CONSTRUCT_Win06.qxp 1/26/06 11:07 AM Page 1 onstruct! Construction Litigation Committee www.abanet.org/litigation/committee/construction/home.html C Damages Issue Winter 2006 Vol. 15 No. 2 Force Majeure: Risk Allocation for Unforeseeable Events By Timothy S. Taylor and Allison O. Kahn

Timothy S. Taylor Allison O. Kahn When a hurricane brings a construction of building materials to skyrocket, who project to a stop, who pays for the delay? When access to a should bear the extra costs? The answers to these questions security-sensitive construction site is severely restricted should be found in the force majeure provisions of the because of newly promulgated, post-9/11 terrorism securi- parties’ . ty measures, who pays for the contractor’s loss of produc- Force majeure, or the Latin expression vis major, tivity? When worldwide natural disasters cause the price describes the particular circumstances that may excuse per- Continued on page 7 Providing Keys to the Courthouse Without Giving Up Full Recovery By Nicole Liguori Micklich

Nicole Liguori Micklich The contingency fee particularly when those fees are Judge Chrisopher F. Droney decided, agreement, the sought pursuant to a statute, like an over objection, that a plaintiff was “enti- 1 proverbial key to the courthouse, unfair or deceptive trade practices tled to an attorney’s fee award that is and, by its terms, is a limit to the act, worker’s compensation act, or a greater than the one provided for by the amount a lawyer can recover from the mechanic’s law, and where the contingency fee agreement.”3 In that client. Such an agreement, however, successful client sought vindication of case, Charts v. Nationwide Mutual 2 should not necessarily limit the attor- both private and public wrongs, Co., the plaintiff and his ney fees that prevailing counsel can those reasonable attorney fees might lawyer entered into a contingency fee recover from the unsuccessful oppos- be recovered without regard to the agreement that provided that the attor- ing litigant. In construction law, prac- limitations on the total recovery ney fee “will be one quarter (25%) of titioners sometimes prosecute claims otherwise imposed by a contingency any recovery obtained in the case, after on behalf of clients that seek, as part fee agreement. deduction of expenses, either by way of of the claim for relief, reasonable In a recent ruling the U.S. District settlement, trial or appeal.” At the con- attorney fees. In certain situations, Court for the District of Connecticut, Continued on page 10

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Exhibit 5: Delay and Related Damages Calculations

TOTAL DELAY (IN WORKDAYS)

INEXCUSABLE + EXCUSABLE + CONCURRENT + COMPENSABLE

EXTENSION OF TIME

OWNER’S DAMAGES CONTRACTOR’S DAMAGES

INEXCUSABLE X LIQUIDATED COMPENSABLE X TIME-RELATED DAMAGE/DAY COSTS/DAY

between the events causing disrup- A more detailed discussion of this topic will be CA, where he leads the Construction Advisory tion and delay and the resultant included in the Construction Claims chapter of Services practice in the United States. He can costs generally provides valuable the upcoming Litigation Services Handbook be reached at (415) 498-6596 or stephen.p.lech- [email protected]. information from which the owner published by Wiley Press. can evaluate liability and quantum Stephen Lechner is a principal of aspects of the claim. PricewaterhouseCoopers L.L.P. in San Francisco,

