This is the second in a three-part series about managing the long-term impact of COVID-19 on capital projects. You can read the first in our series, a discussion about managing business cases, here. The third of our series will address risks in the supply chain.
Force majeure is a critical contract clause included in almost all company terms and conditions; the clause language outlines contractual obligations in the face of what are often referred to as “acts of God.” The term describes events that no involved party can control, such as war or flood. However, force majeure clauses don’t always address the impact of a global crisis like COVID-19.
As COVID-19 spread, it shut down factories, prevented travel, and created a labor shortage. Companies unable to fulfill their contractual obligations invoked force majeure clauses, triggering a domino effect for suppliers further up the supply chain. However, it is ambiguous if and how force majeure clauses include COVID-19. This ambiguity has led to litigation — and COVID-19 force majeure decisions are being decided in the courts, today.
The exact language of the force majeure clause critically impacts case decisions. Some consider the impact of COVID-19 an exception to a force majeure clause. More conservatively, many companies define COVID-19 as an “act of God” because the potential variants of the disease are impossible to predict. Companies need to “dust off” this clause to ensure it mitigates risk in an enforceable manner. In addition, different jurisdictions resolve cases differently, so companies should familiarize themselves with the impact of regional differences on potential litigation.
Drafting contracts in today’s environment, where COVID-19 is not a surprise, companies should incorporate language to acknowledge that all parties agree there may be disruptions caused by COVID-19 and will build the anticipated impacts into their price and schedule. Consequently, the risk is passed to the contractor and allows them to manage their commitments. A risk premium and the potential for a longer schedule guarantee are possible in this scenario. However, the business model and projected returns for the project will have a higher degree of unpredictability.
Disclaimer: The contents of this report do not have the force and effect of law and are not intended to bind contractors or the general contracting community in any way, unless specifically incorporated into a contract. This document is intended only to provide insight into the impacts of COVID-19 in the engineering and construction industry, and it is not intended to determine existing requirements under the law.