, surely there must be some help if the show can’t go on, and no one, I mean no one, can access the construction site.
The good news is that there may be some contract relief, by way of Force Majeure clause (or Act of God clause), which is prominent in construction contracts.
Force Majeure clauses were inserted into agreements to give parties relief when an extraordinary event occurs which is beyond the control of all parties. It was designed for events like earthquakes (think Christchurch 2011), or major floods, but Covid-19 certainly falls into this category.
So the all important question is whether Covid-19 is a force majeure event?
The answer is yes, but there is a reasonable amount variation in the way construction contracts define it and also variation in terms of excusing the affected party – e.g. treating the agreement as though it never existing, or delaying performance, or lowing for an extension, or waiving penalties.
To be sure that there is relief under the construction contract, you will need to answer these questions.
Does the construction agreement specifically contemplate epidemics and pandemics?
What are the consequences of this (e.g. delay, right to terminate etc)?
Where the agreement does not specifically mention epidemics or pandemics in its list of events, it comes a question of interpretation – in that, was it the intention of the parties to include all events which are outside of the control of the parties leading to the inability to perform the requirements of the agreement?
In an unprecedented event such as New Zealand’s nationwide lock-down it is conceivable that, where the agreement is unclear, parties will agree that it was the intention of the agreement to handle this type of scenario.
If a main contractor or sub-contractor is wanting to rely on a force majeure clause it will need to be proven that
Covid-19 event was the thing that caused the delays, or non-performance, and
That these delays were beyond the control of the contractor, and
There were no alternatives or ways to mitigate the consequences.
These ‘proof’ components could be hard to satisfy at a Level 2 alert (i.e. keep your distance, wash hands, stay home if unwell), but at a level 4 (total lock-down) proving the impact should be relatively easy.
Given that force majeure clauses (and similar ‘Act of God’ clauses) vary it is always advisable that contractors look at their specific agreements.
This is general advice only from a risk management and insurance perspective, it is not intended to be legal advice. Always consult your lawyer for specific advice relevant to your particular agreement and situation.