cate to the owner the risk of loss in the Neither party will be liable for any Force Majeure event that unforeseeable delays occur for breach or failure to perform under Continued from page 1 reasons beyond the control of the con- this Agreement or any other docu- tractor. Similarly, a subcontractor or sup- ments incorporated by reference formance under a when an act plier may place a force majeure clause in herein if such breach or failure to of God or some other supervening its subcontract or supply contract to shift perform is due to acts beyond the event occurs beyond the control of the risk to the contractor for unforesee- reasonable control of such party, either of the parties.1 In determining able delays that are beyond their control. which include by way of illustration, whether a force majeure event has In the absence of a force majeure clause, acts of God or public enemy, acts of occurred, the test is “whether under the the performance risk is presumed to rest Federal, state or local government, particular circumstances there was such with the promisor.5 either in its sovereign or contractual an insuperable interference occurring Enforceability of a force majeure , fire, floods, civil disobedi- without the party’s intervention as clause is determined by the intent of the ence, strikes, lock-outs, freight could not have been prevented by the parties, which is evidenced by the lan- embargoes, inclement weather, or exercise of prudence, diligence and guage in the contract.6 The terms of the any other cause or conditions care.”2 In other words, the force majeure contract will be enforced with common beyond such party’s reasonable con- event has to be (1) not reasonably fore- law rules merely filling in gaps left by trol; provided, however, that the seeable in the ordinary course of the the document.7 “In other words, when party which has been so affected will industry and (2) beyond the reasonable the parties have themselves defined the (i) promptly give written notice to control of the party.3 contours of force majeure in their agree- the other of the fact that it is unable ment, those contours dictate the appli- to so perform and the cause(s) there- Drafting the Force Majeure Clause cation, effect, and scope of force fore; and (ii) resume its performance Force majeure clauses can shift the risk majeure.”8 Consequently, parties to a under this Agreement immediately allocation from the promisor, who is pro- construction contract should draft the upon the cessation of such cause(s).9 viding the labor, materials, or service, to force majeure provision with care, As illustrated in this example, force the promisee, who has agreed to pay for mindful of the risks that they may majeure clauses often contain catchall and accept the labor, materials, or serv- encounter, especially in light of lessons phrases such as “or any other cause or ice.4 For example, a contractor may learned from recent disasters. conditions beyond such party’s reason- demand that a force majeure clause be For example, a force majeure clause able control.” Such a catchall phrase inserted into the general contract to allo- may provide that: must be construed within the context

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established by the list of force majeure destroyed in the City of New Orleans Therefore, in the event that a project events that precedes it.10 Although such by Hurricane Katrina and the picture suffers massive increases in materials a broad term would suggest an expan- starts to become clear. We can expect costs, such a provision allows the con- sive interpretation, the term will be lim- increases in the costs of most construc- tractor to seek an increase in the agreed- ited to events similar to those specifical- tion materials, including concrete, lum- upon price for these materials. ly enumerated. In addition, the party ber, steel, and drywall. Furthermore, the seeking relief under the force majeure rising fuel prices will no doubt increase Terrorism and Government Policy clause must show it exercised reason- the production and distribution costs of Since the unfortunate events of able diligence to avoid the event.11 these materials.14 September 11, 2001, terrorism has Parties also should contract for the There can be no that hurri- become a well-known force majeure remedies available upon occurrence of canes and similar natural disasters will event. Terrorism can impact a construc- force majeure events. Often, construc- trigger a force majeure