Supervening events: preparing for the worst

Ryan Lax (00:12): Hi everyone. Welcome back to our series on Navigating Project Disputes. Today we're discussing force majeure events under construction or P3 contracts.

Alexandra Shelley (00:20): Force majeure events are events that arise as a result of outside forces beyond the party's control, which in some way materially affect or frustrate the performance of the contract. Contracts frequently allocate the risk of these events through a force majeure clause. If the risk is not contractually allocated, each party bears the risks associated with these events. In project agreements, force majeure clauses allocate the risk of events like severe weather, pandemics, or natural disasters, as well as more remote events such as war or terrorist attacks.

Ryan Lax (00:52): A force majeure clause may also address liability for unknown conditions or conditions that can't easily be managed by the parties. For example, if project construction turns on seasonal access to a project site, the length of which turns on weather conditions, the parties may designate unusual weather deviating from historical norms as a supervening or force majeure event.

Alexandra Shelley (01:13): The key is that when contracting, the parties consider the major external risks that could materially impact project development, and allocate responsibility between them. It is, in essence, a risk allocation exercise.

Ryan Lax (01:26): And the general principle, Alex, is usually that the party best able to control the risk is the party that should bear responsibility for it.

Alexandra Shelley (01:34): Of course, though, with risks that are dependent on acts of God or other natural forces, the events may be beyond anyone's control. In those circumstances, the project owner often assumes the risk, but sometimes such risks are shared. For example, until Covid-19, it was not unusual for force majeure clauses to be silent on pandemic risk, meaning that both parties bore the risk of a pandemic.

Ryan, tell us how we mitigate force majeure risk in project planning.

Ryan Lax (02:02): Well, Alex, the existence of a force majeure clause in a contract doesn't mean that there is a free or unchecked right to compensation in those circumstances. Force majeure events are not an opportunity for contractors to lump a lot of disparate costs into a force majeure bucket.

Alexandra Shelley (02:18): It's important in contract negotiation to manage that risk. Obligations on the contractors to conduct prudent investigations in advance of contracting, and to develop industry standard plans, and to mitigate any losses in the case of force majeure events are key to ensuring that the claim is limited only to the scope of losses that are truly unavoidable.

Ryan Lax (02:39): And obligations of industry standard planning and conduct, and the duty to mitigate are useful mechanisms to discipline parties when force majeure events do arise. If, for example, a construction season for a part of a project is shorter than contemplated by the agreement, it will be important for a contractor to consider how resources that are already deployed in the field can be effectively redeployed elsewhere onto the project in order to mitigate losses.

The mitigation obligation means that a force majeure event does not automatically trigger compensation if those resources can be usefully used elsewhere.

Alexandra Shelley (03:13): Exactly, Ryan. Often when a force major event arises, construction teams are put under pressure. They may make choices they wouldn't otherwise make in less pressured circumstances, equipment or key supplies may be procured in a rush at inflated rates, or key planning steps that would reduce construction risk may be skipped. Sometimes the benefits of proceeding quickly may outweigh the risks.

These decisions have to be considered carefully and made responsibly. They should not be adopted in a rush and justified after the fact.

Ryan Lax (03:45): When a force majeure event does arise, the key task of the project owner will be to distinguish the real effects of a force majeure from the effects of any errors or decisions of the contractor, and if there are overlapping force majeure events, it's also going to be important to separate out the effects and responsibilities that are individually attributed to each event.

Alexandra Shelley (04:07): A party should also recognize at this point it is in the early stages of potential litigation. We, of course, hope that we can resolve matters before litigation, but the steps needed to position yourself for successful negotiation and a dispute are the same. Here are three steps that you can take.

Ryan Lax (04:23): First, engage counsel and technical experts early in the process. This is going to help you frame the issue in view of contractual obligations and any ultimate dispute from the outset of the issue arising, the input of experts will be essential in determining what information needs to be collected, what claims for damages are valid, and what is attributable to a third party. All of that helps assess what should be settled earlier on and what should be contested.

Alexandra Shelley (04:51): Second, take steps to obtain access to information on the ground, something that is always a challenge. If you are the project owner and a force majeure event arises, give serious consideration to having your own personnel in the field to monitor the work performed. In any complex project, reconstructing daily actions taken and costs incurred as a result of force majeure is a challenging exercise when relying solely on contractor-generated documents.

There is no substitute for firsthand knowledge. Having your own personnel in the field also enables you to position potential witnesses or maintain a record of the observations of personnel who may move on before litigation.

Ryan Lax (05:32): And third, keep the practical realities of the situation in mind, in view of finishing the project. Though you may be headed for dispute, pay attention to managing the process in order to avoid unnecessary friction between the parties so that the project is completed as efficiently as possible. For example, it can be helpful to separate the roles of operational personnel on the one hand, who need to be focused on completing the project from those involved in negotiating and hopefully resolving the dispute.

Also, be open to creative solutions, including settling issues that can be settled earlier on or entering tolling agreements to allow litigation to proceed after substantial completion of the project. Keep the focus on collaboration while that needs to be the priority.

Alexandra Shelley (06:15): Thanks for joining Ryan and me. Be sure to check out the other videos in our Navigating Project Disputes series.