With the onset of COVID-19, there is increased attention on force majeure clauses – what they are, when they can be invoked, how they operate, and how they might change in the future. This is especially true in construction matters, where many projects have been delayed, often due to some combination of the following: government regulations and executive orders implementing quarantines, stay-at-home orders, or other restrictions; decreased workforce due to illness; unavailability of goods and materials; loss of access to certain job sites because of owner decisions to close or limit access; and other related issues. Regardless of the specific reason that prevents or delays performance, this COVID-19 pandemic is showing many involved in construction contracts—owners, general/prime contractors, subcontractors, vendors, or suppliers— the benefits of critically reviewing their contracts to understand the effects of the presence (or absence) of a force majeure clause.
The “Standard” Force Majeure Clause
Force majeure is generally defined as an unforeseeable circumstance that prevents someone from fulfilling a contract. In practice, force majeure does not necessarily excuse a party from complete performance of the contract, but rather may allow a party to terminate or cancel the contract, seek an extension of time to perform, seek an increase in the contract price, or recoup costs for delays related to the force majeure event.
While force majeure clauses are common in many construction contracts, they are not often invoked because the facts and circumstances required to successfully invoke such a clause are infrequent. Moreover, because parties may not focus on force majeure provisions during contract negotiations, the litany of what might appear as more common or oft-repeated situations and terms in “standard” clauses may not be scrutinized. However, force majeure clauses can play an important role in determining the cost of performing a contract and the allocation of risk, and should not be underestimated. While force majeure clauses are helpful in submission of lower bids, because contractors can omit line items for a high cost contingency and for insurance coverage for unforeseen and rare circumstances, such clauses also play a critical role when a party must request additional time, an increase in the contract price, or termination because of delays resulting from the event.
Force Majeure in Maryland
Although included in many contracts, force majeure clauses are addressed in only a few written judicial opinions in Maryland. Courts have not addressed the specific language needed for a valid force majeure clause, but have generally acknowledged they exist in contracts without explaining whether they are valid or not. E.g., Phoenix Services Ltd. P’Ship v. Johns Hopkins Hosp., 167 Md. App. 327 (2006); Habliston v. City of Salisbury, 258 Md. 350 (1970), Wootton Enterprises, Inc. v. Subaru of Am., Inc., 134 F. Supp. 2d 698 (D. Md. 2001). Generally speaking, Maryland courts interpret an agreed-upon contract clause by looking to the contract language and applying the customary, ordinary and accepted meaning of the language.Ocean Petroleum, Co. v. Yanek, 416 Md. 74, 86 (2010). Plain language is applied even more forcefully to contracts negotiated by sophisticated parties, such as real estate owners, contractors, suppliers, and vendors. Smelkinson Sysco v. Harrell, 162 Md. App. 437, 452 (2005).
Importantly, as we will discuss more fully in a future blog, when a party is determining whether to invoke a force majeure clause to recoup costs, seek a delay, or terminate, a contracting party must account for a few key considerations:
- Foreseeability,
- Mitigation,
- Physical and legal restrictions versus mere economic impacts,
- A party’s control over an event, and
- Whether the force majeure event will be considered a compensable or non-compensable delay.
Force Majeure Event…but No Force Majeure Clause
In the absence of an express force majeure provision, Maryland courts have noted the concepts of “impossibility,” “frustration of purpose,” and/or “impracticability.” Impossibility excuses a party from performing contractual obligations when unforeseen circumstances beyond the party’s control arise after formation of the contract making performance impossible. Harford County v. Town of Bel Air, 348 Md. 363 (1998) (citing Wischhusen v. Am. Medicinal Spirits Co., 163 Md. 565 (1933). But “impossibility” is a high bar, indeed. “Far more difficult or costly than expected” is not the same as “impossible.” The Court of Appeals found impossibility applied when a change in the law made performance legally impossible (Levine v. Rendler, 272 Md. 1 (1974) (citing Wischhusen v. Spirits Co., 163 Md. 565 (1933)). However, where a change in state and federal environmental regulations were foreseeable, the Court of Appeals found impossibility did not apply. Harford County v. Town of Bel Air, 348 Md. 363 (1998). There is much more to discuss concerning these defenses, but we will save this for another day.
Looking Forward
Because Maryland courts will likely interpret force majeure clauses based on the four corners of a contract, parties must pay close attention to the language included. Specifically, contractors may want to consider the following factors when negotiating future contracts:
- Add specific language regarding what is a trigger event for force majeure such as a “pandemic” or “epidemic”;
- Articulate the exact benefit if invoked, whether an extension of time, costs, etc.;
- Explain how the delays or costs will be moved downstream to subcontractors; and
- Read closely all insurance policies (or talk with your insurance agent) to see what coverage is included, or may be purchased, for force majeure incidents, like pandemics, and whether riders/exceptions/exclusions apply to consequences of pandemics. If insurance is not available, then contractors may need to rely on protections offered under the force majeure clause.
Additionally, with initial scientific research showing that COVID-19 could remain active for months or years, even with a vaccine, it will remain to be seen whether a future reoccurrence of COVID-19 or another pandemic will be considered an “unforeseen” circumstance. We can anticipate arguments that contractors should be prepared for pandemics, including having policies and emergency plans ready. If contractors should reasonably expect or have knowledge of the likelihood of a future event, then it would likely not be considered “unforeseen.”
Stay tuned for a future post concerning foreseeability and other salient points as we all begin to modify, develop, and add provisions to new contracts. Also, see additional M&S alerts concerning force majeure matters in the construction context, and for discussion of force majeure clauses in leases and other contract documents.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
