COVID-19 and Force Majeure—Real and Not

Almost every engineering and construction contract contains a force majeure clause in the terms and conditions. Force majeure excuses a party from performing under the requirements of the contract as long as the force majeure event is in effect. At least some aspects of the COVID-19 pandemic will qualify as force majeure under most contractual terms, especially if the contractor’s inability to perform stems from some government action. Most contracts provide schedule relief and some provide schedule relief and some degree of cost relief as well. Even if cost relief is not explicitly outlined in the force majeure clause, it is possible claims to that effect will be made and disputed anyway.

Force majeure claims are obviously important under lump-sum contracts, and force majeure is likely to be most hotly contested if not allowed under those contracts. But force majeure is also relevant for contracts that have cost and/or schedule incentives, because contractors may demand those incentives be re-baselined due to force majeure. Furthermore, contractors may seek force majeure relief under any contract with liquidated damages (LDs) for late completion in which the LDs are triggered.

Over the past few weeks, Independent Project Analysis, Inc. (IPA) analysts have seen a number of instances in which force majeure was invoked on capital projects, especially to excuse delays by contractors. Some of these have surely been reasonable invocations of force majeure, although whether and to what extent they are allowed will depend on the wording of the particular contracts.

However, we are also seeing a number of instances in which contractors are seeking to invoke force majeure due to the pandemic for projects that were already in a good deal of trouble in terms of cost and schedule. It is these projects that concern us here. What should owners do to protect themselves from the possibility of faux (false) force majeure?

Step 1: Re-Baseline Now

If a project may be subject to a force majeure claim and that project is running late or over budget, the owner should immediately start re-baselining the project. A subsequent paper will detail the technical aspects of re-baselining, but suffice it, for now, to say that the re-baselining must be comprehensive. Secure all documentation from contractors in native form, e.g., the Primavera schedule. Especially important will be an assessment of procurement as of the re-baseline date. Additional delays in procurement are possible due to the pandemic, but if procurement is already running late, much of the ultimate delay may devolve from that fact. In other words, if the procurement had been on time to start with, it could well have missed the pandemic’s effects.

Step 2: Escrow All New Baseline Documents

All documents, including any studies, that make up the baseline should be date stamped and escrowed with a neutral third party who can attest to the date and that the documents have not subsequently been changed. This is a necessary step to authenticate the new baseline.

Step 3: Secure Releases

Many contracts, especially lump-sum engineering, procurement, and construction (EPC) contracts contain clauses that require contractors to announce any claims they are developing. If a project’s contract has such a clause, the owner should be securing those releases monthly. If the contract does not have such a clause, demand the contractor announce any claims they have in development at the new baseline. We know from experience that such releases deter the back-dating of claims. Claims that are said to have started long ago are difficult to defend because the owner was unaware that such a claim was in the making.

Step 4: Exercise All Audit Rights

We would hope owners have exercised all audit rights for major contracts right from the start. But if you haven’t been, make an attempt to do so now. We say attempt because if owners have not been exercising those rights, they may find it quite difficult to do so now because contractors will sometimes argue that unexercised rights were lost, regardless of what is stated in the contract.

If indeed force majeure is invoked on a project, seek to be fair to the contractors involved. It does not help us at all if the result of this pandemic is to bankrupt our contractors. On the other hand, the pandemic should not be used as a reason for underperforming contractors to be excused.