Proper Risk Allocation: Force Majeure Clause

Abstract

The negative impact on time and cost of unforeseeable events or circumstances far beyond the control of construction project parties may be a chronic risk on the project, the relationship of the parties, and/or each party’s existence as an entity. Events, such as hurricanes, earthquakes, terrorism, government shutdowns, pandemics, and labor disputes, are often referred to as force majeure, or acts of God. Generally, parties to a contractual agreement negotiate the terms of the contract to allocate the risk and to mitigate impacts related to force majeure events, whether it be a force majeure–type clause to excuse performance or contractual provision identifying responsibilities of each party. Force majeure contract clauses often only provide time relief to delay the performance of contract obligations. In the absence of a force majeure clause, other clauses may allow or disallow recovery of time and money (e.g., no damages for delay or labor strike clauses). Alternatively, in the absence of a force majeure clause, the common law principles of impossibility, impracticability, and frustration may apply and afford a party with relief, including excusing performance of contractual obligations, in whole or in part. The main objective of this paper is to identify the various risks and considerations associated with a force majeure clause and the application of common law principles. Several legal cases and articles were reviewed, examined, and analyzed to best fulfill the objective of this research and identify ways to effectively manage risks when negotiating the allocation of risks in a contractual agreement. The results of this legal research are summarized in a flowchart as a generic guide of the important legal considerations that construction professionals and contracting parties should consider when faced with force majeure.