clause in a con- tion project directly, as was the case in tion contracts and supply contracts will tract. However, a contract that only New York City, or indirectly, by affect- grant time extensions but no monetary allows for time extensions is of no help ing market conditions and increasing relief. For example, a force majeure to contractors, subcontractors, and sup- government security and regulation. clause may permit an extension of the pliers facing potentially record-breaking The issue of whether increased gov- completion date but prohibit a contrac- increases in material costs and fuel ernmental antiterrorism security mea- tor from claiming damages resulting sures constitute a force majeure excuse from delay.12 However, parties are free for contractor delay was at issue in the to contract otherwise. The negotiation Courts recent decision of Broward County v. of a force majeure clause should accu- Brooks Builders, Inc.16 Brooks Builders, rately reflect the ability of the parties to traditionally the contractor, filed suit against accept and allocate risk. Therefore, a Broward County seeking compensation contractor in a project located in a state have found that for delay damages on a project for con- where extreme weather conditions are struction of a fire station adjacent to the possible may want to build a contin- government Fort Lauderdale airport. Although the gency risk into the price of the contract project was not inherently complex, its or negotiate terms for monetary relief policies that location—adjacent to an active airport in the event of delays resulting from runway—presented significant chal- such events. indirectly affect lenges and numerous delays. Some of the delays were caused by a consider- Hurricanes and Natural Disasters the economic able increase in security measures on Parties to a construction contract the active airport runway after the should also consider whether to make conditions and September 11, 2001, terrorist attacks. provision for the impact of force These delays occurred daily as the con- majeure events on the cost of con- struction workers spent a substantial struction supplies. profitability amount of time gaining access to the Until recently, the inflation in build- worksite through the security gates. The ing materials has been driven in large of a contract contract expressly required the contrac- part by the rapid industrialization of tor to comply with all airport security nations like China and India, as well as are not force measures, but the contractor argued it by the enormous reconstruction efforts could not have anticipated the extra in Iraq and Afghanistan.13 However, the majeure events. measures put in place after 9/11. devastation of hurricanes and other nat- The court found that although the ural disasters in the 2004 and 2005 hur- expenses. Similarly, a contract that parties may not have foreseen the ricane seasons has caused fuel prices to allows a contractor an extension of time extraordinary delays due to the skyrocket, and costs for lumber, ply- or damages for delay usually will not September 11 terrorist attacks, their con- wood, cement, and steel are also expect- the costs of construction materials tract nonetheless had multiple provi- ed to rise. Past natural disasters, such as that increase drastically as a result of the sions suggesting that the risk of loss for Hurricane Andrew in 1992, inflated the force majeure event. Consequently, to be unexpected delays was to be borne by price of building materials. Hurricane protected, the party responsible for sup- the contractor. Nevertheless, the con- Andrew destroyed more than 28,000 plying such materials needs to include tractor claimed relief under the follow- housing units and was largely responsi- separate escalation clauses in its con- ing force majeure provision: ble for pushing the cost of plywood up tract to absorb increases to material or In the event that the Contractor is 44.6 percent and the price of Southern labor costs. These clauses usually refer- ordered by the Engineer, in writing, pine framing lumber up 16.7 percent, ence a general inflation index or a spe- to suspend work for some unfore- according to the National Association of cific materials/industry index to be seen cause not otherwise provided Home Builders. Compare those statis- adjusted at specific intervals, that is, for in the contract and over which tics with the roughly 200,000 homes monthly, annually, and so on.15 the Contractor has no control, the

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Contractor may be reimbursed for acts of God, acts of the public enemy, from unforeseen delay damages result- actual money expended on the work acts of Government, labor disputes, ing from force majeure events. during that period for shutdown. fires, insurrections or floods. . . . No provision of this article shall Seaboard sought to invoke the force Timothy S. Taylor is a member of the Con- be construed as entitling the majeure clause for “acts of Govern- struction Litigation Practice Group in the Miami office of Carlton Fields, P.A. He can be Contractor to compensation for ment” that made its timber contract reached at [email protected] or delays due to inclement weather, for costly and unprofitable. Specifically, (305) 530-0050. suspensions made at the request of Seaboard argued that there were a num- the Contractor, or for any other delay ber of government acts that occurred Allison Oasis Kahn is a member of the Labor and provided for in the contract, plans, during the early 1980s that affected its Employment and Appellate Practice and Trial or specifications. contract—for example, new monetary Support groups in the West Palm Beach office of Carlton Fields. She can be reached at The court disagreed with the con- control procedures and the deregulation [email protected] tractor’s interpretation of this provision, of savings institutions—which led to an because the gate access delays resulted increase in interest rates and a slump in Endnotes from the increased security measures the timber market. implemented by the government, not The court found that the force 1. See R&B Falcon Corp. v. Am. Exploration Co., 154 F. Supp. 2d 969, 973 from any order by the engineer. majeure clause listing “acts of (S.D. Tex. 2001). However, the court’s ruling suggests Government” as an excuse for per- 2. See Mathes v. City of Long Beach, 263 that had the contract contained a force formance was not to be interpreted so P.2d 472, 477 (Cal. Ct. App. 1953). majeure clause allocating risk of govern- broadly as to include government fis- 3. See Stroud v. Forest Gate Dev. Corp., mental interference to the county, then cal or monetary policy. Government 2004 WL 1087373 (Del. Ch. 2004). the contractor could have recovered acts or policies that were complained 4. See In re Westinghouse Elec. Corp. Uranium Contracts Litig., 517 F. Supp. 440, damages resulting from delay. of had no more than an attenuated 459 (E.D. Va. 1981) (“the risk of a contin- Courts traditionally have found that effect on the contract at issue and at gency that affects performance is presumed government policies that indirectly most made performance of the con- to rest on the promisor. However, the parties affect the economic conditions and prof- tract unprofitable. Government poli- may agree to shift a particular risk to the itability of a contract are not force cies that affect the profitability of a promisee, or to allocate the various risks majeure events. For example, in contract but do not preclude perform- between them as they see fit.”). 17 5. Id. Seaboard Lumber Co. v. United States, ance should not be considered “acts 6. See R&B Falcon Corp., 154 F. Supp. 2d Seaboard entered into a timber contract of Government” in the context of at 973. with the U.S. government to harvest force majeure. Finally, the court reas- 7. Id. timber on government lands. At the sured, “A force majeure clause is not 8. Id. citing Sun Operating Ltd. v. Holt, time the contracts were executed in intended to buffer a party against the 984 S.W.2d 277, 283 (Tex. App. 1998). 9. 12 WEST’S PENNSYLVANIA FORMS, September 1980, there was a housing normal risks of a contract. The normal COMMERCIAL TRANSACTIONS § 2301, form 12.5. boom, and the price of timber was high. risk of a fixed-price contract is that 10. See Stroud, 2004 WL 1087373 at 5; see 18 However, between 1981 and 1983, the the market price will change.” also Matador Drilling Co. v. Post, 662 F.2d government allowed interest rates to 1190, 1198 (5th Cir. 1981) (requiring party rise in order to combat inflation, which Force Majeure Insurance claiming force majeure to demonstrate that led to a softening of the housing and Almost by definition, the damages event of same general character as those specifically listed in clause occurred). lumber markets. This arguably caused resulting from a force majeure event can 11. See Stroud, 2004 WL 1087373 at 5. many contractors to run into financial be disastrous. However, perhaps the 12. Wm. Cary Wright, Force Majeure difficulties. Seaboard sought relief from best solution for allocating risk is for the Clauses and the Insurability of Force Majeure the courts in order to invoke a force owner to assume the risk and then Risks, CONSTR. LAW., Fall 2003, at 17. majeure clause in its contract for “acts of insure against it. Force majeure insur- 13. James Temple, Cost of Building Government,” which granted relief to ance may include coverage for project Expected to Rise, CONTRA COSTA TIMES (S.F.), Sept. 9, 2005, at 2. the contractor where completion, performance coverage, and 19 14. The Katrina Premium: Facing Higher [the contractor] experiences delay in delayed completion. Although a proj- Construction Costs, Governments Need to starting scheduled operations or ect is usually protected by “all-risk” Scrutinize Needs More Closely, FORT WAYNE interruption in active operations insurance provided by the contractor, NEWS SENTINEL, Sept. 13, 2005, at A6. either of which stops removal of all-risk insurance usually does nothing 15. Laurence P. Lubka, What Can I Do About Those Steel Prices?, CLAIMS RESOURCE, Included Timber from Sale Area more than cover the expense of repair- Fall 2004. through curtailment in felling and ing the work in place. However, it does 16. 908 So. 2d 536 (Fla. 4th Dist. Ct. App. buckling, yarding, skidding and not provide coverage for damages 2005). loading, hauling or road construc- incurred by the owner for the delays 17. 308 F.3d 1283 (Fed. Cir. 2002). tion, as scheduled under B6.31, for 10 incurred in completing the project, 18. Id. citing N. Ind. Pub. Serv. Co. v. or more consecutive calendar days which often can be substantial. Barbon County Coal Co., 799 F.2d 265, 275 (7th Cir. 1986). during a Normal Operating Season Therefore, force majeure insurance may 19. PHIL BRUNER & PATRICK O’CONNOR, due to causes beyond Purchaser’s be the best way to protect owners who BRUNER AND O’CONNOR ON CONSTRUCTION control, including but not limited to are concerned about their investment LAW, § 11.126 (2002); Wright, supra note 13.

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